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Simple English definitions for legal terms
Position limits
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A quick definition of Position limits:
Position limits are rules that limit the amount of trading or positions that a person can hold in a commodity. These limits are set by the Commodities Futures Trading Commission to prevent excessive speculation that can cause sudden or unreasonable changes in the price of a commodity. The limits are determined by a formula based on the previous year's average open interest in futures and options. Bona fide hedging transactions or positions are exempt from these limits. Spot month limits are stricter than other limits because physical delivery is required in that month. Exchanges can set their own position limits for commodities not specified by the CFTC, or impose position accountability requirements. Jointly-owned commodity interests are treated as a single person for compliance with position limits.A more thorough explanation:
Position limits are rules set by the Commodities Futures Trading Commission (CFTC) that restrict the amount of trading or positions that can be held in commodities that have experienced "excessive speculation." These limits are put in place to prevent sudden or unreasonable fluctuations in commodity prices.
For certain commodities like corn, oats, wheat, soybeans, soybean oil, soybean meal, and cotton, the CFTC specifies the maximum position that one person can hold in a single month or in all months. The size of positions is denominated in contract units or contracts, which are relatively large quantities of a commodity by mass.
Position limits are stricter in the spot month, which is the month in which a futures contract matures and becomes deliverable. This is because physical delivery is required in that month, and excessive positions and disorderly trading practices can be particularly disruptive.
However, "bona fide hedging transactions or positions" are exempt from position limits. These are transactions or positions that normally represent a substitute for transactions to be made or positions to be taken at a later time in a physical marketing channel that are economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise.
The CFTC treats a pool of traders as a single trader. Limited partners and pool participants that have no knowledge of or control over the positions of the pool are exempt from this aggregation rule, as are commodity pool operators or commodity trading advisors with commonly-owned but independently-controlled positions.
For commodities other than those specified in the table, the exchanges can impose "position accountability" requirements instead of position limits. This allows the exchanges to ask high-volume traders for information related to the hedging and strategic nature of a heavy position, which facilitates detection of attempts at market manipulation.
Overall, position limits are put in place to prevent market manipulation and ensure fair trading practices in the commodities market.