Protecting the futures markets from excessive speculation is critical to maintaining market integrity, resiliency, and vibrancy. The Commodity Exchange Act (CEA), as amended by the Wall Street Transparency and Accountability Act of 2010 (Dodd-Frank Act), requires the Commission to establish such limits as it finds are necessary for the purpose of preventing the burdens associated with excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price of an underlying commodity. The Commission, in its Position Limits for Derivatives (2020 Final Rulemaking), established new and/or amended federal speculative position limits for 25 physically-settled commodity derivative contracts and certain linked instruments.
To provide flexibility and certainty for end-users, these limits include a number of exemptions, such as a revised definition of “bona fide hedging transaction or position,” and an expanded list of enumerated bona fide hedges to cover common commercial hedging practices.
There are three basic elements to the regulatory framework for federal speculative position limits:
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Which contracts are subject to speculative position limits;
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When these contracts are subject to limits;
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The size of the limits;
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- Contract Limits
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The 2020 Final Rulemaking applies federal speculative position limits to 25 physically-settled core referenced futures contracts (the “Core Referenced Futures Contracts” or “CRFCs”) and certain associated contracts. Collectively, contracts that are subject to federal speculative position limits, including the 25 CRFCs, are called “Referenced Contracts.”[1]
This list of 25 CRFCs was expanded from the nine contracts that were previously subject to federal speculative position limits (the “Legacy Contracts”). In addition to the 25 CRFCs, the 2020 Final Rulemaking applies federal speculative position limits to contracts that are linked, either directly or indirectly, to the price of:
- a CRFC; or
- the same commodity underlying a CRFC for delivery at the same location(s) specified in that particular CRFC.
Furthermore, the 2020 Final Rulemaking applies federal speculative position limits to economically equivalent swaps. Economically equivalent swaps are swaps that have “identical material” contractual specifications, terms, and conditions as another Referenced Contract. Swaps in a commodity other than natural gas are economically equivalent swaps even if they differ from the Referenced Contract in one or more of the following:
- lot size specifications or notional amounts;
- delivery dates diverging by less than one calendar day for physically-settled swaps; or
- post-trade risk management arrangement (e.g., uncleared swaps versus cleared futures contracts).
For natural gas swaps, the same definition generally applies, except that they are considered economically equivalent to their corresponding CRFC if the delivery date diverges by less than two calendar days, instead of one calendar day.
All 25 CRFCs and their associated Referenced Contracts are subject to spot month federal speculative position limits, while only the Legacy Contracts and their associated Referenced Contracts are subject to federal speculative position limits outside of the spot month (the non-spot month).
Federal speculative position limit levels generally apply across exchanges and the over-the-counter (“OTC”) swaps market.[3]
Core Referenced Futures Contracts Subject to Federal Speculative Position Limits
Legacy
Agricultural[4]
(federal speculative position limits during and outside of the spot month)
Non-Legacy Agricultural
(federal speculative position limits only during the spot month)
Metals
(federal speculative position limits only during the spot month)
Energy
(federal speculative position limits only during the spot month)
CBOT Corn (C)
CME Live Cattle (LC)
COMEX Gold (GC)
NYMEX Henry Hub Natural Gas (NG)
CBOT Oats (O)
CBOT Rough Rice (RR)
COMEX Silver (SI)
NYMEX Light Sweet Crude Oil (CL)
CBOT Soybeans (S)
ICE Cocoa (CC)
COMEX Copper (HG)
NYMEX New York Harbor ULSD Heating Oil (HO)
CBOT Soybean Meal (SM)
ICE Coffee C (KC)
NYMEX Platinum (PL)
NYMEX New York Harbor RBOB Gasoline (RB)
CBOT Soybean Oil (SO)
ICE FCOJ-A (OJ)
NYMEX Palladium (PA)
CBOT Wheat (W)
ICE U.S. Sugar No. 11 (SB)
CBOT KC Hard Red Winter Wheat (KW)
ICE U.S. Sugar No. 16 (SF)
MGEX Hard Red Spring Wheat (MWE)
ICE Cotton No. 2 (CT)
Federal spot month position limits apply to all Referenced Contracts. Each spot month limit is set at or below 25% of estimated deliverable supply. The federal spot month position limits apply on a futures-equivalent basis based on the size of the unit of trading of the relevant CRFC. With respect to each CRFC, the federal spot month position limit applies separately to physically-settled and cash-settled Referenced Contracts.[6] Consequently, during the spot month, a market participant may net positions across physically-settled Referenced Contracts and separately net positions across cash-settled Referenced Contracts.[7] However, a market participant is not permitted to net cash-settled Referenced Contracts with physically-settled Referenced Contracts.
