Cadwalader, Wickersham & Taft LLP Position Limits. Jonathan H. Flynn

Transcription

1 Cadwalader, Wickersham & Taft LLP Position Limits Jonathan H. Flynn December 12, 2011

2 Overview The subhead would go here, Arial 18 pt. black Definitions and Basic Terminology Effective Date and Compliance Date (Interim) Spot-Month and Non-Spot Month Limits Aggregation Exemptions Bona Fide Hedging Exemptions Reporting and Recordkeeping Cadwalader, Wickersham & Taft LLP 2

3 Definitions and Basic Terminology Cadwalader, Wickersham & Taft LLP 3

4 Core Referenced Futures Contracts 46 COVERED CONTRACTS 28 CORE REFERENCED FUTURES CONTRACTS CBOT Corn CBOT Oats CBOT Rough Rice CBOT Soybean Meal CBOT Soybean Oil CBOT Soybeans CBOT Wheat CME Feeder Cattle CME Lean Hog CME Live Cattle CME Class III Milk CMX Gold CMX Silver ICUS Cocoa ICUS Coffee C ICUS Cotton No. 2 ICUS FCOJ-A ICUS Sugar No. 11 ICUS Sugar No. 16 KCBT Hard Winter Wheat MGEX Hard Red Spring Wheat NYMEX Light Sweet Crude Oil NYMEX NYH Gasoline Blend NYMEX Henry Hub NG NYMEX NHY HO NYMEX Palladium NYMEX Platinum CBOT Ethanol CME Butter CME Cheese CME Dry Whey CME Non Fat Dry Milk CME Random Length Lumber CME Softwood Pulp CMX Copper Grade #1 NYL Gold, 100 Troy Oz NYL Silver, 5000 Troy Oz NYMEX Cocoa NYMEX Brent Financial NYMEX Central Appalachian Coal NYMEX Coffee NYMEX Cotton NYMEX Sugar No. 11 NYMEX Uranium Diversified Commodity Indices Cadwalader, Wickersham & Taft LLP 4

5 Core Referenced Futures Contracts Core Referenced Futures Contracts Paired Swaps Referenced Contracts Covered Contracts Cadwalader, Wickersham & Taft LLP 5

6 Referenced Contract The definition of Referenced Contract includes: Core Referenced Futures Contracts; contracts directly or indirectly linked to the price of a Core Referenced Futures Contract or the same commodity underlying the applicable Core Referenced Futures Contract for delivery at the same location; contracts t with a referenced price based only on the combination of at least one Referenced Contract and one or more prices in the same commodity as the underlying Core Referenced Futures Contract; and inter-commodity spreads with two components, one or both of which are Referenced Contracts Position limits it apply to all economically equivalent contracts t Cadwalader, Wickersham & Taft LLP 6

7 Referenced Contract The definition of Referenced Contract does not include: basis contracts; commodity index contracts; or contracts based on the same commodity at different locations but with substantially the same supply and demand fundamentals as a Core Referenced Futures Contract t This was included in the proposed rule, but removed in the final rule Position limits it apply to all Referenced Contracts t cleared and uncleared Cadwalader, Wickersham & Taft LLP 7

8 Effective Date and Compliance Date Cadwalader, Wickersham & Taft LLP 8

9 Ready or Not... Cadwalader, Wickersham & Taft LLP 9

10 Timeline Effective Date Comments due on interim spot-month limits Pre-existing positions grandfathered Expiration of certain exemptions (e.g., risk management) Compliance Date Spot-month limits Position visibility levels Non-spot-month limits for legacy agricultural Referenced Contracts Non-spot-month non-legacy Referenced Contracts after the Commission has obtained or estimated >12 months of open interest data Approx. September 2012 January 1, 2012 January 17, Days after Swap is Published in the Federal Register Approx. April 2012 Cadwalader, Wickersham & Taft LLP 10

11 Treatment of Pre-Effective Date Positions Futures (and options thereon): Futures and options entered into in good faith before January 17, 2012 are exempt from non-spot month position limits Spot month position limits still apply Swaps and options: Swaps entered before January 17, 2012 will not be subject to spot-month or non-spot month position limits Pre-effective date swaps may be netted with post- effective date swaps for purposes of complying with position limits Position limits it apply only to post-effective ti date swaps Cadwalader, Wickersham & Taft LLP 11

12 (Interim) Spot-Month and Non-Spot Month Limits Cadwalader, Wickersham & Taft LLP 12

13 Initial (Interim) Spot-Month Limits Initial spot-month position limits: NYMEX Light Sweet Crude Oil 3,000 contracts NYMEX NYH Gasoline Blend. 1,000 contracts NYMEX Henry Hub NG 1,000 contracts* NYMEX NYH Heating Oil 1,000 contracts Limits apply separately to physical-delivery and cashsettled positions * Referenced Contracts based on the NYMEX Henry Hub NG contract are subject to a limit equal to five times the spot- month position limit for: Cash-settled contracts; and Aggregate physical-delivery and cash-settled contracts Cadwalader, Wickersham & Taft LLP 13

14 Initial (Interim) Spot-Month Limits The CFTC adopted the spot-month position limits as interim final rules to solicit additional comment on the methods used to calculate the position limit levels and other aspects of the interim i final rule Comments are due January 17, 2012 Conditional limits for positions exclusively in cash-settled Referenced Contracts were included in the proposed rule, but removed from the final rule Cadwalader, Wickersham & Taft LLP 14

