Position Limits Rumors Become Reality: CFTC Adopts Final Position Limits Rule Under Dodd-Frank

Position Limits Rumors Become Reality: CFTC Adopts Final Position Limits Rule Under Dodd-Frank

On October 18, 2011, the Commodity Futures Trading Commission ("Commission") adopted, by a vote of 3 to 2, a final rule regarding position limits for certain physical commodity derivatives ("Final Rule") pursuant to the Commodity Exchange Act ("CEA"), as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act").

Although the text of the Final Rule is not yet available, the Commission has stated its intent to phase-in position limits in two parts following effectiveness of the Commission's final rulemaking regarding the further definition of "swap."

  • Phase one: Spot-month position limits will be effective sixty days following effectiveness of the Commission's final rule further defining the term "swap" under the Dodd-Frank Act. This means that the first phase of position limits imposed by the Final Rule is likely not to become effective until at least mid-April 2012.
  • Phase two: Non-spot-month position limits will not be implemented until after the Commission has received one year of swaps open interest data regarding the relevant contracts, likely not until sometime in 2013 or later.

The Commissioners expressed a wide range of opinions for and against adoption of the Final Rule, in particular with respect to the effects on commodities markets of imposing position limits on contracts not previously subject to limits. Chairman Gensler expressed strong support for the Final Rule, but noted that the rule is in no way intended or able to control pricing. Despite voting in favor of the Final Rule, Commissioner Dunn suggested that there was little economic evidence that speculation in previously unregulated contracts caused higher market prices for underlying commodities, and suggested that position limits may impair price discovery and the ability of commercial entities to adequately hedge their business risks. Commissioner Chilton expressed some dissatisfaction with the Final Rule, but indicated his belief that it is consistent with the intent of Congress in the Dodd-Frank Act of imposing position limits on swaps and previously unregulated futures contracts.

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