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WASHINGTON, Oct. 19- The Commodity Futures Trading Commission (CFTC) adopted the controversial position limits rule under the Dodd-Frank Act. The rule, approved yesterday with a 3-2 vote, aims to curb sharp price increases by capping the positions firms can take on certain commodity contracts.
The two Republican commissioners, Scott O'Malia and Jill Sommers, voted against the position limits rule, which curbs bets on 28 referenced commodities in agricultural, energy and metals markets.
“Historically, the Commission has taken a much more disciplined and fact-based approach in considering the question of positions limits; a process that is lacking from the current proposal,” O'Malia said.
O'Malia said the rule goes beyond the intended reach of Dodd-Frank and “fails to make a compelling argument that the proposed position limits, which only target large concentrated positions, will dampen price distortions or curb excessive speculation.”
CFTC chairman Gary Gensler, who voted in favor of the rule, said that position limits “help to protect the markets both in times of clear skies and when there is a storm on the horizon.” He said the extended rule complies with the Dodd-Frank Act, which “broadened the CFTC's position limits authority to include aggregate position limits on certain swaps and certain linked contracts traded on foreign boards of trade in addition to U.S. futures and options on futures.”
According to the CFTC, the new rule will, in addition to changing the size and scope of speculative position limits, amend the scope of the bona fide hedging exemption consistent with the new Commodity Exchange Act.
The Commission received more than 15,000 comments on the position limits rule, which supporters believe will prevent price hikes by limiting hedge funds and banks in commodity markets, but critics believe will place undue burden on traders and be too costly.
The commissioners also voted 3-2 on a rule for derivatives clearing organizations (DCOs), which sets new regulations for DCOs under the Dodd-Frank Act.
Gensler said the rule requires that DCOs collect initial margin on a gross basis for its clearing member's customer accounts; implements open access to DCOs; sets reporting requirements to ensure that the Commission has the information to monitor DCO compliance with the Commodity Exchange Act and Commission regulations; and revises the DCO application procedures.
However, O'Malia said the new requirements place a “one size fits all” approach to derivatives clearing organizations.
“DCO risk management poses complex and multidimensional challenges,” said O'Mailia. “One DCO may have a significantly different risk profile than another. Consequently, each DCO must have sufficient discretion to match requirements to risks. The role of the Commission is to oversee the exercise of such discretion, not to prevent such exercise.”
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