Industry Participants Generally Applaud Proposed Amendments to CFTC Position Limit Proposal But Criticize Ability to Undo Exchanges’ Determinations

In comment letters filed with the Commodity Futures Trading Commission, futures industry participants generally supported the Commission’s recent proposed changes to its November 2013 proposed position limit rules in order to permit exchanges to approve non-enumerated hedge exemptions, spread exemptions and anticipatory hedge exemptions, as well as to delay exchange-set position limits for swaps.

However, industry participants were critical of (1) the potential CFTC review of any exchange-granted exemption;

(2) the requirement that a designated contract market have one year of experience in administering position limits in order to grant exemptions;

(3) the requirement that applications for non-enumerated or anticipatory hedges be accompanied by three years of cash market activity; and

(4) the interpretation of bona fide hedging to include only price risk, as opposed to all risks that might affect cash markets, such as time risk, location risk, quality risk and credit risk. According to the Commodity Markets Council, for example, “[r]isk is inherent to commercial businesses, and the Commission should encourage commercial and end-user firms to manage risk to the fullest extent possible.”

Many industry commentators also objected to the Commission’s suggestion that, where it disallowed a previously exchange-granted non-enumerated hedge, it would be “reasonable” to expect a firm to liquidate an existing futures position within one business day, and disagreed with the Commission’s proposal that non-enumerated hedge exemptions should only be approved in advance, not subsequently (subject to strict conditions), as currently is sometimes the case.

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