The Commodity Futures Trading Commission (CFTC) Thursday voted out the long-anticipated proposal to set hard position limits to curb excessive speculation in the derivatives market. And until the position limits can be implemented, the agency head issued a directive for staff to closely monitor traders with large positions.

It will be some time before position limits for single-month and all-months-combined can be fully implemented. There will be a 60-day period for comments, followed by a staff review and submission of a proposed final rule for a vote by the commissioners.

"In the interim, if a trader has a position that is above a level of 10 and 2 1/2% of futures and options on futures open interest in the 28 contracts for which the Commission is proposing position limits, I have directed staff to collect information, including using special call authority when appropriate, to monitor these large positions," said Chairman Gary Gensler.

The staff regularly receives public and confidential market data and can contact traders directly. If necessary CFTC staff may issue a special call to obtain additional information about traders' cash and swap activity. "If there continue to be concerns, staff can recommend appropriate action to the Commission," he said.

The controversial proposal on hard position limits cleared the CFTC by a vote of four to one, with Commissioner Jill Sommers dissenting. She said she was voting against the proposed rule, not because she was inherently opposed to position limits, but because the rule "is not based on market information. First, we should conduct a complete analysis of swap market data before we determine the appropriate formula to propose. We have not done that...Without data on spot market positions, the spot month limits we are proposing are not enforceable."

Commissioner Michael Dunn questioned whether Gensler's interim directive was consistent with the CFTC's surveillance activities. Gensler assured him that it was.

"For decades the Commission's surveillance staff has briefed the Commission weekly on the positions of traders in futures markets that are of regulatory interest; sometimes as regards large traders, price volatility, supply and demand imbalances issues, around delivery in the spot market, or convergence matters," Gensler said.

Commissioner Scott O'Malia also took issue with the interim approach -- the so-called "interim position points" system (see Daily GPI, Jan. 5). "While the interim step may be well-intentioned, it is unnecessary and ultimately detrimental to the overall objective of the proposed rule," he said. O'Malia recommended that the CFTC disregard the "position points" system and await full implementation of the final rule on position limits.

The Commission's proposed rule on hard position limits, which was introduced in mid-December, 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 (see Daily GPI, Dec. 17, 2010).

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.

The proposed rule "includes one position limits regime for the spot month and another regime for single-month and all-months-combined limits. It would implement spot-month limits, which are currently set in agriculture, energy and metals markets, sooner than the single-month or all-months-combined limits. Single-month and all-months-combined limits, which currently are only set for certain agricultural contracts, would be re-established in the energy markets and be extended to certain swaps," Gensler said.

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