CFTC Supplements Position Limits Proposal: The CFTC Supplements Its Position Limits Proposal by Revising the Proposed Definition of Bona Fide Hedging and Including a Provision that Would Permit Exchanges to Recognize Non-Enumerated Bona Fide Hedges and Other Exemptions

Sullivan & Cromwell LLP - June 3, 2016

On May 26, 2016, the U.S. Commodity Futures Trading Commission (the “CFTC”) released a supplemental notice of proposed rulemaking along with a proposed rule (the “Supplemental Proposal”) that would supplement and amend the proposed rule originally released by the CFTC in December 2013 (the “2013 Proposed Rule”) that would impose speculative position limits on positions held by traders in 28 physical commodity futures contracts, options and “economically equivalent” futures and swaps contracts.  The Supplemental Proposal includes three key changes as compared to the 2013 Proposed Rule, each largely aimed at addressing concerns raised by commercial entities.  First, the Supplemental Proposal would provide a new process allowing trading facilities, including designated contract markets (“DCMs”) and swap execution facilities (“SEFs”), to recognize certain positions in commodity derivative contracts as non-enumerated bona fide hedges or enumerated anticipatory bona fide hedges, as well as to exempt from federal position limits certain spread positions, in each case subject to CFTC review.  Second, the Supplemental Proposal would amend certain definitions originally proposed in the 2013 Proposed Rule, notably including the definition of “bona fide hedging” for physical commodities.  Lastly, the Supplemental Proposal would delay the requirement that DCMs and SEFs establish and monitor position limits on swaps where the DCM or SEF lacks access to sufficient swap position information.  Comments on the Supplemental Proposal will be due 30 days after the Supplemental Proposal is published in the Federal Register.