Ten years after the passing of the Wall Street Accountability Act a.k.a. Dodd Frank the Commodity Futures Trading Commission (CFTC) held a public meeting yesterday to bring forth the fifth attempt at proposing a position limit rule. Over the last 10 years the CFTC has attempted four position limit proposals. In 2011 one proposal passed but was later struck down by the courts. Today, the fifth proposal was published. As expected, this densely complex 494-page proposal did not have unanimity of support. The proposed regulation was supported by three commissioners (Tarbert, Quintenz and Stump) with two commissioners dissenting (Benham and Berkovitz).
Highlights from the meeting.
Some highlights from yesterday’s meeting were 1) the dissent essentially related to the role of exchanges in the process, 2) the broadening of strategies in the enumerated positions categories and 3) the elimination of cash reporting forms.
A couple of the objectives of Dodd Frank relating to the establishment of position limits were to move the accountability of establishing position limits for certain energy and metals contracts from the exchanges to the CFTC and broaden the types of contracts subject to those limits. Those two objectives were met. The CFTC now has primary accountability on the establishment of speculative position limits. However, the exchanges still maintain and important and vital role in the granting of hedge exemptions.
The initial number of contracts with federal position limits imposed went from nine “legacy” agricultural contracts to now a total of 25 contracts. As the regime gets rolled out up to 400 contracts could be impacted. Also, the number of enumerated hedges has been increased by five. The proposal is said to address the interplay between the CFTC and the exchanges in terms of informing both the appropriate level of limits as well as hedging strategies that meet regulatory requirements.
There are three main categories of contracts effected, core referenced futures contracts (CFRC), other futures and options contracts related to CFRCs and economically equivalent swaps – a term that is not defined. Two important changes alluded to in the meeting were the elimination of the risk management exemption and the elimination of the “12-month” rule related to anticipatory hedging. As Chairman Tarbert stated in his opening comments, “Our proposal would also end the “risk management” exemption that has allowed banks, hedge funds, and trading firms to take large and purely speculative positions in agricultural markets.” The impact of this change will be important to monitor.
Clarity around position limits has taken far too long to be addressed. An interesting set of facts was injected into the meeting by commission staff. When asked by Commissioner Quintenz if there were any examples of increase in deliverable supply staff presented two examples. Deliverable supply numbers were last updated in 1999. Stated in contracts deliverable supply in corn went from 3,324 contracts in 2016 to 13,020 in 2019, a nearly four-fold increase. Similarly, for wheat deliverable supply went from 9,422 contracts to 12,990. Irrespective of congressional intent, the facts on the ground – for those legacy contracts under existing regulatory structures scream for position limit changes. I am quite sure similar examples can be made in the energy sector.
Second, was the proposed elimination of cash reporting forms. In my opinion this is a long overdue and welcomed change. The commission recognized that much of the required information was already available from exchanges, when hedgers apply for hedge exemptions. Again, from Chairman Tarbert’s opening comments, “Given the choice of burdening a government agency or private enterprise, I think it is more prudent to put the burden on the government.” This is one aspect that supports that refreshing approach to regulation.
That said, this is a 494-page proposal and the devil will be in the details. MRB will analyze this proposal in full for a further analysis to be forthcoming.