Position Limit Violations
The Commodity Exchange Act authorizes the Commodity Futures Trading Commission (CFTC) to impose limits on the size of speculative positions in futures markets in order to prevent excessive speculation that can cause unreasonable or unwarranted price fluctuations. The CFTC may pursue an enforcement action if you provide information through its whistleblower program. The attorneys at McEldrew Young represent individuals who report misconduct in the commodities and derivatives market. Under the Dodd-Frank Act, the CFTC is authorized to pay eligible whistleblowers a reward of 10 to 30 percent when they report information about violations of the Commodity Exchange Act or CFTC rules that results in a recovery of $1 million or more in monetary sanctions.
CFTC Regulation of Position Limits
Certain commodity products are subject to speculative position limits. The limits for markets such as corn, oats, wheat, soybeans and cotton, are determined by the CFTC and are set out in federal regulations. The limits for other non-regulated markets are determined by the exchanges. The CFTC has adopted “Acceptable Practices” for exchange-set limits, and violations of CFTC-approved exchange speculative limit rules are subject to enforcement actions.
For regulated commodities, the CFTC limits the number of net long or net short contracts a person can hold or control for the purchase or sale a commodity for future delivery. The limits apply to an individual spot month, non-spot individual month, and all months-combined basis. There are exemptions for certain activities, including bona fide hedging transactions, certain spread or arbitrage positions, and positions carried for an eligible entity in the account of an independent account controller.
The CFTC and the exchanges treat multiple positions subject to common ownership or control as if they were a single trader. All positions in accounts for which any person controls the trading, or holds a 10 percent or greater ownership or equity interest, must be aggregated with the positions held and the trading performed by that person.
There are narrow exceptions to the aggregation rules for limited partners and pool participants that have no knowledge of, or control over, the positions held by the pool. Commodity pool operators or commodity trading advisors with commonly-owned, but independently-controlled market positions, are also exempt. If requested by the CFTC, an entity claiming this exemption must provide information to prove that account controllers for these positions acted independently.
Why Have Position Limits?
Section 4(a) of the Commodity Exchange Act provides that excessive speculation in a commodity traded for future delivery may cause “sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity.” Under the Act, the CFTC is authorized to impose limits on the amount of speculative trading that can be done, or on speculative positions held in contracts for future delivery. Position limits were first introduced in 1938 and applied to specific agricultural commodities: wheat, corn, oats, barley, flaxseed, sorghum and rye. Since 1938, other products have been added, and sometimes removed, from the list of commodities subject to position limits. In 1981, the CFTC required exchanges to establish speculative position limits for all commodities not subject to federal limits.