Spot Month Federal Speculative Position Limits
Core Referenced Futures Contract
2020 Final Rulemaking Federal Spot Month Limit Level
CBOT Corn (C)
1,200
CBOT Oats (O)
600
CBOT Soybeans (S)
1,200
CBOT Soybean Meal (SM)
1,500
CBOT Soybean Oil (SO)
1,100
CBOT Wheat (W)
1,200
CBOT KC Hard Red Winter Wheat (KW)
1,200
MGEX Hard Red Spring Wheat (MWE)
1,200
ICE Cotton No. 2 (CT)
900
CME Live Cattle (LC)
600/300/200[8]
CBOT Rough Rice (RR)
800
ICE Cocoa (CC)
4,900
ICE Coffee C (KC)
1,700
ICE FCOJ-A (OJ)
2,200
ICE U.S. Sugar No. 11 (SB)
25,800
ICE U.S. Sugar No. 16 (SF)
6,400
COMEX Gold (GC)
6,000
COMEX Silver (SI)
>3,000
COMEX Copper (HG)
1,000
NYMEX Platinum (PL)
500
NYMEX Palladium (PA)>
50
NYMEX Henry Hub Natural Gas (NG)
2,000[9]
NYMEX Light Sweet Crude Oil (CL)
6,000/5,000/4,000[10]
NYMEX New York Harbor ULSD Heating Oil (HO)
2,000
NYMEX New York Harbor RBOB Gasoline (RB)
2,000
The following federal non-spot month speculative position limit levels, summarized in the table below, are generally set at 10 percent of open interest for the first 50,000 contracts, with an incremental increase of 2.5 percent of open interest thereafter, and apply on a futures-equivalent basis based on the size of the unit of trading of the relevant CRFC. With respect to each CRFC that is a Legacy Contract, the federal non-spot month speculative position limit applies to physically-settled and cash-settled Referenced Contracts in the aggregate. Consequently, a market participant may net positions across physically-settled and cash-settled Referenced Contracts.[11]
Non-Spot Month Federal Speculative Position Limits
Core Referenced Futures Contract
2020 Final Rulemaking Federal Single
Month and All-Months-Combined Limit Levels[12]
CBOT Corn (C)
57,800
CBOT Oats (O)
2,000
CBOT Soybean (S)
27,300
CBOT Soybean Meal (SM)
16,900
CBOT Soybean Oil (SO)
17,400
CBOT Wheat (W)
19,300
CBOT KC HRW Wheat (KW)
12,000
MGEX HRS Wheat (MWE)
12,000
ICE Cotton No. 2 (CT)
5,950 (single month)
11,900 (all-months-combined)
[1] The Commission specifically excluded the following contracts from the “Referenced Contract” definition: (1) location basis contracts; (2) commodity index contracts; (3) swap guarantees; (4) trade options that satisfy the requirement of § 32.3 of the Commission’s regulations; (5) outright price reporting agency index contracts; and (6) monthly average pricing contracts.
[2] The compliance date for federal speculative position limits on economically equivalent swaps is January 1, 2023.
[3] The exception is for cash-settled NYMEX Henry Hub Natural Gas (NG) Referenced Contracts. For those contracts, cash-settled NYMEX Henry Hub Natural Gas (NG) Referenced Contracts, the 2,000 contract spot month speculative position limit level applies on a per-exchange basis for each exchange that lists one or more cash-settled NYMEX Henry Hub Natural Gas (NG) Referenced Contract(s), rather than on an aggregated basis across such exchanges and the OTC swaps market. An additional 2,000 contract limit applies across all cash-settled economically equivalent NYMEX Henry Hub Natural Gas (NG) OTC swaps.
[4] Prior to the 2020 Final Rulemaking, only the nine Legacy Contracts were subject to federal speculative position limits.
