By Todd Kemp, Senior Vice President, Treasurer
As reported in last week’s NGFA Newsletter, the Commodity Futures Trading Commission (CFTC) on Jan. 30 voted to publish a new proposal designed to implement one of the final remaining pieces of Dodd-Frank legislation that was signed into law 10 years ago.
NGFA’s initial staff analysis of the proposal finds much to support.
The proposal would implement speculative position limits on a range of commodities on which such limits have not been imposed previously. For grain and oilseed futures contracts, which have had position limits for decades, the proposal is important because it establishes federal position limits for those commodities, redefines bona fide hedging strategies, and recrafts the process by which hedge exemptions are granted and monitored.
The 494-page pre-vote draft of the proposal is available on the CFTC’s web site; however, an informative executive summary on pages 10-24 of the document is relatively light reading and provides a concise synopsis of the proposal.
The Risk Management Committee (see committee spotlight article later in this Newsletter) will spearhead the NGFA’s analysis of the proposal and preparation of comments to the agency during the 90-day public comment period, with a view to ensuring that all needed hedging strategies are recognized in the final rule and that CFTC procedures for hedge exemptions don’t restrict market participants from making timely and appropriate risk-management decisions.
Here are a few brief highlights of the CFTC proposal:
- The table on page 13 shows proposed federal spot-month limits for grains and the soy complex. Consistent with NGFA conversations with the CME Group during the past 18 months, the CFTC proposal would increase spot-month limits for corn, soybeans and the three wheat contracts from 600 to 1,200 contracts. Final discussion will review those levels; and the committee will need to examine the agency’s large proposed increases in spot-month limits for soybean meal and oil.
- The table on page 15 shows proposed federal non-spot month limits, for which there are some fairly large increases. For both spot-month and non-spot month limits, the NGFA’s priority will be to recommend levels that encourage consistent and predictable convergence.
- It is important to note that under the CFTC proposal, CME would continue to have discretion to establish exchange-level limits that are lower than federal limits. For example, if certain non-spot month limits were deemed by the exchange to be too high to facilitate orderly convergence, CME could propose its own exchange-level limits – a process in which the NGFA would provide input.
- Section 6 on page 17 of the CFTC proposal restates the three elements of the bona fide hedge definition as it currently exists. It then summarizes several proposed changes, including: An expansion of the list of enumerated bona fide hedges, to include anticipatory merchandising (see the footnote on pages 17-18 for a full list); loosening the current five-day rule; and eliminating so-called risk-management exemptions.
- Significantly, the proposal explicitly states that the CFTC is willing to consider additional expansion of enumerated bona fide hedges (i.e., strategies explicitly cited in the rule) as the commission becomes comfortable with them. A primary goal of NGFA’s Risk Management Committee during the comment period will be to assist in that process.
- Under the proposal, hedge exemptions for enumerated strategies would not be subject to CFTC review – to use the commission’s term, they will be “self-effectuating.” Further, Form 204 no longer would be required to be filed with CFTC to show cash-market positions to justify exemptions.
- Under the proposal, market participants could apply for non-enumerated hedge exemptions (i.e., for hedging strategies not included in the rule) either from CFTC or from the applicable exchange. Then, within 10 business days, the applicant could rely on that determination unless the agency notified them otherwise.
- Important point: Any rejection of an exchange hedge exemption determination would require action by the CFTC commissioners, not by CFTC staff.
- The summary appears to indicate that a market participant could execute on an exchange-granted hedge exemption before the 10-day review period expired – but this aspect of the proposal will require further clarification.
- The summary also appears to indicate that a market participant would not be held in violation of speculative position limits if the CFTC rejected an exchange determination, and that the market participant would be given some “commercially reasonable amount of time” to unwind the position – another aspect of the proposal that requires clarification.
- The summary seems to contradict itself on whether an exemption request for sudden or unexpected hedging needs would be subject to a two- or five-day review; that should be clarified when the proposal is published in the Federal Register.
- Compliance with the new rule, once finalized and approved by the CFTC, would be no later than 365 days after publication in Federal Register – likely around early February. 2021.