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CFTC Issues Improved Final Rule on Position Limits for Futures, Swaps

November 3, 2011

On October 25, the Commodity Futures Trading Commission (CFTC) approved an improved final rule on position limits for futures and swaps. The rule will impose new limits on the number of future and swap contracts that speculators can hold.

This action is part of the raft of rules that CFTC is writing to implement its part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislation was passed last year in response to the 2008 financial crisis, and swept up many agricultural risk management tools with the riskier and more complicated derivatives that played a central role in that crisis.

Speculators in agricultural markets have long been limited on the size of their positions, in order to prevent market distortion and manipulation. Agricultural hedgers often need to buy or sell more contracts than these limits allow, and hedging exemptions have always been extended to ‘bona fide’ (true) hedgers to meet those needs. Because of this, and because these limits will soon be applied to agricultural swaps, it is very important that CFTC has a broad definition of hedging that allows farmers, their cooperatives and their customers to manage price risks beyond the speculative limits.

When first proposed in January, the position limits rule defined hedging very narrowly, and only identified a limited set of hedging practices as legitimate. NMPF worked with other agricultural groups, all urging CFTC to broaden this definition, and provided detailed comments in support of this position.

The resulting final rule is a considerable improvement over the original proposal, providing much more leeway to conduct legitimate hedging, and providing latitude for CFTC to recognize legitimate new hedging practices.

NMPF was specifically recognized within the rule notice itself for convincing CFTC not to require hedgers to unwind cash-settled future contracts before their final settlement. Under the proposed rule, for example, a cooperative that bought Class III futures contracts to hedge a milk price would have had to sell those contracts at least five days before the Class III price was announced. In the final rule, that restriction is eliminated.

Again, this rule is one of many that CFTC will issue by next summer. NMPF has commented on many of them, and continues to work on these rules to allow the dairy industry ready access to sound risk management tools and effective price discovery. If you have questions or specific concerns, please contact Roger Cryan in the NMPF office.

Until the rule is published in the Federal Register, it can be found on the CFTC website.