A little-publicized part of the latest CFTC proposal for speculative position limits on certain physical commodities could make it difficult for asset owners to comply.
At issue is the proposed aggregation limit, which would be set at 10% of trading control of a commodity whether an investor does the speculating themselves or it's done via external managers. And pension funds that currently exceed that limit could have to petition the CFTC for an exemption.
“A pension (fund) that uses outside managers will have to set up arrangements with its managers so as to fit” within the aggregation requirement, said Willa Cohen Bruckner, partner, financial services, at the law firm of Alston & Bird LLP, New York. “Otherwise the pension (plan) will have to aggregate positions across all managers in determining whether it has exceeded position limits. If aggregation is required, managing compliance with position limits across unrelated managers could be quite difficult.”
Added Deborah Monson, hedge fund partner at the law firm of Ropes & Gray LLP, Chicago: “I think (pension funds) need to know. I think most people know this position limit proposal is lurking, but the aggregate exemption filing requirement is under the radar a bit.”
The aggregation limit is part of the Commodity Futures Trading Commission's third attempt to impose speculative position limits in 25 core physical commodity futures contracts and their “economically equivalent” futures, options and swaps, according to the agency when it released the final proposal Dec. 5.
Along with the aggregation limit, the proposal would ban investors from owning more than 25% of a commodity's estimated deliverable supply — the amount that meets the delivery specifications of a futures contract — in a month, and would apply to all market participants, including exchanges. Those limits could actually be lower in some cases than the current limits that have been established by some exchanges.
“The proposal broadens the scope of commodities subject to position limits and also the type of financial instruments through which exposure to commodities is obtained, so the investment community is more likely to be impacted by position limits if the proposed rule is adopted,” said Ms. Bruckner.
The CFTC first proposed position limit rules in October 2011, as recommended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, but the proposal was vacated a year later after a U.S. District Court in Washington ruled in favor of the International Swaps and Derivatives Association in a lawsuit against the CFTC opposing the rules. Then in November 2013, the agency introduced a revised position limits proposal. The current proposal, originally issued in May 2016, now takes into account comments made on that proposal last summer.