As it writes new rules under Dodd-Frank, the Commodity Futures Trading Commission (CFTC) has shown a tendency to, at a minimum, push rule proposals to the comment period. Twice, though, CFTC Chairman Gary Gensler has postponed discussing proposed rules at the Commission's initially scheduled meeting. While they were initially discussed in December, it wasn’t until Jan. 13 that position limit rules were approved.
While expanding specific limits on spot months and combined months for energy and metal markets, the rule also establishes swap trading relationship documentation requirements for swap dealers and major participants.
"[Gensler] didn’t have the votes to go forward [in December]. There was a little disconnect between [CFTC Commissioner Bart] Chilton and the other commissioners. There still seems to be a bit of disconnect, but at least now they are going forward with the discussions regarding position limits," says Paul Zubulake, senior analyst at Aite Group.
After the Dec. 16 meeting, Chilton, a Democrat, told Reuters he would have voted against the proposed position limit rule. He has expressed concerns that higher energy costs are because of excessive speculation. Commissioners Jill Sommers and Scott O’Malia, both Republicans, have voiced concerns about the speed of reforms and a lack of information about the proposals.
Chilton’s complaint at the time was that the proposed limits would not be enacted soon enough. In the current version of the rule that is going forward, while hard position limits still are a way off, in the meantime a points system can be put in place. Under the points system, traders will report their positions to the CFTC; if that position gets too large, then the CFTC can encourage the trader to reduce his position. The line of "too large" has not been decided.
Some analysts say the scope of the CFTC's action is too small, though, as markets have become global in nature. "You need global cooperation in these markets. If you restrict them in the United States only, there is going to be some regulatory arbitrage," Zubulake says.
On releasing the rules CFTC Chairman Gensler wrote, "At the core of our obligations is promoting market integrity, which the agency has historically interpreted to include ensuring markets do not become too concentrated."