On December 5, 2016, the U.S. Commodity Futures Trading Commission (“CFTC”) reproposed regulations implementing limits on speculative futures and swaps positions (“Reproposal”). Notably, in the Reproposal, the CFTC: (1) proposes limits on speculative positions in 25 physical commodity futures contracts and their “economically equivalent” futures, options, and swaps; (2) proposes numerous adjustments to the bona fide hedging position definition; and (3) proposes to allow exchanges to recognize non-enumerated bona fide hedging positions and certain enumerated anticipatory hedge positions, and to grant spread exemptions.
In November 2011, the CFTC passed a final rule on position limits for futures and swaps to cap the maximum number of derivative contracts that an entity may purchase or sell over a set period. However, after industry associations argued to the U.S. District Court for the District of Columbia (“District Court”) that the CFTC misinterpreted the Commodity Exchange Act (“CEA”) to require such a rule, the District Court vacated and remanded the rule back to the CFTC (see October 5, 2012 edition of the WER). In doing so, the District Court held that the CFTC failed to make a necessary finding that such limits were “necessary and appropriate” before promulgating the rule. As a result, the CFTC proposed a new position limits rule in December 2013 (“2013 Proposal”) after finding that position limits were necessary and appropriate for 28 commodity futures and option contracts. The CFTC later supplemented its proposal in June 2016 (together with the 2013 Proposal, the “Previous Proposed Rule”).
After receiving comments on the Previous Proposed Rule, the CFTC issued the Reproposal, which proposes the following, among other things:
- Limits on speculative positions in 25 physical commodity futures contracts and their “economically equivalent” futures, options, and swaps, including on NYMEX Henry Hub Natural Gas (“Henry Hub”), NYMEX Light Sweet Crude Oil, NYMEX Gasoline Blendstock, and NYMEX New York Harbor Heating Oil contracts.
- Levels for spot month limits based on 25 percent of estimated deliverable supply or at lower levels recommended by a Designated Contract Market to accommodate speculative activity that provides liquidity for hedgers. The CFTC also proposes a conditional spot-month limit exemption of 10,000 contracts for cash-settled contracts in Henry Hub.
- Levels for non-spot-month limits based on 10 percent of the open interest for the first 25,000 contracts and 2.5 percent of the open interest thereafter.
- Define a bona fide hedging position to, among other things, (1) mirror CEA section 4a(c), including a temporary substitute test, an economically appropriate test, and a change-in-value requirement for physical commodities; (2) eliminate the incidental test and the orderly trading requirement; (3) recognize certain pass-through swap offsets and offsets of hedging swaps; (4) retain certain enumerated hedges largely as previously proposed, but remove the condition that a utility be required or encouraged to hedge by its state commission to qualify as a bona fide hedge; (5) withdraw the safe harbor quantitative test for cross-commodity hedges; and (6) deem certain trade options to be equivalent to a cash position for the purpose of a basis of a bona fide hedging position.
- Processes for exchange recognition of non-enumerated bona fide hedging positions, certain enumerated anticipatory hedge positions, and granting of spread exemptions.
- A delay of the compliance date of any final rule until January 3, 2018 at the earliest.
In a separate statement, CFTC Chairman Timothy Massad stated that he supported a reproposal because of the numerous changes made to the Previous Proposed Rule and because he did not “want to adopt a final rule today that the [CFTC] would choose not to implement or defend next year.”