Limits compromise on ags, allow larger nat gas cash settled positions

The Commodity Futures Trading Commission (CFTC) offered a few changes in its position limit rule it will vote on later today from the initial proposal. The proposal set an all month limit based on an open interest formula of 10% of open interest for the first 25,000 and 2.5% thereafter. However that was for the mostly energy and metals contracts that were not previously subject to Federal limits. The ag markets use the same metric but based on 2004 open interest levels, which are much less than if they use current open interest levels. The amended rule accepted a CME Group proposal that was significantly higher than the previous limit but less than if they used up to date open interest figures.

Another change is the provision that sets limits for cash settled commodity contract at 5X that of physically settled contracts has been scrapped with the exception of natural gas. The limits on cash settled contracts will be the same as that of physically delivered contract on all commodities except for natural gas where it will remain at 5X that of the physically settled equivalent contract.

An ongoing joke between Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and several exchange 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 majority of those comments dealt with its rule proposal on position limits, which the Commission will vote on today 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 has 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.

We will know today what changes were made based on industry feedback and if it will be enough to get the necessary three votes.

CFTC released fact sheet on Position Limits
CFTC released Q&A sheet on Position Limits

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