Stroock Special Bulletin
"CFTC Issues Final Rules Regarding Position Limits for Derivatives"
On October 18, 2011, the Commodity Futures Trading Commission (the "CFTC") approved final rules (the "Final Rules") establishing position limits for derivatives under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The Final Rules establish position limits and limit formulas for 28 futures and option contracts (the "Core Referenced Futures Contracts") traded on Designated Contract Markets ("DCMs") and futures contracts, options, swaps or swaptions (other than basis contracts or commodity index contracts) that are economically equivalent to such DCM contracts (such futures contracts, options, swaps or swaptions, together with the Core Referenced Futures Contracts, the "Referenced Contracts").
In selecting the Core Referenced Futures Contracts, the CFTC focused on those commodity contracts that (i) have high levels of open interest and significant notional value or (ii) otherwise may provide reference prices for a significant number of cash market transactions. The CFTC approved the Final Rules by a 3-2 vote, with Commissioners Sommers and O'Malia providing statements with their dissents.
On December 2, 2011, the Securities Industry and Financial Markets Association ("SIFMA") and the International Swaps and Derivatives Association ("ISDA") filed joint lawsuits against the CFTC claiming that the Final Rules are flawed in several respects. The lawsuits ask the U.S. District Court and the U.S. Court of Appeals for the District of Columbia to vacate the Final Rules or direct the CFTC to conduct the analysis required to determine that position limits are necessary. A joint statement by Conrad Voldstad, ISDA's Chief Executive Officer, and T. Timothy Ryan Jr., SIFMA's President and Chief Executive Officer, called the rule "poorly crafted" and based on "an incorrect reading of the law." Mr. Voldstad further stated, "[t]he evidence is overwhelming that position limits are, at best, unnecessary and may, at worst, negatively impact commodity markets and users."
This Stroock Special Bulletin highlights the major provisions of the Final Rules.