The US Commodity Futures Trading Commission is expected to approve a long-awaited final position limits rule Tuesday morning that includes limits on NYMEX contracts for natural gas, crude oil, RBOB and heating oil, as well as five metal contracts.
But under the rule, energy and metals market participants may not face any new limits until 2013, several types of commercial energy transactions will be exempt from the new limits and financially settled gas contracts would be subject to a different set of limits, according to a fact sheet on the final rule.
At the same time, commissioners on Tuesday are also expected to approve a proposed order that would further delay many new derivatives rules from taking place until July 16, 2012, a full year after last year's Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that these rules take effect.
The final position limits rule, which has been delayed for months and that the Dodd-Frank Act mandated, is similar to the proposed rule unveiled in January, since it will set limits on 28 core physical commodity contracts, including four energy and five metal contracts, as well as economically equivalent futures and swaps, in two phases.
But under the final rule, financially settled NYMEX Henry Hub natural gas contracts will be subject to both a cash-settled spot-month limit and an aggregate limit, which would each be set at five times the limit that applies to the size of the physically settled gas contract's position limit.
Gas contracts will be subject to these different limits because of the large level of open interest in financially settled gas contracts, a CFTC official said Monday during a press briefing on the rule.
The CFTC had originally proposed extending these conditional limits for all financially settled commodities, but decided to only apply them to gas. Another commodity could face these limits in the future if open interest reaches a high level, the official said.
Under the first phase of the final rule, spot-month limits will be set at levels that are 25% of a commodity's deliverable supply, limits which already are in place for spot month contracts at designated contract markets, including NYMEX. These federal spot-month limits will become effective 60 days after the CFTC finalizes the definition of a swap under the new regulatory regime the agency is developing.
CFTC Chairman Gary Gensler has scheduled this definition to be finalized before the end of this year, but it may not be completed until sometime next year. Under the rule, these spot month limits would be adjusted each year for energy and metals contracts and twice a year for agricultural contracts.
The CFTC estimates that 85 traders in the energy markets and 12 traders in the metal markets may hold positions that could exceed these spot-month limits, according to the fact sheet.
In a letter to Gensler Monday, US Senator Bernie Sanders, a Vermont Independent, called these spot month limits "much too weak," and said they "would have little, if any, impact on diminishing excessive speculation as required by statute."
Under the second phase of the final rule, non-spot-month limits would be set at levels using a formula that would be based on 10% of open interest in the first 25,000 contracts and 2.5% of the open interest beyond 25,000 contracts. Open interest for these non-spot-month limits would be based on a combination of open interest in futures and cleared and uncleared swaps.
But since the CFTC lacks much of this data, these limits would not go into place, at least for energy and metals contracts, until the agency has received one year of open interest data on cleared and uncleared swaps. This data will be from September 2011 to August 2012, the CFTC official said.
Once the CFTC has two years of open interest data it will begin adjusting these non-spot-month limits twice a year, according to the fact sheet. The CFTC estimates that there are 10 traders in energy markets and 25 in metal markets that may hold positions that could exceed these non-spot-month limits.
But these estimates do not take into account traders that may be exempt from these new limits, according to the fact sheet.
The agency will give exemptions for all position limits for bona fide hedge exemptions and, as expected, the final rule will broaden the types of transactions that will be classified as bona fide hedge transactions.
"These exemptions have been broadened to include certain anticipated merchandizing transactions, royalties and service contracts in the final rulemaking to reflect concerns by commercial firms," the fact sheet stated.
The CFTC Tuesday is also expected to vote on a proposed order that would keep several new derivatives regulatory requirements from taking effect by the end of this year and, instead, push back their effective date to July 16, 2012. The order, which "would not limit in any way the CFTC's ability to pursue fraud and manipulation," according to the fact sheet, would keep certain regulatory exemptions for certain derivatives transactions, which were originally set to expire July 16 of this year, in place until the new effective date, one year later.
In July, the CFTC finalized an order extending these effective dates until the end of this year.
The CFTC is also expected to approve on Tuesday a final rule on general provisions and core principles for derivatives clearing organizations. This rule includes financial resource and risk management requirements for these organizations.
