October 26, 2020

Volume X, Number 300

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October 23, 2020

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CFTC Adopts New Position Limits Requirements

On October 15, the Commodity Futures Trading Commission adopted new rules on position limits. The new rules mark an important step forward in a decade-long journey to enact one of the remaining key provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). The Commissioners voted 3-2 in favor of the new rules, with Chairman Heath Tarbert and Commissioners Brian Quintenz and Dawn Stump voting in favor and Commissioners Rostin Behnam and Dan Berkovitz dissenting.

As described in greater detail below, the new rules (1) set forth federal position limits for 25 different futures contracts, (2) enhance the roles played by exchanges in setting limits and granting exemptions, (3) modify exemptions from federal position limits, and (4) eliminate Form 204 (Statement of Cash Positions in Grains) and portions of Form 304 (Statement of Cash Positions in Cotton).

  • Federal position limits for 25 futures contracts. The new rules modify existing spot month, single month and all-months-combined position limits for nine “legacy” futures contracts on certain agricultural products and adopt new spot month position limits for 16 “non-legacy” futures contracts, including additional agricultural products, and certain metals and energy products. There are no single month or all-months-combined federal position limits for the 16 “non-legacy” futures contracts.

Under the new rules, position limits apply to any contract that is directly or indirectly linked to, or that has a pricing relationship with, one of the 25 referenced futures contracts, including economically equivalent swaps. All spot month limits are separately calculated with respect to cash-settled and physically settled positions. In other words, in the spot month, a person can net positions within but not across each settlement category. There is no such distinction for non-spot month limits, so cash-settled and physically settled positions can be netted against each other.

  • Exchange-set position limits and exemptions. Similar to the existing regulatory framework, the new rules prohibit exchanges from adopting position limits that are more lenient than any limit set for the same futures contract at the federal level. In addition, with respect to contracts with no federal limit, the new rules provide exchanges with greater flexibility in setting position limits or position accountability levels by, among other things, allowing the exchanges to adopt alternative approaches that are “necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.” The new rules also allow the exchanges flexibility to grant exemptions from exchange-set position limits.

  • Exemptions from federal position limits. The new rules change the bona fide hedge exemption by, among other things, expanding the list of enumerated bona fide hedges. An enumerated bona fide hedge exemption is “self-effectuating” for federal position limit purposes, and a market participant that qualifies for an enumerated bona fide hedge would not be required to request prior approval from the CFTC in order to hold a hedge position in excess of a federal position limit. However, the practical benefit of this “self-effectuating” exemption is limited given that market participants may still need to request an exemption from the relevant exchange for any limits set by the exchange.

The CFTC also approved an expedited regime for market participants to exceed federal position limits for a non-enumerated bona fide hedging transaction or position. Under this regime, a market participant may choose whether to apply directly to the Commission or, alternatively, apply indirectly to the Commission through the applicable exchange. If any exchange approves the non-enumerated hedge exemption, the Commission will generally have ten days to reject the exchange’s determination, after which the hedge exemption would be valid for both exchange and CFTC purposes. In the interim, once an exchange approval a non-enumerated hedge exemption, a market participant could exceed the federal position limits during the Commission’s 10 business-day review period. If the Commission subsequently denies the exemption, the market participant would have to liquidate positions excess of the speculative position limit within a commercially reasonable amount of time.

The new rules also clarify that market participants generally may hedge positions on a gross basis or on a net basis, provided that the market participant has done so over time in a consistent, non-evasive manner.

  • Forms 204 and 304. Under the new rules, hedgers are no longer required to file Form 204 or Parts I and II of Form 304 on a monthly basis. Instead, the CFTC will obtain the relevant cash market position information from the relevant exchanges.

The new rules will become effective 60 days after publication in the Federal Register. However, the new rules have a general compliance date of January 1, 2022, and later compliance date of January 1, 2023 with respect to swaps-related requirements and the elimination of previously granted risk management exemptions.

The publication of these final position limits rules ends a long effort by the CFTC to implement position limits rules pursuant to Dodd-Frank that began with publication of proposed and final rules in 2011 that were mostly set aside by a federal district court in September 2012.

More information, including a link to the new position limit rules, is available here.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 290
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About this Author

James M. Brady, Katten Muchin Law Firm, Finance Attorney
Associate

James Brady concentrates his practice in financial services matters.

While in law school, James was an editor of the Michigan Journal of International Law. He also served as a judicial intern to the Honorable Stephen J. Markman of the Michigan Supreme Court. http://www.kattenlaw.com/James-Brady

312-902-5362
Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior managing director and group general counsel for Newedge, where he oversaw the worldwide Legal, Compliance, Financial Crimes Prevention (including AML) and Regulatory Developments departments. He also worked for the US Commodity Futures Trading Commission's Division of Enforcement in New York. For several years, Gary taught a course in derivatives regulation as an adjunct professor at Brooklyn Law School. He currently serves as a practitioner faculty and mentor for the State University of New York Buffalo Law School’s New York City Program on Finance & Law.

Gary is frequently quoted in the media for his thoughts on the international financial services industry and has published numerous articles on futures and securities industry issues. He regularly lectures or appears as a speaker at futures and securities industry conferences or in training sessions for international regulators. Gary is the sole author and publisher of Bridging the Week, a blog addressing issues in the financial services industry.

212-940-6558
Kevin M. Foley, Finance Lawyer, Katten Llaw Firm
Partner

Kevin M. Foley has extensive experience in commodities law and advises a wide range of clients, both in the United States and abroad, on compliance with the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission (CFTC) affecting traditional exchange-traded products, as well as the over-the-counter markets involving swaps and other derivative instruments. His clients include futures commission merchants, derivatives clearing organizations, designated contract markets, foreign boards of trade and an industry trade association.

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312-902-5372
Carl E. Kennedy Financial Services Lawyer Katten Muchin Rosenman Law Firm
Partner

Carl Kennedy is a partner in Katten's Financial Services practice. He applies his extensive prior financial services and government experience to assisting financial institutions, clearing firms, asset managers, clearinghouses, exchanges, hedge funds and proprietary trading firms with a full range of regulatory, compliance, transactional and enforcement-related issues in the commodities and derivatives markets.

Carl's prior professional experience includes working as senior in-house legal counsel at a large investment bank and futures commission merchant, providing legal advice and...

212-940-8544
Elizabeth Organ Financial Markets and Funds Katten Muchin Rosenman New York, NY
Associate

Elizabeth Organ represents clients across the financial services industry, with a focus on regulatory compliance and advice. Liz's background positions her to provide valuable legal counsel on transactional and regulatory matters relating to commodities and derivatives, investment management, and cryptoassets and distributed ledger products.

Helping clients address complex regulatory and legal challenges

Liz assists clients with a range of financial services regulatory matters, collaborating with legal staff, business executives and regulators alike to pursue...

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