Dodd-Frank financial reform legislation required the Commodity Futures Trading Commission to establish position limits. A decade later, the agency's fifth attempt may be the most likely to cross the finish line.
Nine grain futures contracts are already subject to position limits, and the proposed rule adds limits to 25 other futures contracts, which the agency said would cover most physically delivered commodities.
The proposal also would eliminate the risk management exemption used by banks, hedge funds and others to take large speculative positions. To balance out that potential loss of liquidity in longer-dated contracts, the proposal raises non-spot month limits. It also includes anticipatory hedging on its list of enumerated bona fide hedging strategies -- a big win for the grain industry.
(To see what's in the rule, please read "CFTC Proposes New Limits" here: https://www.dtnpf.com/…)
"The NGFA has worked closely with CFTC over the years to resolve contentious issues that existed in earlier proposals of the rule. As a result of NGFA's efforts, the current proposal comes much closer to a workable approach for the grain, feed, and processing industry," the National Grain and Feed Association stated in a news release. "While expressing general support of the proposal and citing improvements from previous iterations, NGFA highlighted a few remaining concerns."
The association said it supports increasing spot-month limits for grain and oilseed contracts, which would double under CFTC's plan to 1,200 contracts. However, it wants CFTC to add a caveat: that CFTC and CME Group will monitor implementation and make adjustments if the new limits cause problems with futures and cash market convergence.
"Rather than endorse very large increases in single-month and all-months-combined limits, the NGFA recommends that the commission maintain relatively lower single-month limits to prevent too much volume from becoming concentrated in nearby non-spot months. In addition, the NGFA strongly supports providing authority for exchanges to implement limits lower than federal limits as merited for individual contracts and various commodities."
The NGFA commended CFTC's inclusion of anticipatory hedging in its list of bona fide hedges. It also praised the agency's decision to make hedges enumerated in the rule self-effectuating, which means market participants don't have to apply for CFTC exemptions for that strategy.
"However, NGFA urges the CFTC to make one additional hedging strategy enumerated in the final rule; that is, using a futures calendar spread to hedge an unfixed price basis purchase or sale," the organization stated.
The proposed rule also creates a new, two-track process for applying for hedge exemptions. Hedger applies directly to the exchange. Following the exchange's approval, CFTC would have 10 days business days to review the transaction. NGFA would like that period to be shortened to two days. "In addition, NGFA seeks clarification from the CFTC as to whether a market participant may take a position based upon the exchange's determination during the review period without fear of CFTC penalties for a position limit infraction."
Katie Dehlinger can be reached at Katie.firstname.lastname@example.org
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