Regulations - Position Reporting Requirements

Position Reporting Requirements
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.

Speculative Position Limits
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.

Guaranteed And Independent IBs
Related Articles
  1. Personal Finance

    Does It Make Sense to Go to College in Europe?

    If you're deciding whether to get a degree abroad, first do your research and talk to alumni who have completed the same program.
  2. Investing Basics

    Understanding the Spot Market

    A spot market is a market where a commodity or security is bought or sold and then delivered immediately.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Chart Advisor

    Traders Step Back to Assess Commodities Damage

    Traders are turning to these exchange-traded notes and exchange-traded funds to analyze key commodities and determine what could be coming next.
  5. Credit & Loans

    Four Ways to Improve Education In America

    U.S. students place 27th in math and 20th in science out of 34 countries. The United States must reform its education system or harm future economic productivity and global trade competitiveness.
  6. Investing News

    Oil or Gold: Which Will Recover First?

    Not sure where oil and gold are headed? The answer is complex.
  7. Investing Basics

    Explaining Forward Rate Agreements

    Forward rate agreement (FRA) refers to an interest rate or foreign exchange hedging strategy.
  8. Investing

    Using Fibonacci to Analyze Gold

    Use Fibonacci studies to analyze gold by picking out hidden harmonic levels that can provide major support or resistance.
  9. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  10. Mutual Funds & ETFs

    ETF Analysis: United States Natural Gas Fund LP

    Find out more about the United States Natural Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations of it.
RELATED TERMS
  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
  4. Best To Deliver

    The security that is delivered by the short position holder in ...
  5. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  6. Advanced Diploma In Insurance

    A qualification earned by insurance professionals and conferred ...
RELATED FAQS
  1. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  2. Can I use my 401(k) to pay for my college loans?

    If you are over 59.5, or separate from your plan-sponsoring employer after age 55, you are free to use your 401(k) to pay ... Read Full Answer >>
  3. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  4. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  5. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  6. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!