In a 3-to-11 vote, the Commodity Futures Trading Commission chose to favor restricting the size of any traders’ footprint in the commodities market. This is the CFTC’s second vote on a proposal over “position limit” rules. A rule that it proposed two years ago was turned down by the United States District Court for the District of Columbia after two Wall Street trade organizations sued claiming that the rule would cause prices to become erratic.
The proposal is related to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The CFTC already has rules to limit market speculation but before they were just applicable during the last days before a futures contract delivery and only to specific agricultural commodities.
Now, the agency’s new rules are proposing to set up limitations that are more broad so that they include derivative contracts for 28 kinds of commodities futures contracts, and not just agricultural contracts but also metal and energy ones and regardless of when the delivery date would be. Exemptions for traders with genuine hedging needs would be allowed, as it will be for firm-held positions involving banks with nearly 50% ownership. To avail of exemptions, trading firms would have to prove that they are not in control of an affiliate. Aside from that, just non-consolidated firms will get exemptions.
The CFTC’s rules would restrict a trader’s maximum size in derivatives to 25% of the deliverable supply of the commodity that has been estimated. It also will bring back conditional limits, which let traders hold five times more than the limit in cash-settled contracts as long as they don’t have a position in physical-settled contracts. The rule will also modify details about what is considered hedging, which, per Dodd-Frank, is exempt from position limits. Additionally, the rule won’t let there be an exemption for derivative contracts that traders entered into in order to make good rent paid for empty storage facilities.
The rule is now subject to public comment. After 60 days, commissions will vote on a final rule.