Position limits and large-trader reporting

Most traders never come close to these rules. They exist for the biggest players, so that no single trader grows large enough to push a market around, and so the regulator can see who holds the big positions. There are two separate tools: position limits (a ceiling) and large-trader reporting (a spotlight).

Why limits exist

Section 4a of the Commodity Exchange Act (7 U.S.C. 6a) states the reason. Excessive speculation that causes sudden or unreasonable fluctuations or unwarranted changes in a commodity’s price is an undue burden on interstate commerce. So the CFTC may fix limits on the positions any person may hold, as needed to diminish, eliminate, or prevent that burden.

The same section says these limits do not apply to positions shown to be bona fide hedging.

What a speculative limit is

CFTC Regulation 150.1 defines a speculative position limit as the maximum net long or net short position one person may hold without an exemption. It is measured three ways:

• the spot month (for a physical-delivery core referenced futures contract, it starts at the close of business on the trading day before the first day delivery notices can be issued, or at the close of business on the trading day before the third-to-last trading day if that is earlier, and runs until the contract expires; a few contracts have their own exceptions),
• any single month other than the spot month, and
• all months combined.

Options count too. They are converted to a futures-equivalent amount based on how much they move with the underlying futures.

Who sets the numbers

• Federal limits: Regulation 150.2 sets federal limits for a list of “core referenced futures contracts” and contracts linked to them. The levels themselves are listed in Appendix E to Part 150 (150.2(e)). These numbers can change, so always check the current appendix rather than memorizing a figure.
• Exchange limits: Regulation 150.5 requires exchanges to set their own limits, no higher than the federal level, for contracts with federal limits. For physical commodity contracts without federal limits, the exchange sets a spot month limit and, outside the spot month, either limits or position accountability rules.

Counting your position: aggregation

You cannot dodge a limit by splitting a position across accounts. Regulation 150.4 requires a person to add together positions in every account in which they:

• directly or indirectly control trading, or
• hold a 10 percent or greater ownership or equity interest.

Positions held by people acting together under an agreement count as one person. And a person who runs more than one account or pool with substantially identical trading strategies must combine them too.

Made-up example, with a made-up limit of 1,000 contracts net long (not a real limit for any contract): a trader is net long 400 contracts in her own account, controls the trading of a client account that is net long 350, and owns 20 percent of a fund that is net long 300. She must combine all three: 400 + 350 + 300 = 1,050, which is over the made-up 1,000 limit.

Exemptions

Regulation 150.3(a) lists the exemptions from federal speculative limits:

• bona fide hedging positions,
• qualifying spread transactions,
• positions held in financial distress situations, when the CFTC exempts them,
• a conditional spot month exemption for certain natural gas positions, and
• positions from certain pre-enactment and transition period swaps.

A hedger who is genuinely offsetting business price risk is the classic case. Speculative limits are aimed at speculation, not at commercial hedging.

Large-trader reporting

Limits are a ceiling. Reporting is about visibility: it lets the CFTC see who holds large positions, well before anyone gets near a limit.

• Reportable position (15.00): any open position that, at the close of the market on a business day, equals or exceeds the reporting level for that contract. An account holding one is a special account. The definition covers any open position, so it applies to hedgers and speculators alike.
• Reporting levels (15.03): the CFTC lists a level per commodity. For example, the table in 15.03(b) sets corn at 250 contracts and wheat and soybeans at 150 contracts each. Holding above a reporting level is allowed; it just gets reported.
• Who files the daily reports (17.00): FCMs, clearing members, and foreign brokers report special accounts’ positions to the CFTC for each business day. These daily reports are the firm’s job.
• The trader’s own form (18.04): a trader who holds a reportable position must file a Form 40, Statement of Reporting Trader, when the CFTC makes a special call for it.

Made-up example: a customer is long 260 corn futures at the close (above the 250-contract corn reporting level in 15.03(b)). Her FCM includes her account in its daily large-trader reports. She may later get a special call from the CFTC asking her to file a Form 40. She has broken no rule; reporting is simply how the CFTC keeps watch.

Key ideas

• The CFTC sets speculative position limits under CEA Section 4a to prevent excessive speculation from causing unreasonable price swings.
• A limit caps the net long or net short position in the spot month, a single month, or all months combined. Options count on a futures-equivalent basis.
• Federal levels are in Appendix E to Part 150; exchanges set limits no higher than federal ones and may use accountability rules elsewhere.
• Aggregate accounts you control or own 10 percent or more of, and accounts with substantially identical strategies.
• Bona fide hedgers are exempt from speculative limits, along with the other 150.3 exemptions.
• Reporting levels trigger daily reports by the FCM (Part 17) and, on special call, a Form 40 from the trader (18.04). Reporting is not a violation.