The CME Group contends that any attempt by the Commodity Trading Futures Commission (CFTC) to impose position limits on exempt and agricultural commodities without first obtaining evidence on excessive speculation in the markets would violate federal law.
The Commodity Exchange Act, as amended by the Dodd-Frank Wall Street Reform Act, requires the Commission to first find that position limits "are necessary to diminish, eliminate or prevent burdensome excessive speculation before imposing such limits," wrote CME CEO Craig S. Donohue in a recent letter to the CFTC. CME is a holding company for four exchanges, including the Chicago Mercantile Exchange Inc., the Chicago Board of Trade, the New York Mercantile Exchange and the Commodity Exchange Inc.
The Administrative Procedure Act (APA) requires that an agency proposing a new rule justify the need for it. Specifically the APA requires that a notice of a proposed rule include "'sufficient detail on its content and basis in law and evidence to allow for meaningful and informed comment.' Absent a finding with supporting evidence that position limits are 'necessary,' this APA requirement cannot be met because the public will not know the Commission's specific reasoning for the essential finding that triggers its proposed rulemaking," Donohue said.
Morgan Stanley recommends that the Commission propose interim position limits until its has the opportunity to collect and analyze the relevant data before exercising its authority to set limits on speculative positions.
"As the Commission proceeds to determine whether position limits are 'necessary,' it should be guided by the statute's own terms, which indicate that such limits would be 'unnecessary' where burdensome excessive speculation does not exist or is unlikely to occur in the future," the CME's Donohue said.
He believes that regulated exchanges have effectively dealt with speculative concerns through their market surveillance programs. "The exchanges independently have the ability to establish position limits as warranted by the characteristics of their traded contracts, and to employ position accountability provisions as appropriate given particular market constructs and market conditions," Donohue said.
"Insofar as the existing exchange programs are and have been proven to be effective, CME Group believes the Commission would lack the statutory basis for establishing new federal position limits on certain contracts involving exempt and agricultural commodities," he noted.
At a minimum, the CME Group asked the agency to defer imposing the limits on speculative positions until it has the data necessary to accurately set and enforce those limits. Dodd-Frank gives the CFTC the authority to impose position limits, but it does not require the agency to do so.
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