CFTC steps up on limits

The Commodity Futures Trading Commission proposed position limits on four futures and options contracts in energy markets in January that could have far reaching effects on fund managers and passive long commodity indexes.

The proposed limits would cover natural gas, light sweet crude oil, heating oil and unleaded gasoline and cover both physically delivered and cash settled contracts that trade at the New York Mercantile exchange and the Intercontinental Exchange.

The CFTC depended in part on their existing protocols in the agriculture markets in setting position limits. Limits are set across in the same groupings: single month, all months combined (AMC) and spot month.

The basic formula for AMC limits is 10% of the first 25,000 contracts of open interest plus 2.5% of open interest beyond that. The approach in the spot month is the same, 25% of the estimated deliverable supply.

A CFTC release says, “The proposed rules are designed to prevent excessive concentration in these markets.”

The proposal includes exemptions for bona fide hedgers — traders with inventory or anticipatory purchase or sale transactions in the physical commodity. It would establish a new limited risk management exemption for swap dealers. The swap exemption would be limited to two times the otherwise applicable position limit.

One significant difference than ag limits is that the limits would aggregate positions at the owner level. They would not allow positions to be disaggregated for independent account holders.

While all the commissioners supported putting the proposal out for comment, several expressed concerns. The main issue was applying limits on domestic markets while not having the authority to place those limits on the large OTC markets.

“I am very concerned that the result of putting in position limits without having over-the-counter authority and some type of international [agreement] is that we will end up with less transparency in the market place,” CFTC Commissioner Michael Dunn said.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board