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 finalized and implemented, the head of the agency 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. 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 interim period could be lengthy. There will be a 60-day period for comments. Staff then has to review those comments, plus the thousands that already have come in on the subject, and make recommendations to the full Commission, which then will vote.

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 proposed rule 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 proposal, 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. The difference will be the focus on traders with positions outside Gensler’s formula.

Commissioner Scott O’Malia also took issue with the interim approach — the so-called “interim position points” system (see NGI, Jan. 10). “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 NGI, Dec. 20, 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.

In related action last week, eight senators called on the CFTC to reject efforts by Wall Street and the financial industry to water down proposed rules to rein in excessive speculation in the derivative swaps, futures and options markets.

The Dodd-Frank Wall Street Reform Act, which President Obama signed into law in July, requires the Commission to impose hard position limits on exempt commodities (metals and energy) by no later than Monday (Jan. 17), and on agricultural commodities by no later than April 17.

But in recent months, the senators contend that Wall Street firms have mobilized their lobbyists to try to kill the new rules before they ever get off the ground. “It has become increasingly clear that Wall Street seeks to use the rulemaking process to eviscerate the new position limits. We urge you to reject calls to delay the new rules,” wrote the senators (seven Democrats, one Independent) in a letter last Tuesday to Gensler.

“The growing role of hedge funds, financial traders and long-term passive investors in energy and other commodity markets has had devastating consequences for the average American. These speculators have contributed to rising volatility and periodic price spikes [in energy]…It is critical that the Commodity Futures Trading Commission execute these changes,” they said.

Signing off on the letter were Sens. Bill Nelson (D-FL), Maria Cantwell (D-WA), Carl Levin (D-MI), Robert Menendez (D-NJ), Patty Murray (D-WA), Bernie Sanders (I-VT), Sheldon Whitehouse (D-RI) and Ron Wyden (D-OR).

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