CFTC position limit rule exemption following market petition

Author: | Published: 12 Jun 2012
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The US Commodity Futures Trading Commission (CFTC) proposed wider exemptions to the affiliate aggregation requirements of its position limits rule on May 18, following a petition by the Working Group of Commercial Energy Firms.

Commodities traders holding a 50 percent or less stake in an affiliate will now not have to aggregate the positions of that affiliate toward the position limits outlined in the rule, originally finalised last October.

Companies wanting to rely on the exemption will be required to make a notice filing with the CFTC under the yet-to-be finalised proposal.

“It makes you question what was going on during the public comment period,” a lawyer who used to work at the CFTC said. “I don’t think the petition revealed new issues. I think the commission therefore had to recognize there were flaws in what they adopted.”

Davis Polk & Wardwell partner Susan Ervin said the notice filing was pretty extensive. "Unlike most notice filing requirements, this one calls for a whole set of data from a filer including description of risk management and information sharing systems,” she said.

The exemption is dependent on the trader and its affiliate not having knowledge of each other’s trading decisions and trading on separately developed and independent trading systems. Written procedures establishing an information barrier between the parties is also required. Employees and risk management systems must remain independent.

An out of aggregation requirements comes as a relief for those commodity traders that qualify, but lawyers do not think it significantly alters the costs and benefits of the position limits rule – the source of litigation brought against the commission by the International Swaps and Derivatives Association and Securities Industry and Financial Markets Association late last year.

“I don’t know whether the law suits, the litigation, the threat of judicial review or taking an action arbitrarily or capriciously has made it more or less likely [that the CFTC will finalise wider exemptions],” the former CFTC lawyer said.

“I think they are proposing these rules because they think they are improving this rule. They are supporting the idea the first rule wasn’t hot,” the lawyer added.

Ervin said the wider exemption did not moot litigation to have the rule vacated because there were a lot of other significant concerns.