The CFTC approved, by a 4 to 1 vote today, issuance of a proposed rule that establishes limits on positions in physical commodity futures contracts as well as swaps that are economically equivalent to those contracts.

Contracts/Commodities. The position limits will apply to contracts in 28 commodities, consisting of contracts in 19 agricultural commodities, 5 metals, and the following 4 energy commodities:

– NYMEX Light Sweet Crude Oil;
– NYMEX New York Harbor No. 2 Heating Oil;
– NYMEX New York Harbor Gasoline Blendstock; and
– NYMEX Henry Hub Natural Gas.

The proposed rule is similar in structure to the position limits rule proposed by the CFTC in January 2010 regarding only energy commodities, which was later withdrawn to accommodate the current rulemaking under the expanded authority provided by the Dodd-Frank Act.

Implementation. Under the Commission’s proposed rule, position limits on physical commodity derivatives will be established in two phases. In the initial transitional phase, limits will be imposed on spot-month positions only, and the limits will be based on deliverable supply determined by and levels currently set by Designated Contract Markets. In the second phase, the spot-month position limits will be based on the Commission’s determination of deliverable supply and limits on positions outside of the spot month will also be imposed.

The Limits. The proposed rule calls for:

– Spot-month position limit levels set at 25% 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.
– Non-spot-month position limits (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) set for each referenced contract at 10 percent of open interest in that contract up to the first 25,000 contracts, and 2.5 percent thereafter.

Bona Fide Hedging Exemption. The proposed rule exempts bona fide hedging positions from counting towards the limits. Notably, the Commission scrapped the controversial “crowding out” provisions from its January 2010 proposed rule, under which an entity seeking to hold hedging positions in excess of an applicable position limit could not generally also hold speculative positions.

Who Will Be Affected? The Commission estimates that, on an annual basis:

– Agricultural contracts–70 traders will be affected by the proposed spot month position limits, 80 by the all-months-combined and single-month position limits.
– Base metals contracts–6 traders will be affected by the proposed spot month position limits, 25 by the all-months-combined and single-month position limits.
– Precious metals contracts–8 traders will be affected by the proposed spot month position limits, 20 by the all-months-combined and single-month position limits.
– Energy contracts–40 traders will be affected by the proposed spot month position limits, 10 by the all-months-combined and single-month position limits.