[5] While the Commission adopted federal non-spot month speculative position limits only for the nine Legacy Contracts and their associated Referenced Contracts, exchanges are required to establish, consistent with the 2020 Final Rulemaking, exchange-set limits or position accountability levels in the non-spot months for the non-legacy agricultural, metals, and energy Referenced Contracts.
[6] For example, a market participant may hold up to 1,200 physically-settled corn Referenced Contracts (net long) and 1,200 cash-settled corn Referenced Contracts (net long) for speculative purposes.
[7] There is an exception for cash-settled natural gas Referenced Contracts, for which the 2020 Final Rulemaking only allows netting within each exchange and OTC swaps market and not across exchanges or OTC swaps market.
[8] The federal spot month speculative position limit for CME Live Cattle (LC) adopted in the 2020 Final Rulemaking features the following step-down limit: (1) 600 contracts at the close of trading on the first business day following the first Friday of the contract month; (2) 300 contracts at the close of trading on the business day prior to the last five trading days of the contract month; and (3) 200 contracts at the close of trading on the business day prior to the last two trading days of the contract month.
[9] For cash-settled NYMEX Henry Hub Natural Gas (NG) Referenced Contracts, the 2,000 contract spot month federal speculative position limit level applies on a per-exchange basis for each exchange that lists one or more cash-settled NYMEX Henry Hub Natural Gas (NG) Referenced Contract(s), rather than on an aggregated basis across such exchanges and the OTC swaps market. An additional 2,000 contract limit applies across all cash-settled economically equivalent NYMEX Henry Hub Natural Gas (NG) OTC swaps.
Traders may also make use of the conditional spot month limit exemption for NYMEX Henry Hub Natural Gas (NG). As long as a market participant holds no physically-settled NYMEX Henry Hub Natural Gas (NG) Referenced Contracts, a market participant may exceed the NYMEX Henry Hub Natural Gas (NG) federal spot month speculative position limit level by holding up to 10,000 cash-settled NYMEX Henry Hub Natural Gas (NG) Referenced Contracts per exchange that lists one or more cash-settled NYMEX Henry Hub Natural Gas (NG) Referenced Contract(s), as well as an additional 10,000 cash-settled economically equivalent NYMEX Henry Hub Natural Gas (NG) OTC swaps.
[10] The federal spot month speculative limit for NYMEX Light Sweet Crude Oil (CL) adopted in the 2020 Final Rulemaking features the following step-down limit: (1) 6,000 contracts at the close of trading three business days prior to the last trading day of the contract; (2) 5,000 contracts at the close of trading two business days prior to the last trading day of the contract; and (3) 4,000 contracts at the close of trading one business day prior to the last trading day of the contract.
[11] In other words, for purposes of determining whether a market participant complies with the federal non-spot month speculative position limits, the market participant’s physically-settled and cash-settled Referenced Contract positions would be added together and could net against each other.
[12] With the exception of the ICE Cotton No. 2 contract discussed below, for each of the Legacy Contracts, the single month limit is equal to the all-months-combined limit under the 2020 Final Rulemaking. The single month limit for ICE Cotton No. 2 is set at 50% of the all-months-combined limit, or 5,950 contracts, as discussed more fully below.
- Exemptions from the Limits
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Generally, there are exemptions from these federal position limits for:
There is also a conditional spot month limit exemption for cash-settled natural gas Referenced Contracts,[13] and a carve-out for pre-enactment and transition period swaps.[14]
Bona Fide Hedging Transaction or Position
A bona fide hedging transaction or position is a transaction or position where the transaction or position:
- Represents a substitute for transactions or positions made or to be made at a later time in a physical marketing channel (“temporary substitute test”);
- Is economically appropriate to the reduction of price risks in the conduct and management of a commercial enterprise (“economically appropriate test”); and
- Arises from the potential change in value of actual or anticipated assets, liabilities, or services (“change in value requirement”).
In addition, a transaction or position that qualifies as a pass-through swap and pass-through swap offset pair is a bona fide hedge.
The federal speculative position limits regime contains several notable expansions to the previous bona fide hedging definition that make these exemptions more available and efficient for end-users:
- Legitimate hedging practices, including anticipatory merchandising, are included under the bona fide hedging definition as an enumerated hedge. A list of enumerated hedges is contained in Appendix A to Part 150. Persons who hold an enumerated bona fide hedge are not required to submit an application requesting an exemption from the Commission, but continue to be required to request an exemption from exchange-set limits.
