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Opalesque Futures Intelligence

Futures Lab: Commodity rulemaking: Who will be affected by the proposals under consideration?

Friday, January 07, 2011

Bart Chilton

Review of Commodity Rulemaking
Chidem Kurdas

A massive increase in financial regulation is in process in the United States. One question is how this might affect the roughly sixty-six thousand professionals in the futures industry (Table 1), not to mention numerous markets and the countless people who rely on those markets in various ways.

The Commodity Futures Trading Commission is making at least 40 rules to implement the requirements of the Dodd-Frank Act Congress passed in the summer. Many of the new rules have to do with swaps. Another area is "speculative" position limits for certain commodities. In addition, the Commission and other parties have made proposals not mandated by Dodd-Frank.

 Number of Registered Commodities Professionals (2009)

Commodity Trading Advisors

2 568

Commodity Pool Operators

1 277

Floor Brokers

7 114

Floor Traders

1 447

 Introducing Brokers

1 694

Futures Commission Merchants


 Associated Persons

51 921


66 187

Source: CFTC

Most of the proposals have little direct bearing on managed futures. But futures markets may be affected by the regulation of swaps, one of the main goals of the Dodd-Frank Act. Swaps can be economically equivalent to futures. The price of a swap can refer to a futures contract settlement price or the swap can be priced on the same commodity as a covered futures contract.

A significant number of proposed rules are currently open to public comment (Table 2). These include proposals for the clearing of swaps, requirements for swap dealers, protection of customers in broker bankruptcies and the reporting of swap transaction data.

 Selected Proposed Rules Open for Comment at the CFTC

Comment  Deadline



Foreign Futures and Options Contracts on a Non-Narrow-Based Security Index; Commission Certification Procedures


Reporting Certain Post-Enactment Swap Transactions


Designation of a Chief Compliance Officer; Required Compliance Policies; and Annual Report of a Futures Commission Merchant, Swap Dealer, or Major Swap Participant


Implementation of Conflicts of Interest Policies and Procedures by Futures Commission Merchants and Introducing Brokers


Registration of Swap Dealers and Major Swap Participants


Protection of Collateral of Counterparties to Un-cleared Swaps; Treatment of Securities in a Portfolio Margining Account in a Commodity Broker Bankruptcy


Implementing the Whistleblower Provisions of Section 23 of the Commodity Exchange Act


Real-Time Public Reporting of Swap Transaction Data


General Regulations and Derivatives Clearing Organizations


Information Management Requirements for Derivatives Clearing Organizations


Core Principles and Other Requirements for Designated Contract Markets


End-User Exception to Mandatory Clearing of Swaps


Confirmation, Portfolio Reconciliation, and Portfolio Compression Requirements for Swap Dealers and Major Swap Participants

Futures commission merchants and introducing brokers face additional requirements for setting up policies and procedures, for instance regarding potential conflicts of interest. If regulation causes an increase in brokerage costs, there could be a rise in fees. But there is not much information about the cost of the new rules.

Massive Passives
Position limits have been proposed as a means of curbing speculation in key commodities. These limits may be relevant for commodity index investments. The latter have grown fast in recent years and deploy much more capital in futures markets than active managers do.

CFTC Commissioner Bart Chilton says more than $200 billion came into US futures markets in the past several years, primarily from speculators he calls "massive passives," that is, the long-only index investments that roll over contracts regardless of price. Commissioner Chilton argues that while these big investors may not have not caused the 2008 price spikes - such as the $147 crude price - they did generate greater market volatility, both on the upside and downside.
"Futures prices should, by and large, be based upon the fundamentals of supply and demand. We saw delinked commodity prices in 2008, and some of us are concerned that we see that taking place this year," he said in a testimony to the House Agriculture Committee of the US Congress.
Speculative positions are even larger today, he says, arguing for the imposition of position limits without delay. Single traders had positions as high as 20% in energy and 40% in the silver market during 2010, according to Mr. Chilton.

By all evidence most CTAs will not be affected by position limits because they don't take positions of such magnitude. The CFTC estimates that relatively few traders have positions large enough to hit the proposed ceilings (Table 3).

 CFTC Estimates of Number of Traders Affected by  Proposed Position Limits


Spot-month limits

All-months combined

Agricultural Contracts



Precious Metals



Base Metals



Energy Contracts



In summary, new CFTC rules will affect brokers, dealers and very large futures traders, but not the average CTA-at least not directly.

Possible changes related to commodity pools, exchange-traded funds and mutual funds have received less attention than proposed rules on position limits and the clearing of swaps. But some of the changes may matter to commodity trading advisors interested in managing funds. See Regulators for a discussion of this topic.

This article was published in Opalesque Futures Intelligence.
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