Key Takeaways:

• In the last 3 months, the Commodity Futures Exchange Commission (CFTC) has issued 3 orders against firms violating positions limits, totaling $2.3 million in fines.
• CFTC position limit rules apply not only to swap dealers, but to any firm transacting in commodities.
• Firms should review their control framework and confirm that they are adequately monitoring and assessing their compliance with position limits.

The Commodity Exchange Act (CEA) requires the CFTC to establish position limits as necessary for derivatives to help maintain the integrity, resiliency and vibrancy of the markets. In its Position Limits for Derivatives (2020 Final Rulemaking), the CFTC established new and/or amended federal speculative position limits for 25 physically-settled commodity derivative contracts and certain linked instruments. There are three basic elements to the regulatory framework for federal speculative position limits:

In the last 3 months, the CFTC has issued 3 orders against firms violating positions limits, totaling $2.3 million in fines.

Highlighting the importance of position limits, CFTC’s Director of Enforcement Ian McGinley said in a recent press release, “Federal position limits provide an important prophylactic against manipulation… the CFTC will use its ability to look at positions on and across exchanges to enforce compliance and protect the integrity of the futures markets.” Given these recent fines, firms active in the commodity space should review their control framework and confirm that they are adequately monitoring and assessing their compliance with position limits.

Summary of Recent CFTC Orders:

Specific details on each of the recent cases are included below:

On 25 September 2024, the CFTC charged a swap dealer with violating position limits as well as failing to supervise as it relates to position limits. The CFTC found that on certain trading days, the swap dealer exceeded both the federal and exchange spot month speculative position limits for the New York Mercantile Exchange (NYMEX) Henry Hub Natural Gas future referenced contracts. The CFTC also found that the firm failed to diligently supervise their employees and failed to monitor and prevent position limit violations, and failed to monitor and prevent improper reliance on any exemptions from position limits. Further, the CFTC found that the swap dealer lacked an early warning system and policies and procedures designed to detect and alert senior management when position limits were in danger of being breached.

On 25 September 2024, the CFTC filed and settled charges against a U.S. Trading Firm for federal natural gas futures position limits violations. The CFTC found that the firm exceeded the federal spot month speculative positions limits for cash-settled reference contracts to the NYMEX’s physically-delivered Henry Hub Natural Gas futures contracts. In this case, the firm was granted conditional limit exemptions, but the CFTC found that the firm violated the conditions of the exemption several times over a two-year period.

On 14 August 2024, the CFTC filed and settled charges with a Multinational Commodities Trading Firm for federal position limit violations. The CFTC found that the firm had exceeded the position limits on aggregate positions across multiple exchanges in contracts that referenced crude oil futures traded on the NYMEX and ICE Futures Energy Division. This was the first time the CFTC enforced aggregate positions held on multiple exchanges. The firm also exceeded the position limits in live cattle futures contracts traded on the Chicago Mercantile Exchange.

The recent position limit violations should encourage firms active in the commodity space to review their business processes and to assess their compliance with position limit requirements and exemptions. This review should consider:

• Understanding how and when position limit requirements apply to the Firm’s business.
• Ensuring policies and procedures are appropriate to address position limit requirements.
• Understanding whether exemptions may apply and ensuring the Firm has applied to the Commission to rely on these exemptions, when applicable.
• Reviewing and ensuring that all terms of exemptions are continuously being met by the Firm.
• Verification of Firm processes to calculate future equivalents as applicable
• Ensuring the Firm has proper controls to monitor for potential position limit violations.
• Consider whether the Firm’s controls account for position accumulation across multiple exchanges as is required and was enforced in one of the CFTC’s recent cases.

Put Patomak’s Expertise to Work

Patomak has experience in assisting swap dealer entities in complying with CFTC requirements. If you’d like to learn more about how Patomak can partner with you, contact Jill Sommers, Chair of Derivatives Practice (jsommers@patomak.com) or Sudhir Jain, Managing Director and Head of New York Office (sjain@patomak.com).