Bart Chilton, a member of the Commodity Futures Trading Commission (CFTC), Tuesday expressed his reluctance to support the agency's proposal to establish position limits in the swaps market. He instead recommended that the CFTC institute an "interim position 'points' system."

There is a difference between the two. Position limits "would be hard and fast. The Commission would mandate traders adhere to position limits. On the other hand, interim position points would serve first as a flag for us to obtain further data. Second, they would allow for a determination of the size of a trader's net positions," Chilton said.

"If a trader's net position is in excess of a speculative position point, we could use that information to make a determination as to what, if any, course of action to take, just as we do now with market surveillance information. We could do nothing, or we could urge the trader to reduce trading positions," he said.

In addition, the CFTC "has other authorities that could, following an affirmative vote by the Commission, be used to ensure that a trader does not exceed the position point."

Since the last public meeting on Dec. 16, "I have been convinced that the interim position point system is unfortunately the best the agency can do at this time, given the lack of Commission support for moving forward on actual position limits now," Chilton said. The CFTC was expected to vote on a position limit proposal at the Dec. 16 meeting, but it surprisingly punted the issue to 2011 (see Daily GPI, Dec. 17, 2010).

"While I cannot prejudge what or when the Commission will do regarding position limits, it is my intent to move the process forward with the chairman's concurrence to adopt the interim position points approach despite what I consider flaws in the position limits proposal," he said.

The Dodd-Frank Wall Street Reform Act, which President Obama signed into law in July, requires the Commission to impose position limits on exempt commodities (metals and energy) by no later than Jan. 17, 2011, and on agricultural commodities by no later than April 17, 2011. The next scheduled meeting for possible consideration of a proposal on position limits is Jan. 13.

The draft of the proposed rule would limit the amount of positions in futures and options contracts and economically equivalent swaps, other than bona fide hedge positions that may be held by any entity in one of the 28 covered commodities, including crude oil, natural gas, heating oil and gasoline.

It would set spot or front-month position limits at 25% of deliverable supply for a commodity, with a conditional spot-month limit of five times that amount for entities with positions exclusively in cash-settled contracts.

Nonspot month position limits (aggregate single-month and all-months-combined limits that would apply across classes, as well as single-month and all-months-combined position limits separately for futures and swaps) would be set for each referenced contract at 10% of open interest in that contract up to the first 25,000 contracts, and 2.5% thereafter.

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