ACTION!

Last week, the CFTC withdrew two no-action letters which gave DB Commodity Services LLC (CFTC Ltr. No. 06-09, 2006 WL 1419398) and something known only as "Client X" (CFTC Ltr. No. 06-19, 2006 WL 2682362), exemptions from the position limits in Regulation 150.2 (17 C.F.R §150.2). These entities sought exemptions because they were buying small numbers of futures to create a virtual commodity index. The commodity index was a tool used to price their real product: commodity-linked notes.

The withdrawl of no-action protection from this apparently inocuous activity appears to be part of a general CFTC blitz on speculation. The CFTC limits the size of transactions which are not bona fide hedging (see this CFTC Backgrounder for more). The CFTC news release finds that transactions undertaken by DB Commodity Services and X do "not qualify for a bona fide hedge exemption under the Commission’s regulations," and given CFTC Chair Gary Gensler's belief that "position limits should be consistently applied and vigorously enforced," this seems like something of which we'll be seeing more.