Federal Commodity Futures Trading Commission Finalizes Position Limits Rule

Thursday, the Commodity Futures Trading Commission (CFTC) issued its long-delayed position limits rule mandated by the “Dodd-Frank Wall Street Reform Act” to curb excessive speculation in energy and other commodities futures contracts by a 3 – 2 vote.

The final position limits rule applies to 25 physically settled and linked cash-settled futures contracts, options on futures contracts, and “economically equivalent swaps.”

Important to energy marketers, federal spot month position limit levels are set at or below 25 percent of estimated deliverable supply on the NYMEX Light Sweet Crude Oil (CL), NYMEX New York Harbor ULSD Heating Oil (HO) and the NYMEX New York Harbor RBOB Gasoline (RB) contracts.

RB and HO front-month contracts will have a position limit of 2,000 contracts.

The federal spot month limit for the WTI contract features the following step-down limit: (1) 6,000 contracts as of the close of trading three business days prior to the last trading day of the contract; (2) 5,000 contracts as of the close of trading two business days prior to the last trading day of the contract; and (3) 4,000 contracts as of the close of trading one business day prior to the last trading day of the contract.

In written comments earlier this year, EMA urged the CFTC to lower the stated spot-month limit for energy futures and “economically equivalent” energy futures, options on futures, and swaps to a level that is more consistent with existing federal spot month limits for legacy agriculture contracts to prevent excessive speculation.

In addition, EMA urged the Commission to impose position limits on non-spot months to energy futures contracts and “economically equivalent” contracts. EMA also urged the CFTC to impose separate limits on passive traders (i.e., index funds, exchange traded funds, and other similar vehicles that generally buy without regard to price), and require that positions of passive long speculators who follow the same trading strategy be aggregated for purposes of applying spot and non-spot month position limits.

Unfortunately, the final rule fell short in addressing those concerns to reduce excessive oil speculation.

The final rule also expands the list of CFTC-defined bona fide hedge exemptions. It also creates a new process for bona fide hedges that are not on the CFTC’s exemption list to be approved at the exchange level with a 10-day period for the CFTC to review those decisions.

Democratic commissioners expressed concerns that the final rule is less sweeping than earlier versions and would impact trading on the soonest-expiring contracts, leaving intact traders’ abilities to make big wagers on longer-term contracts.

It is also likely to allow for bigger maximum positions than currently allowed in some physically settled futures contracts, and limits will likely be more permissive than those now allowed by exchanges. Exchanges would be free to maintain their current levels.

Excessive speculation helped contribute to the oil price run up in the mid-2000s only to see it dramatically plunge within a six-month period from approximately $147 per barrel in July 2008 to a December 2008 low of $32 per barrel.

It can be argued that excessive speculation helped contribute to the recent dramatic drop in oil prices which sent the West Texas Intermediate (WTI) contract into negative territory (-$37.63 in April 2020) for the first time.

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