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  • Statement of Commissioner J. Christopher Giancarlo Regarding Supplemental Proposal on Position Limits for Derivatives: Certain Exemptions and Guidance

    May 26, 2016

    I support issuing for public comment today’s proposal to supplement and revise the Commission’s 2013 proposed rule to establish federal position limits for certain core referenced futures, options and swaps contracts. The supplemental proposal appears responsive to a broad range of public comments. I believe it is a positive step forward in devising a final rule that will take into account certain practical realities associated with administering a workable position limits regime.

    The proposal appropriately recognizes that most exchanges do not have access to sufficient swap positon information to effectively monitor swap position limits. If adopted, it would seem to relieve designated contract markets (DCMs) and swap execution facilities (SEFs) from setting and monitoring exchange limits on swaps until such time as DCMs and SEFs have access to data that is necessary to be able to do so. Position limits for swaps would still be set and monitored by the CFTC. The proposal simply acknowledges that the Commission cannot require exchanges to do the impossible.

    The proposal also recommends changes to the definitions of “bona fide hedging position,” “futures equivalent,” “intermarket spread position” and “intramarket spread position.” The elimination of the incidental test and the orderly trading requirement from the general definition of bona fide hedging position makes sense as the incidental test is already included in the economically appropriate test and the orderly trading requirement is addressed in other provisions of the Commodity Exchange Act (CEA).1 Further, as discussed in the preamble, because the meaning of the orderly trading requirement in the context of over-the-counter swaps markets is unclear, those markets will benefit from greater precision by its removal. The proposed amendments to the definitions of “futures equivalent,” “intermarket spread positon” and “intramarket spread position” appear to be helpful clarifications. I look forward to public comment on whether the proposed changes are appropriate.

    Importantly, the proposal would also allow certain spread exemptions from federal position limits. It would establish a process to permit exchanges to recognize exemptions from exchange and federal position limits for non-enumerated bona fide hedging positions (NEBFH) and spread positions. The proposal would also provide an expedited process for exchange recognition of enumerated anticipatory bona fide hedges.

    Exchanges are in the best position to initially recognize the foregoing exemptions from position limits. They have both the expertise and the resources2 to perform this task in a responsible way as demonstrated by the long history of DCMs analyzing and granting requests for NEBFH exemptions in the context of exchange-set limits. Moreover, the CFTC has a long history of overseeing the performance of DCMs in doing so. In addition, DCMs already have a long-existing framework in place for recognizing exemptions from exchange-set limits with which market participants are well familiar. The supplemental proposal, when incorporated into a final rule, would build upon the existing framework for exchange-set limits. It also would lower unreasonable burdens on market participants under the Commission’s 2013 proposal, including provisions that would have required hedge exemption applicants to file duplicative requests with both the CFTC and the exchanges.

    In short, the supplemental proposal leverages exchange expertise and resources to enable exemptions to be granted in an efficient and timely manner without sacrificing market integrity. The Commission would remain the ultimate arbiter of exemptions from position limits by retaining the authority to review and reverse any exchange-granted exemption.

    I commend Commission staff for their responsiveness to broad-based concerns of market participants. I appreciate the professionalism of my fellow commissioners in persevering to make this rule more workable. I look forward to taking additional steps to ensure that the practical issues raised by the agricultural and end-user communities are addressed in the final rule.

    Now and always, prosperity requires durable and vibrant markets. We must balance regulatory burdens with clear economic benefits if we are to maintain liquid commodity hedging markets that support our American way of life.

    1 See CEA sections 4c(a)(5) and 4c(a)(6).

    2 As noted in footnote 127 of the preamble, from June 15, 2011 to June 15, 2012 ICE Futures U.S. received 142 exemption applications, 92 of which were granted. From November 1, 2010 to October 31, 2011 the Market Surveillance Group from the Chicago Mercantile Exchange (CME) Regulation Department approved 420 exemption applications for products traded on the CME and the Chicago Board of Trade. This is old data, but one could reasonably predict that the number of applications have increased over time and will continue to increase in the future as trading levels increase. Given its current resources, the CFTC is not in a position to timely process the hundreds of applications that likely will be filed with the exchanges each year.

    Last Updated: May 26, 2016