Regulations - Position Reporting Requirements
Position Reporting Requirements Speculative Position Limits
One of the CFTC's reasons for being is to prevent price manipulation, and "position reporting requirements" – which mandate that large-scale traders disclose the nature of the position, trading strategy, and hedging information of the position to the exchange – are the oldest tools in the CFTC's kit for keeping speculators from cornering the market in a commodity.
NFA clearing members, FCMs and foreign brokers must file daily reports with the CFTC showing futures positions held in their accounts that are at or above levels set by the CFTC. The daily reports also include delivery notices and exchange of futures for cash or other financial derivatives. Reporting firms must file forms to identify each new reportable account and its controlling trader. It is the size of the trader's or firm's position that determines whether or not that position needs to be reported. Whether it is long or short, speculation or hedge, any position that exceeds the reporting threshold must be disclosed.
Position reporting requirements are set by the CFTC or, more typically, by the regulated exchanges. These limits could be anywhere from 25 to 3,000 contracts, depending on the size of the market, according to a 2005 Futures Industry magazine article, but reported positions typically represent at least 70% of the open interest in each market. When you consider how much of these markets are controlled by so few individual traders at so few firms, it becomes obvious how easy it would be to fix prices in a commodity, if there were no position reporting requirements.
A "speculative position limit" is the maximum futures position, either net long or net short, in a commodity that may be held or controlled by one person other than a person eligible for a hedge exemption. This is an absolute limit of permissible trading, not merely a threshold for reporting. The purpose of these limits is to reduce price fluctuations.
Regulators grant exemptions to their position limits for what they term "bona fide hedging," as opposed to, one can only suppose, false hedges. The CFTC's standard for a "bona fide hedge" is a hedge that is "economically appropriate to the reduction of risk for a commercial enterprise and must arise from a change in the value of hedger's (current or anticipated) assets or liabilities." Exchanges may also grant exemptions for spreads or other strategies that serve to stabilize prices. Hedgers must file a report with the CFTC if their futures positions exceed the speculative position limits, to be filed monthly or in response to a request by the commission. It shows the trader's positions in the cash market and is used to check whether the trader has sufficient cash position to justify futures positions in excess of the speculative position limits.
Speculative Position Limits