Compliance and trading professionals of firms that trade energy derivatives over NYMEX and COMEX should be aware of a recent development related to hedging, risk management, and arbitrage/spread position exemptions from position limits under Rule 559 (Position Limits and Exemptions).On October 11th, the Division of Market Oversight (“Division”) of the Commodity Futures Trading Commission (“CFTC”) published the results of its rule enforcement review of the market surveillance program of two affiliated exchanges: the New York Mercantile Exchange, Inc. (“NYMEX”) and the Commodity Exchange, Inc. (“COMEX”). The review focused on the exchanges’ compliance with three core principles: Core Principle 2 – Compliance With Rules, Core Principle 4 – Prevention of Market Disruption, and Core Principle 5 – Position Limitations or Accountability. In summary, the review can be divided into two categories of findings:
- Findings Without Recommendations – The review resulted in 8 “findings without recommendations,” which essentially means that the exchanges had adequate resources and processes to satisfy the relevant Core Principles and related CFTC regulations.
- Findings With Recommendations – Notably, there was a single finding with recommendation, which related to Core Principle 5 – Position Limitations and Accountability.
Recommendation: [NYMEX and COMEX] should consider implementing a formal review process by which [their market surveillance departments] can verify that a market participant who has a position larger than a position limit is, in fact, making use of an exemption, consistent with the strategy described in their exemption application.
Firms that trade energy derivatives on NYMEX and COMEX and claim an exemption from otherwise applicable position limits (transactions exempt as hedging, risk management or arbitrage/spread positions ) should note this development and expect changes to their compliance and trading oversight programs in due course, as a result of inevitable changes to relevant exchange rules, including Rule 559 (Position Limits and Exemptions).
The relevant Market Surveillance Rule Enforcement Review is available here.
Good day. Good reminder to stay focused on records, especially for hedging, risk management and arb/spread positions. DR2