15 Netting Spot-month: Generally prohibited Permitted within a single class of contract (e.g., g one cashsettled Referenced Contract may be netted with another cash-settled Referenced Contract based on the same underlying Core Referenced Futures Contract) Permitted when determining compliance with the NYMEX Henry Hub NG aggregate position limit Non-spot-month: Netting permitted Cadwalader, Wickersham & Taft LLP 15

16 Aggregation Cadwalader, Wickersham & Taft LLP 16

17 One Approach to Aggregation Cadwalader, Wickersham & Taft LLP 17

18 Aggregation Subject to limited exemptions, an entity must aggregate all Referenced Contract positions that are: commonly held (directly or indirectly), including positions held by an entity in more than one account and positions held by another entity in which it has a 10 percent or greater ownership or equity interest; commonly controlled (directly or indirectly), including trading pursuant to an agreement (express or implied) or an identical strategy with another entity Aggregated entities are treated t as the same person for position limitsit Cadwalader, Wickersham & Taft LLP 18

19 Aggregation: Exemptions Limited exemptions from the aggregation requirement: Independent Account Controllers Only applies to eligible entities for client positions Violation of Federal law (e.g., FERC affiliate rules, antitrust laws, insider trading) Requires opinion of counsel Inter-affiliate risk transfers not subject to position limits if the entities must aggregate their position No exemption for independently d controlled, owned non-financial i entities Cadwalader, Wickersham & Taft LLP 19

20 Bona Fide Hedging Cadwalader, Wickersham & Taft LLP 20

21 Bona Fide Hedging The Commodity Exchange Act requires the CFTC to exempt bona fide hedging transactions and positions from position limits This requirement has remained essentially unchanged since the Federal government first imposed limits on speculative positions in 1936 Cadwalader, Wickersham & Taft LLP 21

22 Statutory Definition The Dodd-Frank Act defines a bona fide hedging transaction or position as a transaction or position that: Represents a substitute for transactions made or to be made or positions taken or to be taken at a later time in a physical marketing channel; Is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise; Cadwalader, Wickersham & Taft LLP 22

23 Statutory Definition Arises from the potential change in the value of one or several Assets that a person owns, produces, manufactures, processes, or merchandises or anticipates i t [the same]; Liabilities that a person owns or anticipates incurring; or Services that a person provides, purchases, or anticipates [the same]; or Reduces risks attendant to a position resulting from a swap that was executed opposite a counterparty for which the transaction would qualify as a bona fide hedging transaction, or qualifies itself as a bona fide hedging g transaction Cadwalader, Wickersham & Taft LLP 23

24 Regulatory Definition The CFTC narrowed the statutory definition of bona fide hedging to eight enumerated categories of hedging activity: Owned/fixed price purchases Fixed-price sales Offsetting/unfixed price purchases and sales Agent/merchandising purchases and sales Anticipated merchandising hedges Anticipated royalty hedges Service hedges Cross-commodity hedges Must make a specific filing under or 4a(a)(7) to seek clarification or relief for non-enumerated hedges Cadwalader, Wickersham & Taft LLP 24

25 Pass-Through Swaps Pass-through swaps qualify as bona fide hedges if they: Fall within one of the categories of enumerated hedging transactions for the hedging g counterparty Contain a written representation that the swap qualifies in good faith as a bona fide hedging transaction at the time the swap was executed; and Are not maintained in any physical-delivery Referenced Contract during the spot-month for energy commodities (unless the position continues to offset the cash market commodity price risk of the bona fide hedging counterparty) Cadwalader, Wickersham & Taft LLP 25

26 Reporting and Recordkeeping Cadwalader, Wickersham & Taft LLP 26

27 Reporting: Form 404 Any person that exceeds an applicable position limit (other than for anticipatory hedges) must submit Form 404 containing the following, among other, information for each business day (plus the day after) a position limit it is exceeded: d the applicable enumerated hedge category; the corresponding Core Referenced Futures Contract and the cash market hedged; and the cash market commodity stocks and fixed-price purchase/sale commitments being hedged Form 404 must be filed no more than three business days following the day that a position limit is exceeded and monthly thereafter Cadwalader, Wickersham & Taft LLP 27

28 Reporting: Form 404A Any person with anticipated cash market exposure that that exceeds an applicable position limit must submit Form 404A containing the following, among other, information for each business day (plus the day after) a position limit it is exceeded: d a description of the anticipated cash market activity to be hedged and how the purchases/sales of Referenced Contracts are economically appropriate; the time period for the anticipatory hedge exemption (< 1 year for anticipated merchandizing); and substantiating ti ti information on actual and anticipated i t activity associated with the hedge Form 404A must be filed at least ten days before a position limit is exceeded Cadwalader, Wickersham & Taft LLP 28

29 Cross-Commodity Hedges Traders relying on a bona fide hedge exemption must provide conversion methodology for any cross-commodity hedging transactions Cadwalader, Wickersham & Taft LLP 29

30 Visibility Levels Position visibility levels apply to any entity holding or controlling positions, including bona fide hedges, in all months or in any single month (including the spot-month), separately or in combination, net long or net short, above a specified level in: Certain metals Referenced Contracts (copper, gold, silver, palladium or platinum); or Certain energy Referenced Contracts (light sweet crude oil, Henry Hub natural gas, New York Harbor Gasoline Blendstock, or New York Harbor No. 2 Heating Oil) Cadwalader, Wickersham & Taft LLP 30

31 Recordkeeping Traders relying on a bona fide hedge exemption must maintain complete books and records concerning all of their related cash, futures, and swap positions and transactions and make such hbooks and records, along with a list of pass-through h swap counterparties, available to the Commission upon request Cadwalader, Wickersham & Taft LLP 31