We admit. We said it. “Dodd-Frank limits will never happen.” Well, foot please meet mouth. The CFTC just passed Dodd-Frank limits.
This has to be one of the most active (and productive) Commissions we have ever seen. In the past month they dropped both the re-write of Dodd Frank Reporting (couldn’t come soon enough) and Dodd Frank Limits (thought it would never happen).
It’s 899 pages of rulemaking. But here is what you need to know:
The First Big Takeaway: 25 Core Contracts
- Federal limits apply to the 25 core “referenced contracts” (list below);
- Federal limits apply to the futures and options contracts directly or indirectly linked to the core referenced products; and
- Economically equivalent swaps.
The interpretation put forth by the Commission is, however, fairly narrow in terms of product inclusion.
‘Referenced contract,’ however, explicitly excludes location basis contracts, commodity index contracts, contracts that are based on prices across a month (i.e., contracts commonly referred to as calendar month average contracts, trade month average contracts, or balance of month contracts), outright contracts that are based on a price reporting agency index price, swap guarantees, and trade options that meet certain requirements.
Similarly, the inclusion of swaps only deals with “identical material.” The commission limited it to equivalent swaps that have identical terms. For the most part a settlement within one day, same location etc will be included.
Second Big Takeaway: No Mixing of Cash and Phys
Remember this: physical settle and cash settle don’t mix. Spot month volumes aggregate according to the rules above, however, phys and fin do not mix. For example, let’s say a firm has a large NYMEX CL position. This is a physically settling position. Let’s further say that the same firm has a large number of identical look alike positions that settle in cash. Do we add the OTC positions? No! For limit purposes phys and cash settle do not mix.
Third Big Takeaway: Gas Gets Special Handling
Natural Gas gets very special handling. Remember what we just said up there about Phys and Cash settle don’t mix. Well it follows then that you DO aggregate all your cash settle positions across exchanges. Right? Yes, except for natural gas. Natural gas cash settlement does not aggregate across exchanges.
More To Come
K3 limits is, of course, the leading limits engine covering exchange limits, MiFID limits, and now Dodd-Frank Limits. This rulemaking is a long one. Between the Dodd-Frank reporting rewrite and the Dodd-Frank Limits rule there is just shy of 2000 pages to cover. So expect more commentary soon! Until then if you have questions or would like to see the real time K3 Limits or Atlas (our spot period tracker) give us a call.
The Original 9 Agricultural Commodities
CBOT Corn (C)
CBOT Soybean (S)
CBOT Soybean Meal (SM)
CBOT Soybean Oil (SO)
CBOT Wheat (W)
CBOT KC HRW Wheat (KW)
MGEX HRS Wheat (MWE)
ICE Cotton No. 2 (CT)
New: Ag Commodities Include
CME Live Cattle (LC)
CBOT Rough Rice (RR)
ICE Cocoa (CC)
ICE Coffee C (KC)
ICE FCOJ–A (OJ)
ICE U.S. Sugar No. 11 (SB)
ICE U.S. Sugar No. 16 (SF)
COMEX Gold (GC)
COMEX Silver (SI)
COMEX Copper (HG)
NYMEX Platinum (PL)
NYMEX Palladium (PA)
NYMEX Henry Hub Natural Gas (NG)
NYMEX Light Sweet Crude Oil (CL)
New York Harbor ULSD Heating Oil (HO)
NYMEX New York Harbor RBOB Gasoline (RB)