CFTC Makes Second Attempt at Imposing Position Limits on Key Energy Commodities

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The Commodity Futures Trading Commission (CFTC) voted today to approve a revised "position limits" rule intended to limit speculation in derivatives markets for certain energy, agriculture, and metals commodities. The CFTC wants to limit the number of futures contracts a single trader can hold, although a prior rule was vacated by the D.C. District Court in September 2012. The four categories of energy contracts covered by the rule are: (1) NYMEX Henry Hub Natural Gas; (2) NYMEX Light Sweet Crude Oil; (3) NYMEX RBOB Gasoline; and (4) NYMEX NY Harbor ULSD (heating oil).

Under the proposed rule, a firm would be prohibited from holding speculative positions in any one of 28 core physical commodity contracts and their "economically equivalent" futures, options, and swaps. Exceptions are available for "bona fide hedging positions" as well as “positions that are established in good faith prior to the effective date" of the subject regulations. The Commissioners who voted for the rule believe it will prevent manipulation of commodities markets and is required under the Dodd-Frank act from 2010.

The actual regulations in the proposed rule seem very similar to the rule rejected by the District Court last year. The main difference is a better justification for the rule, including an improved cost-benefit analysis. The rule will almost certainly be challenged in court by Wall Street interests and its chances of success are uncertain at this point.

The CFTC will now conduct a public comment session before finalizing the rule.

Read more about this rulemaking here and here.