- The 2020 Final Rulemaking includes guidance on whether and when market participants may measure risk on a gross basis rather than a net basis. Generally, the guidance allows for risk measurement on a gross basis if it is consistent with the trader’s historical practice and is not intended to evade applicable limits.
- For contracts subject to federal speculative position limits, a bona fide hedging transaction or position must always, and not just normally, be a substitute for positions in the physical marketing channel. A market participant is generally no longer permitted to treat a position entered into for “risk management purposes” as a bona fide hedge, unless the position qualifies as either: (i) an offset of a pass-through swap, where the offset reduces price risk attendant to a pass-through swap executed opposite a counterparty for whom the swap qualifies as a bona fide hedge; or (ii) a “swap offset,” where the offset is used by a counterparty to reduce price risk of a swap that qualifies as a bona fide hedge and that was previously entered into by that counterparty.
- Commercial end-users who have entered into unfixed-price transactions (sometimes referred to as “floating rate” transactions) may qualify for one of the enumerated anticipated bona fide hedges, provided all applicable requirements are met (i.e., the enumerated bona fide hedges for anticipated unsold production, anticipated unfilled requirements, and anticipatory merchandising).
New Streamlined Process for Recognizing Non-Enumerated Bona Fide Hedges
The Commission has developed a streamlined process for addressing requests for non-enumerated bona fide hedging positions that leverages exchange expertise, but allows the Commission to make determinations and interventions as needed.
Market participants can provide one application to an exchange to request a non-enumerated bona fide hedge, and receive approval of such request for the purposes of both exchange-set limits and federal limits, so long as the Commission does not intervene within a ten business-day review period (or two business days in the case of sudden or unforeseen bona fide hedging needs) following the exchange approval of the bona fide hedge for purposes of the exchange-set limits.
After the period expires without Commission intervention, the bona fide hedge exemption will be valid for purposes of both federal and exchange-set limits, and the market participant will be able to take on a position that exceeds federal position limits. A market participant will also be able to enter into its bona fide hedging position during the Commission’s review period with the understanding that, if the Commission denies the application, the market participant would be required to reduce their position below the applicable federal position limit within a commercially reasonable time period.
Market participants with sudden or unforeseen hedging needs can file a request for a bona fide hedge exemption within five business days after exceeding the federal limit (i.e., a “retroactive” exemption application). If the Commission denies this application, the market participant will not be subject to a federal position limit violation so long as the market participant filed the application in good faith and brings the position into compliance with the applicable federal position limit within a commercially reasonable amount of time.
Market participants may choose to submit non-enumerated bona fide hedge applications directly with the Commission and also separately submit such applications with the exchanges. It a market participant chooses to do so (instead of following the streamlined process), it should submit its application to the Commission by sending an encrypted email to [email protected].
Once their relevant exchange begins filing the monthly exchange report required under § 150.5 of the 2020 Final Rulemaking, market participants will no longer be required to file Forms 204 or Parts I and II of Form 304 with the Commission on a monthly basis to demonstrate cash-market positions justifying position limit.[15] The Commission will instead leverage cash-market information submitted directly to the exchanges under new § 150.5.
Spread Exemption
A transaction or position may also exceed federal position limits if it qualifies as a “spread transaction,” which includes the following common types of spreads: intra-market spreads; inter-market spreads; intra-commodity spreads; inter-commodity spreads; calendar spreads; quality differential spreads; processing spreads (such as energy “crack” or soybean “crush” spreads); product and by-product differential spreads; and futures-options spreads.
Process for Recognizing Spread Exemptions
For a Referenced Contract on any commodity, a spread exemption is self-effectuating for purposes of federal position limits, provided that:
- the position falls within one of the categories set forth in the “spread transaction” definition;
- and the market participant separately applies to the applicable exchange for a spread exemption from exchange-set limits.[16]
A market participant with a spread position that does not fit within the “spread transaction” definition with respect to any of the commodities subject to federal position limits may apply directly to the Commission, and must also separately apply to the applicable exchange. All applications submitted to the Commission should be sent via encrypted email at [email protected].
