CFTC Adopts New Rules on Position Limits; SEC and CFTC Harmonize Minimum Margin Levels for Securities Futures
On October 15, 2020, the CFTC adopted new rules on position limits. The new rules mark an important step forward in a decade-long journey to implement one of the remaining key provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The new rules (1) establish 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 futures contracts on 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 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 to set position limits or position accountability levels by, among other things, allowing 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 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 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. The new rules have a general compliance date of January 1, 2022 (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.
The adopting release for the final rules is available here.
Margin on Security Futures
At a joint open meeting held on October 22, 2020, the SEC and the CFTC approved a joint final rule to harmonize the minimum margin levels for security futures. The new rule applies to security futures held in a futures account, a securities portfolio margin account or a securities account that is not approved for margining. The joint final rule and a related request for comment are two components of the SEC’s and the CFTC’s ongoing efforts to further harmonize their regulatory regimes to better serve the markets and investors.
Under the joint final rule, the required margin level for each long or short unhedged position in a security future will be set at 15 percent of its current market value. Although there are currently no security futures contracts listed for trading on U.S. exchanges, the final rule amendments would establish a 15 percent level for security futures in the event an existing exchange were to resume security futures operations or if another exchange were to launch trading in security futures contracts.
The SEC and the CFTC also issued a joint request for comment regarding possible ways to implement portfolio margining of uncleared swaps and non-cleared security-based swaps, including any ways to use margin rules to improve efficiency, reduce complexity and boost consistency and resiliency in the financial system. The SEC and CFTC are soliciting comments on several aspects of the margining of uncleared swaps, non-cleared security-based swaps and related positions, including on the merits, benefits and risks of margining these types of positions, and on regulatory, legal and operational issues related to margining these positions in different account types. The public comment period will remain open for 30 days following publication in the Federal Register. All comments will be posted on the websites of both the SEC and the CFTC.
The adopting release for the new margin rules is available here.
The request for comment is available here.