Proposed Rule: Position Limits for Derivatives (PR 2020) RIN 3038–AD99
Submitted electronically to CFTC Comments Portal: https://comments.cftc.gov
The Institute for Agriculture and Trade Policy (IATP) appreciates the opportunity to comment on the PR 2020. IATP first commented on the proposed position limit rule authorized by the Commodity Exchange Act (CEA), as amended by the Dodd Frank Wall Street Reform and Financial Consumer Protection Act of 2010 (“Dodd Frank”), on March 28, 2011. IATP has continued to comment on the re-proposals and supplements to the re-proposals of the position limit rule, as well as on the proposals to aggregate positions.
To summarize and simplify our views: adequate speculation by non-commercial entities provides necessary liquidity to enable the commercial entities involved in producing, warehousing, transporting, processing and retailing of physical commodities to discover prices and manage price risks in those commodities. Excessive speculation by non-commercial entities provides a flood of capital that disrupts price discovery and inhibits effective price risk management. The CEA authorizes the Commission to carry out the difficult tasks to prevent, diminish and eliminate excessive speculation, as well as different forms of market manipulation.
In PR 2020, the Commission concludes its extremely concise history of the position limit and position aggregation rulemaking struggle on this note: “After reconsidering the prior proposals, including reviewing the comments responding thereto, the Commission is withdrawing from further consideration the 2013 Proposal, the 2016 Supplemental Proposal, and the 2016 Reproposal.” (Federal Register (“FR”) Vol. 85. No. 39, February 27, 2020) Notwithstanding this withdrawal decision, the CEA authorities, as amended by Dodd Frank, and market events and practices that result in opportunities for market manipulation and excessive speculation in physical derivatives contracts, dictate that the PR 2020 cannot and should not be analyzed in isolation.
When the Commission developed the term sheet for PR 2020, the regulatory and market environment appeared to be Business as Usual (BaU). Indeed, if you trusted conventional macro-economic and business indicators, the overall economy appeared to be “strong.” The Commission will be deliberating this and other rulemakings during the National Emergency whose economic consequences are very unlikely to result in a return to BaU. The Commission is rightly extending COVID-19 related regulatory relief to market participants and issuing staff advisories to exchanges and market participants to mitigate disorderly market events, e.g., the May 13 advisory on the West Texas Intermediate (WTI) crude oil contract. But these short term measures, however necessary, will not prevent an increasingly scale and frequency of disorderly market events unless the Commission regulates robustly contracts, market participants and exchanges. A rulemaking BaU likely will contribute to more frequent market events, some of them posing systemic financial and market risks. IATP urges the Commission not to treat this and other rulemakings during the National Emergency as items to be checked off on the schedule of a regulatory agenda.
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