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CFTC Reproposes Position Limits, Adopts Aggregation Regulations

With the Obama-to-Trump transition and the expected change in attitude toward regulations that will come with it less than seven weeks away, the Commodity Futures Trading Commission (CFTC) on Monday voted unanimously to repropose regulations implementing limits on speculative futures and swaps positions as called for in the Dodd-Frank Wall Street Reform and Consumer Protection Act, and approved final aggregation regulations, which are a key component of the agency's position limits regime.

The 910-page reproposal includes "many changes to the 2013 proposal we inherited," CFTC Chairman Timothy Massad said during a conference call with reporters. In addition, "the Commission is now in a time of transition. I do not want to adopt a final rule today that the Commission would choose not to implement or defend next year. Our markets and the many end-users and consumers who rely on them are served best by having reasonable and predictable regulation. Uncertainty and inconsistency from one year to the next are not helpful."

In response to comments on a prior proposal published in December 2013, and on a supplemental proposal published in June 2016, CFTC is reproposing limits on speculative positions in 25 core physical commodity futures contracts and their "economically equivalent" futures, options, and swaps (referenced contracts), and is deferring action on three cash-settled commodities. CFTC is also reproposing the definition of bona fide hedging position, as well as exemptions for bona fide hedging positions in physical commodities. Exemptions are being reproposed for, among other things, positions that are established in good faith prior to the effective date of the initial limits that would be established by final regulations, CFTC said.

The reproposed regulations include requirements and acceptable practices for Designated Contract Markets (DCM) and Swap Execution Facilities (SEF) for setting position limits for the 25 referenced contracts, as well as acceptable practices for exchange position limits or accountability rules in all other listed contracts, including excluded commodities. The reproposed regulations also permit exchange recognition of non-enumerated bona fide hedging positions, certain enumerated anticipatory hedge positions, and granting of spread exemptions, and includes updated reporting requirements under part 19 of the CFTC's regulations. The reproposed regulations would delay any requirement for DCMs and SEFs that lack access to sufficient swap position information to establish position limits on swaps that are subject to a federal position limit.

The reproposal will be open for public comment for 60 days after publication in the Federal Register.

The reproposal is the result of the latest effort by CFTC to implement position limits as directed by Congress in 2010. In 2013, after withdrawing its appeal of a federal court decision that tossed a controversial final rule aimed at limiting speculative trading in the swaps markets, CFTC voted to propose new rules in place of the discarded position limits rule. The proposed rule would implement section 737 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, clamping down on speculation in 28 selected physical commodity futures and swaps, including four energy contracts: Nymex Henry Hub Natural Gas, Nymex Light Sweet Crude Oil, Nymex New York Harbor Gasoline Blendstock and New York Harbor Heating Oil.

"We have proposed further adjustments to the bona fide hedging position definition, to eliminate certain requirements that we have decided are unnecessary, and to address other concerns raised by market participants," Massad said. "Another substantial difference from the 2013 text is our proposal first made this summer to allow the exchanges to grant non-enumerated hedge exemptions. This process must be subject to our oversight as a matter of law and as a matter of policy, given the inherent tension in the roles of the exchanges as market overseers and beneficiaries of higher trading volumes."

Commissioner J. Christopher Giancarlo left the door open to amending the proposal before it becomes a final rule.

"In some areas, concerns expressed by market participants regarding the 2011 rule that was struck down by the court and the 2013 proposal have been well addressed," Giancarlo said. "In other areas, they do not appear to have been as well addressed.

"Notably, the proposal introduces a series of new estimates of deliverable supply that have not been previously presented to the public. It also incorporates concepts introduced in the 2016 supplemental proposal. Given these new additions and the complexity of the proposal, one more round of public comment is appropriate. I feel comfortable that the proposal before us provides the basis for the implementation of a final position limits rule that I could support."

In another unanimous vote Friday, CFTC approved proposed rules establishing swap dealer (SD) and major swap participant (MSP) minimum capital requirements. The rules propose minimum levels of qualifying capital for SDs and MSPs that are not subject to the capital rules of a prudential regulator, as required by Dodd Frank, CFTC said.

"The proposed rules generally permit the application of alternative approaches based upon existing U.S. bank regulators' capital requirements or the CFTC's future commission merchant and the Securities and Exchange Commission's broker-dealer net liquid asset capital requirements," the agency said. "The proposal further provides that SDs predominantly engaged in non-financial activities and MSPs may elect minimum capital requirements based upon the tangible net worth of the entities. Also, SDs may use internal models for purposes of computing their regulatory capital, subject to prior approval by either the CFTC or the National Futures Association. The rules would also require certain SDs and MSPs to satisfy defined liquidity requirements."

Massad, formerly assistant secretary for financial stability at the Treasury Department, was nominated CFTC Chairman by President Obama in 2013 and was confirmed by the Senate in June, 2014. It is widely assumed that he will step down from that position as part of the looming transition. Massad would not clarify his post-inauguration plans or comment on speculation that Giancarlo could be moved into the Chairman's seat. Giancarlo, a Republican, was a brokerage firm executive before being appointed to CFTC.

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