§ 5.06 CFTC Regulations Applicable to Both Registrants and Non-Registrants

• Jurisdiction: United States
• Publication year: 2022

§ 5.06 CFTC Regulations Applicable to Both Registrants and Non-Registrants

As discussed previously,³⁹² registration with the CFTC and NFA membership will subject a firm to disclosure and reporting obligations along with substantive prohibitions. CPOs and CTAs that are exempt from CFTC registration will nonetheless be subject to certain obligations and prohibitions whenever they engage in transactions on U.S. commodities futures exchanges or conduct swap transactions that have a U.S. nexus. This section will address the principal obligations and prohibitions applicable to registered CPOs and CTAs.

[1]—Position Limits

[a]—Generally

Section 4a(a) of the CEA,³⁹³ authorizes the CFTC to impose limits, known as "position limits," on the amount of speculative trading that may be done or speculative positions that may be held in contracts for future delivery. A position limit caps the maximum number of derivatives contracts to purchase (long) or sell (short) a commodity that an individual trader or group of traders may own during a given period. A position limit may impose a ceiling on either a "spot-month" position or a "non-spot-month" position. A "spot-month" is a specific period of time (which varies by commodity under the rules) that immediately precedes the date of delivery of the commodity under the derivatives contract. A spot-month position limit caps the position that a trader may hold or control in contracts approaching their expiration. A non-spot-month position limit caps the position that may be held or controlled in contracts that expire in periods further in the future or in all months combined. Speculative position limits in physical delivery markets are generally set at a more strict level during the spot month.

Most physical delivery and many financial futures and option contracts are subject to speculative position limits. For several markets (corn, oats, wheat, soybeans, soybean oil, soybean meal, and cotton), the limits are determined by the CFTC and set out in Federal regulations.³⁹⁴ For other markets, the limits are determined by the exchanges. The Commission has adopted "Acceptable Practices" for the establishment of exchange-set limits.³⁹⁵ Violations of exchange-set limits are subject to exchange disciplinary action. Violations of exchange speculative limit rules approved by the CFTC also are subject to enforcement action by the CFTC.

The CFTC adopted new Rule 151, which: (a) establishes a position limits regime for twenty-eight exempt and agricultural commodity futures and options contracts; (b) for the first time, extends those position limits to physical commodity swaps that are "economically equivalent" to such contracts; and (c) modifies the aggregation principles set forth in CFTC Rule 150.³⁹⁶ Subsequently, the International Swaps and Derivatives Association ("ISDA") and the Securities Industry and Financial Markets Association successfully challenged the CFTC's authority to promulgate the rule and the court vacated the rule.³⁹⁷ In the following years, the CFTC proposed three additional collections of rules covering speculative position limits, but none of these proposals were finalized.³⁹⁸ In January 2020, the CFTC proposed new position limits for physical commodity derivatives.³⁹⁹ The CFTC adopted Rule 151, which originally: (a) established a position limits regime for twenty-eight exempt and agricultural commodity futures and options contracts; (b) for the first time, extended those position limits to physical commodity swaps that are "economically equivalent" to such contracts; and (c) modified the aggregation principles set forth in CFTC Rule 150.⁴⁰⁰ Subsequently, the International Swaps and Derivatives Association ("ISDA") and the Securities Industry and Financial Markets Association successfully challenged the CFTC's authority to promulgate the rule and the court vacated the rule.⁴⁰¹ In the following years, the CFTC proposed three additional collections of rules covering speculative position limits, but none of these proposals were finalized.⁴⁰² In January 2020, the CFTC proposed new position limits for physical commodity derivatives⁴⁰³ and...