An ongoing joke between Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and several exchanges leaders during last week’s Futures Industry Association’s Expo held in Chicago was the number, approximately 24,000, of comment letters sent to the CFTC on its proposed rules. The vast majority of those comments dealt with its rule proposal on position limits, which the Commission will vote on tomorrow along with a final rule on Derivatives Clearing Organization general provisions and core principles.
During the FIA event last week there was some speculation regarding changes in the final rule on position limits but there was agreement that both sides of the position limit debate would be unsatisfied with the results. “The rule may offend everybody. Both sides will be upset by this rule,” said CFTC Commissioner Scott O’Malia.
Commissioner Michael Dunn, expected to be the swing vote, would not reveal whether he was leaning for or against approving the rule but many insiders at the event assumed the measure would be approved.
Dunn acknowledged that lack of position limits were not a critical element in the overall response to the financial crisis of 2008 and indicated the commission needed to focus on elements of the rules that would prevent another crisis and protect the U.S. economy.
The position limit rule is a major rule meaning the CFTC estimates that is will cost the industry at least $100 million to comply.
CME Group CEO Craig Donohue joked with Chairman Gensler that the majority of those comments were from CME Group during the Chairman’s address to the conference. But on a panel of exchange leaders CME Executive Chairman Terry Duffy wasn’t joking when he criticized the rule that allowed limits on cash settled commodities to be 5X that of physically settled contracts. “I never saw a more perverse rule in my life,” Duffy stated. “[Allowing a 5X higher limit for cash settled contracts] is a recipe for manipulation. It incents people to do bad things.”
Another criticism of the January rule proposal was that limits on agricultural commodities were frozen at 2005 levels of the open interest formula used in the proposal for all commodities. The proposal sets non-spot month limits (aggregate single-month and all months combined) at 10% of open interest in that commodity for the first 25,000 and 2.5% thereafter for the commodities that did not have specific non-spot limits. That was based on the most recent open interest numbers available but the rule left the limits in place for “legacy” ag markets using the same metric but based on 2004 open interest.
We will know tomorrow what changes were made based on industry feedback and if it will be enough to get the necessary three votes.