Statement of Chairman Timothy Massad Regarding Proposed Rule on Position Limits for Derivatives
December 5, 2016
Today, the Commission is issuing a revised position limits proposal. We are also finalizing a separate but related rule on the aggregation of positions. I am pleased that today’s actions are unanimous.
Congress directed us to implement a position limits rule to limit excessive speculation. While speculators play a necessary and important role in our markets, position limits can prevent the type of excessive speculation by a few large participants that leads to corners, squeezes and other activity that can distort markets and be unfair to other participants. Position limits can also promote convergence without compromising market liquidity. There are many issues to consider in this rule, but position limits are not a new or untested concept. They have been in place in our markets for decades, either through federal limits or exchange-set limits, and they have worked well.
There are two reasons why I am supporting issuing a reproposal. First, we have made many changes to the 2013 proposal we inherited that are reflected in today’s reproposal. Certain aspects have been previously proposed in separate pieces, and I believe the public would benefit from seeing the proposal in its entirety, to better understand how the various changes work together.
Second, the Commission is now in a time of transition. I do not want to adopt a final rule today that the Commission would choose not to implement or defend next year. Our markets and the many end-users and consumers who rely on them are served best by having reasonable and predictable regulation. Uncertainty and inconsistency from one year to the next are not helpful.
Our staff has done a tremendous amount of work to devise a position limits rule that meets the requirements of the law and balances the various concerns at stake. This work has spanned several years, involved review of literally thousands of pages of comments from participants, and included many meetings and public roundtables.
Commissioners Bowen, Giancarlo, and I have also spent substantial time on this issue. We took office together in June 2014 and inherited a proposal that the Commission had issued six months before. As I promised then, we have been working hard to get the rule right. In addition to discussing the issues extensively with staff, we have each had many meetings with market participants and other members of the public. We have each traveled around the country and heard from users of these markets. In particular, I have heard from many smaller, traditional users about the importance of position limits. I have also had the benefit of sponsoring the Agricultural Advisory Committee, whose members have provided important input on these issues.
We have revised the proposed limits themselves in light of substantial work our staff has done to make sure they are based on the latest and best information as to estimated deliverable supply. We have considered a wide range of information, including the recommendations of the exchanges and other data to which the exchanges do not have access. For some contracts, the proposed limits for the spot month are higher than the exchange-set limits today. There have been, for example, substantial increases in estimates of deliverable supply in the energy sector. In other cases, we have accepted recommendations of the exchanges to set federal limits that are actually lower than 25 percent of deliverable supply, because we determined that the requested lower limit was consistent with the overall policy goals and would not compromise market liquidity.
We have proposed further adjustments to the bona fide hedging position definition, to eliminate certain requirements that we have decided are unnecessary, and to address other concerns raised by market participants.
Another substantial difference from the 2013 text is our proposal first made this summer to allow the exchanges to grant non-enumerated hedge exemptions. This process must be subject to our oversight as a matter of law and as a matter of policy, given the inherent tension in the roles of the exchanges as market overseers and beneficiaries of higher trading volumes.
The proposal we are issuing today provides extensive analysis of the impact of the proposed spot and all months limits, which I believe supports the view that the limits should not compromise liquidity while addressing excessive speculation. The analysis shows few existing positions would exceed the limits, and that is without considering possible exemptions.
I recognize there will still be those that are critical of the proposal. Some will complain simply because of the length of the proposal—even though most of that is not rule text, but rather the summaries of the extensive comments and analysis required by law. Others may suggest broadening the bona fide hedge exemption so that it encompasses practically any activity with a business purpose, which is not what Congress said in the law. Still others will argue position limits are not necessary. But while the Commission should consider all comments, it is important to remember that the Commission has a responsibility to implement a balanced rule that achieves the objectives Congress has established.
Finally, while the Commission works to finalize this rule, we still have federal limits for nine agricultural commodities and exchange-set spot month limits for all the physical delivery contracts covered by this rule, which the Commission will continue to enforce.
I want to thank the staff again for their extensive work on this rule, particularly our staff in the Division of Market Oversight, the Office of the Chief Economist and the Office of the General Counsel. Their expertise and dedication on this matter is truly exemplary. I also want to thank Commissioners Bowen and Giancarlo for their very constructive engagement on this issue.
Last Updated: December 5, 2016