The U.S. Commodity Futures Trading Commission closes the 60-day comment period on Monday on its proposal to cap the number of speculative contracts traders can hold in a range of commodity markets.
The rule, proposed in December 2010, generated about 4,000 comments. Most were in favor of the proposal, but many of the industry's biggest names have said the proposed position limits would reduce liquidity and make it harder to hedge risk.
Following the comment period, the CFTC will determine whether to make changes to the rule, and the five commissioners must vote to finalize it. The vote could come as early as this spring.
Here are details of the proposed position limits rule:
POSITION LIMITS PROPOSAL
Establish limits on positions in physical commodity futures contracts as well as swaps that are economically equivalent to those contracts.
Comment period: 60 days
* Limits to be placed on 28 core physical-delivery contracts and their "economically equivalent" derivatives.
* Commodities covered include gold, silver, copper, platinum, palladium, crude oil, natural gas, heating oil, and gasoline, corn, rice, soybeans, wheat, live cattle, lean hogs, milk, cocoa, coffee, orange juice, sugar and cotton.
FIRST PHASE
* Initial transitional phase would focus on spot month, with limits based on deliverable supply and levels determined by exchanges:
* Limits set at 25 percent of deliverable supply for a given commodity, with a conditional spot-month limit of five times that amount for entities with positions exclusively in cash-settled contracts.
SECOND PHASE
* Second phase would focus on non-spot-month position limits and spot-month position limits based on commission's determination of deliverable supply:
* Non-spot-month position limits would be 10 percent of open interest in that contract below the first 25,000 contracts and 2.5 percent thereafter.
* These limits would consist of aggregate single-month and all-months-combined limits that would apply across classes, as well as single-month and all-months-combined position limits separately for futures and swaps.
WHO IT AFFECTS
* Annually, the spot-month limits may affect at most 70 traders in agricultural contracts, six traders in base metals contracts, eight traders in precious metals contracts, and 40 traders in referenced energy contracts.
* The all-months-combined and single-month position limits may affect approximately 80 traders in agricultural contracts, 25 traders in base metals contracts, 20 traders in precious metals contracts and 10 traders in energy contracts.
ECONOMICALLY EQUIVALENT
* A swap may be economically equivalent to a futures contract if the price of the swap refers to a covered futures contract settlement price or if priced on the same commodity delivered at the same, or a similar location, as that of a covered contract.
PURPOSE
* Limits are aimed at combating excessive speculation and manipulation while ensuring sufficient market liquidity and efficient price discovery.-----
