Recent CFTC Rule Changes That Affect Hedge and Private Equity Fund Managers |

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Recent CFTC Rule Changes That Affect Hedge and Private Equity Fund Managers

In recent weeks, the US Commodity Futures Trading Commission has issued several final rules and rule proposals that directly affect hedge fund managers that trade in futures contracts (and in other commodity interests) and private equity fund managers with portfolio companies that may, as part of a hedging or raw materials acquisition effort, engage in commodity interest transactions. All fund managers should review these changes to determine if they present limitations on their business or require regulatory relief filings; registered commodity pool operators and commodity trading advisors, of course, should review all of the developments discussed in this article.

Expanded Position Limits

On Dec. 5, 2016, the CFTC reproposed rules that would, if adopted, expand the scope of the existing federal position limits regime for exchange-traded futures contracts (the “Reproposal”).1

CFTC rules currently impose position limits for nine futures and commodity options contracts (the “Legacy Contracts”). In 2011, the CFTC adopted rules to expand the position limits regime beyond the Legacy Contracts, but these rules were quickly vacated — on technical grounds — by a federal district court. In 2013, the CFTC again put forth a proposal for expanded position limits and most recently supplemented that proposal in May 2016. No final rule was adopted, however, and the CFTC issued the Reproposal earlier this month based on public comment and related reviews by the CFTC Staff.

The Reproposal, if adopted, would:

• Establish federal limits on speculative positions in 25 core physical commodity futures contracts (the actual numerical limits were set by the CFTC based on statistical analyses of the normal trading levels for futures and other referenced contracts in actual trading);

• Require their economically equivalent “referenced contracts” (i.e., options and swaps) to count towards such limits; and

• Clarify and, in some ways, expand the use of the “bona-fide hedging” position limits exemption.

The Reproposal also requested comments on the possibility of delaying the compliance date of any final rule to Jan. 3, 2018 (which would align CFTC position limits rules with new EU position limits rules scheduled to go into effect on that date).

While the Reproposal could represent an important expansion of the CFTC’s direct role in the markets, it will fall to the CFTC commissioners, and especially the new chairman, who are appointed by the new presidential administration to finalize these changes. While it is quite possible that the CFTC will revisit, modify or even abandon the Reproposal, in the interim, all fund managers that trade in the futures markets should review the new position limits to determine whether they, if adopted, would negatively affect their trading and investment program. Of course, any fund manager that seeks to rely on the hedging exemption should also review the changes to that exemption contained in the Reproposal.

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