US position-limits plan for commodities traders faces likely changes in wake of bipartisan criticism

03 February 2020 12:40 by Neil Roland

The US Commodities Futures Trading Commission's proposal last week to cap speculative commodity trading seems likely to be changed following criticism of a hedging provision from three of the five commissioners.

But it's unclear what modifications will be made because of philosophical differences between Republican Dawn Stump and her Democratic counterparts, Dan Berkovitz and Rostin Behnam, on the proper role of government regulation.

The provision at issue would curtail the CFTC's role — and give futures exchanges more leeway — in deciding whether to exempt some price-risk hedges that don't fall into a designated category from speculation caps.

The commission would have 10 business days to review an exchange's decision on these contracts, or two days in the event of a sudden or unforeseen hedging need. The CFTC now has 30 days.

"I do not believe this 10/2-day rule is workable in practice for either market participants or the commission because it is both too long and too short," Stump said in a written statement.

"It is too long to be workable for market participants that may need to take a hedging position quickly, and it is too short for the commission to meaningfully review the relevant circumstances," she said.

Stump called for expanding the exchanges' latitude by restricting the amount of time that the CFTC would have to review heir hedging exemptions.

The commission would track these decisions through its "routine, ongoing review of the exchanges," she said.

Stump still voted to issue the overall proposal for comment by market participants before it is considered again by the commission. She was joined by the two other Republicans on the panel, including Chairman Heath Tarbert.

— Democratic dissents —

Democrats Berkovitz and Behnam dissented, arguing that the CFTC should have more decision-making authority.

Under the proposal, the commission would be "demoted from head coach over the hedge exemption process to Monday-morning quarterback for exchange determinations," Berkovitz said.

Behnam said that the "narrow window of time" gave the CFTC too short a period to perform a legitimate review, and it would likely "default" to approval on most decisions.

"The proposal attempts to justify deferring to the exchanges on just about everything, and in so doing it pushes to the back any earnest interpretation of the commission's mandate," he said.

— Stump likely to win —

While it isn't clear what details might be changed, Stump appears likely to get her way on the thrust of her request for more streamlined decision-making.

Tarbert, the Republican chairman, said that "the greatest risk" of a rule is that "hedgers are caught in the limits aimed at speculators.

"Creating burdensome red tape or slowing down approvals to take on hedging positions could result in lost business opportunities for the participants we are called to protect," he said.

Tarbert said it would be a "rare case" that market participants' hedging needs don't fall into the CFTC's designated categories.

Currently, position limits are imposed for nine agricultural contracts. That number would be expanded to 25, including energy and metals contracts, under the proposal.

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