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FIA commends and offers refinements to CFTC’s proposed position limits rule

14 May 2020

Washington, D.C.—FIA today commends the CFTC for proposing a workable and flexible rule on speculative position limits for derivatives.  The rule, which has been proposed and re-proposed several times since the passage of the Dodd-Frank Act nearly 10 years ago, provides a pragmatic framework for the agency and market participants while enacting the market protections sought by Congress.  FIA welcomes the new effort by the CFTC to complete the rule in a way that sets spot month limits on core referenced futures contracts based upon updated measures of deliverable supply, aligns better with current commercial hedging practices, removes unnecessary regulatory burdens on market participants and seeks to protect market liquidity and efficiency.

While praising the overall effort, FIA suggests technical changes to certain parts of the draft rule that would help to further clarify the rule text, enhance the rule’s accommodation of commercial hedging and other risk management activities, and promote a smooth implementation process.

“Position limits are an important tool to help ensure the proper functioning and fairness of markets, but the rules need to ensure that end-users like farmers, manufacturers, and construction companies are able to rely on the risk management tools provided by derivatives markets,” said FIA President and CEO Walt Lukken. “Chairman Tarbert and the CFTC staff should be commended for working with the industry to produce a workable position limits rule, and FIA looks forward to working with the CFTC to finalize the rule.”

Specifically, FIA’s comment letter today supports many provisions in the rule, for example:

  • The use of updated deliverable supply estimates to set spot month limits.
  • The decision not to impose position limits outside of the spot month for the energy, metals, and certain agricultural core referenced contracts (and related referenced contracts).
  • The exclusion of location basis contracts, swap guarantees, and trade options from speculative position limits. 
  • The exclusion of pre-existing positions from the new proposed limits and the grandfathering of preexisting bona fide hedges.
  • The targeted definition of economically equivalent swap.
  • The expanded list of enumerated bona fide hedge transactions.
  • The delegation to exchanges of the authority to grant non-enumerated hedge exemptions subject to Commission review periods.  
  • The elimination of the 5-day rule that would have restricted enumerated bona fide hedge transactions during the shorter of the last five days of trading or the spot period. 
  • The adoption of the pass-through swap provision.
  • The elimination of position limit reporting forms. 
  • The determination that the Commission must find that position limits are necessary before it is authorized to establish federal position limits.
  • The proposal to set the date for compliance with a final position limits rule at 365 days following publication of a final rule in the Federal Register.

In supporting the rule, FIA also makes several recommendations to help make the rule more practical for market participants who will have to comply with the new limits while managing their businesses. These suggestions include:

  • The Commission should provide market participants with greater clarity about the referenced contracts subject to federal position limits.
  • The list of enumerated bona fide hedging transactions should be expanded and moved into the rule text.
  • Exchanges should be permitted to accept and grant hedge exemptions on a rolling basis in advance of the effective date of a final rule to facilitate implementation and compliance by exchanges and market participants.
  • There needs to be a process for moving commonly used non-enumerated bona fide hedge transactions to the list of enumerated bona fide hedges.
  • The Commission should retain for itself and the exchanges the flexibility to grant risk management exemptions for contracts that would benefit from more liquidity and enhanced price discovery.
  • A dealer or other market participant should be able to rely on the pass-through swap exemption if it has a reasonable basis to believe that a swap qualifies as a bona fide hedge for its swap counterparty.
  • The Commission should propose cross-border guidance for position limits.
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