Financial Distress Exemption
Market participants may exceed federal position limits if necessary to take on the positions and associated risk of another market participant during a potential default or bankruptcy situation. This exemption is available on a case-by-case basis, depending on the facts and circumstances involved. Market participants should submit a request pursuant to § 140.99(a)(1).
[13] As long as a market participant holds no physically-settled NYMEX NG Referenced Contracts, a market participant may exceed the NYMEX Henry Hub Natural Gas (NG) federal spot month position limit level by holding up to 10,000 cash-settled NYMEX Henry Hub Natural Gas (NG) Referenced Contracts per exchange that lists one or more cash-settled NYMEX Henry Hub Natural Gas (NG) Referenced Contract(s), as well as an additional 10,000 cash-settled economically equivalent NYMEX Henry Hub Natural Gas (NG) OTC swaps. A market participant may not use a spread exemption to exceed the conditional spot month limits for natural gas.
[14] Economically equivalent swaps entered into in good faith prior to the 2020 Final Rulemaking’s Effective Date, including both “Pre-Enactment Swaps,” which are swaps entered into prior to the Dodd-Frank Act whose terms have not expired, and “Transition Period Swaps,” which are swaps entered into between July 22, 2010 and the 2020 Final Rulemaking’s effective date, are not subject to federal position limits.
[15] Exchanges must implement § 150.5 by the 2020 Final Rulemaking’s general compliance date of January 1, 2022.
[16] The Commission understands that certain exchanges may distinguish between the terms “spread,” “arbitrage,” and “straddle.” In general, the Commission’s use of the term “spread” is meant to include all of these related trading strategies, and any Commission reference to “spread” rather than “arbitrage” or “straddle” is not intended to suggest a substantive difference in meaning.
- Account Aggregation
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In 2016, the Commission adopted the Aggregation of Positions Rule, which generally requires aggregation of positions in the case of accounts with common ownership, common control, and substantially identical trading strategies.
There are eight general exceptions to this aggregation presumption, including:
- The Participant Exemption–For participant interests in certain commodity pools and funds by limited partners, shareholders or other pool participants;
- The FCM Exemption–For certain accounts held by a futures commission merchant (“FCM”) where another person is directing the trading in the FCM’s account;
- The Independent Account Controller Exemption–For certain positions of accounts controlled by an independent account controller (an “IAC”);
- The Owned Entity Exemption–For certain owned entities if the owner meets certain conditions intended to ensure trading independence;
- The Underwriting Exemption–For persons who hold positions or accounts for the purpose of underwriting;
- The Broker-Dealer Exemption-For persons who hold positions or accounts for the purpose of their business as a broker-dealers;
- The Violation-of-Law Exemption–For persons who must not share trading information to avoid violating state or federal laws, or the law of a foreign jurisdiction; and
- The Affiliated Person Exemption–For persons who are affiliated with a person who has already filed an exemption notice, so that duplicative notice filings are not made with the Commission.
A person wanting to qualify for one of the above aggregation exemptions must file a Notice with the Commission that provides a description of the relevant circumstances that warrant disaggregation, and a statement certifying that, as of the date of the filing, the conditions of the applicable aggregation exemption provision have been met. For further information please see the 2016 Aggregation of Positions Rule.
Compliance Date and “Pre-Existing Positions”
Market participants and exchanges must comply with the updated federal position limits by the general compliance date of January 1, 2022.[17] Additionally, the 2020 Final Rulemaking provides a separate compliance date of January 1, 2023 for:
- the elimination of previously-granted risk management exemptions, and
- federal position limits for economically equivalent swaps.
Certain “Pre-Existing Positions” entered into in good faith before the effective date of the 2020 Final Rulemaking are not subject to federal position limits. These are:
“Pre-Enactment Swaps,” which are swaps entered into prior to the Dodd-Frank Act whose terms have not expired; and “Transition Period Swaps,” which are swaps entered into between July 21, 2010 and 60 days after the publication of the 2020 Final Rulemaking whose terms have not expired as of 60 days after that rule’s publication date.
Neither of these categories of swaps are subject to federal position limits. All other “Pre-Existing Positions” are subject to federal position limits.
[17] The Legacy Contracts are currently subject to federal speculative position limits and will be to the higher federal speculative position limits under the 2020 Final Rulemaking on the effective date.