At an open meeting on October 15, 2020, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) voted to adopt three final rules. First, the Commission adopted by a 3–2 vote a final rule overhauling its regulatory framework governing speculative position limits on a large variety of commodities. Second, the Commission unanimously approved amendments to margin requirements for uncleared swaps for swap dealers and major swap participants. Third, the Commission unanimously voted to finalize amendments to Regulation 3.10(c), which sets forth exemptions from registration for certain foreign intermediaries.
The final rule is the latest in the Commission’s years-long effort to finish one of the last remaining rules under the Dodd-Frank Act. The Act, passed in 2010, amended the Commodity Exchange Act to direct the CFTC to construct a regulatory framework for position limits in an effort to curb speculative trading. The CFTC first adopted a final rule on position limits in 2011, but it was vacated by a federal court, and although the Commission issued subsequent proposals for position limits in 2013 and in 2016, none became a final rule. Adopting a final rule in this area has been a priority for CFTC Chairman Heath P. Tarbert, as he indicated when the Commission issued a Notice of Proposed Rulemaking in January 2020 preceding the current final rule. Covington published a client alert on this proposed rulemaking and will provide a detailed review of the final rule in an upcoming client alert.
The final rule imposes position limits on 25 “core referenced futures contracts” for physically settled commodities enumerated in the rule, futures contracts and options on futures contracts “directly or indirectly linked” to a core referenced futures contract, and swaps that are “economically equivalent” to such contracts. It also enumerates certain forms of bona fide hedging exempt from position limits, including hedging of unfixed-price transactions. Key differences from the January 2020 proposal include changes to the spot-month limit for cotton futures and the application of position limits on natural gas on a disaggregated or per-exchange basis, rather than aggregated across all exchanges. The final rule also amends the proposal’s temporary substitute test for a bona fide hedge to clarify that a bona fide hedge must be a substitute for a position in the physical marketing channel.
At the open meeting, Commissioner Dan M. Berkovitz offered a last-minute amendment to the final rule’s preamble that permits exchanges to voluntarily provide the CFTC with information related to nonenumerated hedging requests before the CFTC receives the submission. This early access will presumably facilitate the Commission’s ability to render a decision within 10 days of a request, as contemplated under the rule. The amendment passed 3–2 over the dissents of Chairman Tarbert and Commissioner Brian D. Quintenz.
The final rule will take effect 60 days following its publication in the Federal Register. Compliance with provisions of the rule relating to 16 non-legacy core referenced futures contracts, those contracts’ associated referenced contracts, and the requirements of exchanges under 17 C.F.R. § 150.5 will be required beginning January 1, 2022; the compliance date for the remaining provisions will be January 1, 2023.
Margin Requirements for Uncleared Swaps
The Commission also approved a final rule amending the implementation schedule for changes to the CFTC Margin Rule, which sets margin requirements for uncleared swaps that apply to swap dealers and major swap participants that do not have a prudential regulator. Under a July 2020 interim final rule, changes to the CFTC Margin Rule were set to take effect for many market participants on September 1, 2021. This week’s final rule extends the compliance date until September 1, 2022 for participants within the “Smaller Portfolio Group,” which are those with smaller average daily aggregate notional amounts of swaps and other financial products, so as to avoid market disruption that would ensue if a large number of participants were required to keep to the same compliance date.
Registration Exemption for Certain Foreign Intermediaries
The Commission voted to approve a final rule providing a registration exemption for certain foreign intermediaries. CFTC Regulation 3.10(c) sets forth categories of exemptions to CFTC’s requirements for registration as an intermediary. One such exemption applies to a foreign-located person acting as a commodity pool operator (“CPO”) on behalf of offshore commodity pools, so long as transactions are submitted for clearing through a registered futures commission merchant. This final rule clarifies the application of this exemption by permitting a foreign-located person acting as a CPO to claim this exemption on a pool-by-pool basis. This means that a non-U.S. CPO operating a pool including only non-U.S. persons could claim the exemption for that pool even if the CPO operates other pools that include U.S. persons.
Additionally, the final rule creates a safe harbor allowing a non-U.S. CPO of an offshore pool to rely on the exemption if it takes reasonable actions to reduce the possibility that participation units in the pool are offered or sold to U.S. persons. It also contains minor structural amendments to Regulation 3.10(c) intended to clarify the exemption’s application. The rule will take effect 60 days following its publication in the Federal Register.