Practitioners reported general readiness for the introduction last week of new CFTC rules around position limits, a decade after the regulator first floated its plans for changing them. Regulated firms are now being urged to prepare for further changes scheduled for next year, which will introduce new exchange rules and federal limits on derivatives contracts not previously subject to them.
The long-awaited CFTC rule changes came into effect on March 15. The Final Rule, published in the Federal Register in January, aims to dispel uncertainty among market participants by clarifying CFTC’s position limits on a slew of legacy agricultural contracts. The new rules increase the limit size on a series of agricultural commodity contracts, presenting affected firms with the opportunity to increase their volumes in these securities.
“But what is crucial is that firms avoid any further delay in preparing for new rules for exchange limits and those contracts not previously subject to federal limits coming into effect on January, 2022,” says Andrew White, CEO at FundApps, which helps firms manage their position limits.
According to Nick Krzywkowski, Business Development at FundApps, this next phase will introduce CFTC position limits to another set of commodities products in the energy and metals segments for the first time. In particular, widely traded contracts that will be impacted include NYMEX Henry Hub Natural Gas for the former and COMEX Gold and Silver contracts for the latter.. As a result of these changes at the federal level, Krzywkowski says, exchanges will have to review and possibly amend their own limits. Additionally, by 2023, the CFTC wants to start introducing position limits on economically equivalent swaps.
All this regulatory activity, White says, means there is “a significant body of work to do from a legal, operational, and compliance perspective in order for firms to be ready for limit changes as well as including OTC derivatives in their calculations required by the CFTC from 1st Jan 2023.” Those that don’t have the right processes in place to keep abreast of position limits expose themselves to significant financial and reputational risk, in an area of compliance where economic sanctions are high and, amidst the backdrop of an ever-competitive business landscape, compliance infractions can put firms at a disadvantage to their competitors, he says.
Adds Krzywkowski: “Firms often perform this function on a manual basis, say via quarterly audit, where limits stored by companies internally, for example in excel spreadsheets, are updated in respect of changes made by exchanges and regulators. This can be risky, especially if limits go down and firms are caught short and breach them. Firms trading derivatives contracts will have to build monitoring tools to deal with these and future updates. On top of this, there is a significant burden of work for exchanges to carry out in setting up processes to capture relevant OTC trading in order to satisfy the CFTC’s requirements set out in the Final Rule.” FundApps helps firms to get away from manual processes, he says, promoting operational efficiency as well as compliance.
FundApps launched in 2010 as a compliance-as-a-service provider. The company has three main areas of focus: shareholding disclosure for financial institutions that are required to disclose their equity ownership stakes for transparency purposes; sensitive industries, for sectors which are deemed to be ‘sensitive’ by governments and where restrictions on equity ownership have been established; and position limit monitoring, which assists firms with monitoring their derivative exposures across asset classes, versus limits set out by exchanges and regulators around the globe.
In this latter segment, FundApps helps firms monitor and prepare for the sometimes frequent changes in position limits issued by exchanges or by regulators like CFTC or ESMA. FundApps receives updates on limits from FIA Tech, the data arm of the Futures Industry Association (FIA), and through their team of software engineers and regulatory experts, they normalise the data, interpret monitoring instructions into algorithmic code, add relevant calendar information and then map these to client firms’ position information, which is uploaded to FundApp’s AWS instance. Results are then delivered to the client either via user interface, email snapshot, or for those that would like another layer of automation, via an outbound API, which can be used by clients in a number of ways, including direct connection to trading systems.
Users of the service are able to check whether they are close to breaching a trading limit, and inform traders or desk heads as appropriate. API users can connect the services directly to analytical applications like Tableau to create dashboards for monitoring during the trading day, or else connect directly with their traders’ order management systems (OMSs), portfolio management systems (PMSs) and other systems. “Many of our clients use our services in collaboration with a number of companies,” Krzywkowski says, “including: Bloomberg, Refinitiv, FactSet, SimCorp, Enfusion, Eze Software, Broadridge, Asset Control, Markit EDM, HedgeServ, Northern Trust and GoldenSource.”