If at first you don’t succeed

The CFTC commissioners have voted 3-1 for a proposal to impose position limits on speculative commodity trades in 28 markets, ranging from oil to orange juice. Although mandated by Dodd-Frank, the original October 2011 proposal was rejected by the District Court of Columbia on the grounds of ambiguity and lack of necessity.

The new proposal mirrors its predecessor, applying spot month and non-spot month limits on: 19 soft contracts, four energy and five metals. Spot month limits will broadly be set at 25% of deliverable supply, non-spot month at 10% of the first 25,000 open interest contracts. The intention is to make it very difficult to “corner the market”, while still providing enough flexibility for even the largest genuine hedges- the CFTC estimate about 400 groups will need to apply for exemption on hedging grounds. The proposal adds three new exemptions to the previous eight, while narrowing the definition of hedging to exclude the perennially porous “anticipatory hedging”.  The CFTC  aims to avoid the judicial objection on grounds of necessity, by invoking the spectre of the Hunt brothers’ infamous silver corner and the 2006 escalation in natural gas prices caused by the Amaranth hedge fund blow up.

Despite comment from the trading \broking community predicting dire reductions in market liquidity, position limits in the commodity markets are hardly new, and the CFTC’s original proposal was vacated on technical, and therefore likely temporary, drafting grounds. Although not as “unassailable” as described by the slightly-hyperbolic CFTC Commissioner Bart Chilton, position-limits are a necessary (if blunt) tool, it is unlikely that the new proposal will suffer significant legal challenge.

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