Guest Post: JP Morgan Wins: CFTC Position Limits Do Not Apply (To Them)

Tyler Durden's picture

Submitted by Chris Martenson

JP Morgan Wins: CFTC Position Limits Do Not Apply (To Them)

Speaking of changing the rules...

Gold and silver are now down hard over the past two days and the reason may have something to do with the fact that the CFTC utterly caved to JPM in their long-awaited decision on position limits in a 4-1 vote.

While position limits will eventually be set, maybe, someday, the course of action taken by the CFTC grandfathers in JPM's (and HSBC, et al) current outlandish positions.

Here's the background (emphasis mine):

On July 21, 2010, the Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, the Dodd-Frank Act amended the Commodity Exchange Act to:

  • Require the Commission, as appropriate, to limit the amount of positions, other than bona fide hedge positions, that may be held by any person with respect to commodity futures and option contracts in exempt and agricultural commodities traded on or subject to the rules of a designated contract market (DCM).
  • Require the Commission to establish position limits, including aggregate position limits, for swaps that are economically equivalent to DCM contracts in exempt and agricultural commodities (collectively, economically equivalent swaps). Such limits must be imposed simultaneously with limits on DCM contracts.


The only wiggle room in the Dodd-Frank bill is for "bona fide" hedge positions which, I should state, I think is not a good idea because the exact definition of a 'bona fide hedge' is elusive.

For example, you and I could decide to engage in a massive short-hedged position where you short a commodity but buy calls from me. Your 'hedge' is only as good as my credit. Or perhaps you decide that oil and natural gas have enough negative correlation that you are 'hedged' by being equally short and long both substances. What if your correlation blows out? You're not hedged is the answer to that question.

Continuing into the meat of the new position limit ruling, we find these discomforting items:

The Commission’s proposed regulations call for:

Position limits to be placed on 28 core physical-delivery contracts and their “economically equivalent” derivatives.

Establishment of position limits on physical commodity derivatives in two phases:

  • Initial transitional phase: spot-month position limits only, based on deliverable supply determined by and levels currently set by DCMs.
  • Second phase: spot-month position limits, based on the Commission’s determination of deliverable supply, and position limits outside of the spot month.

Translation: Only the front month of any contract will be subject to the position limits initially. Later, at some undefined point "early next year", out months will be included.  But for now it's just the spot month.

Impact: Watch out for crazy out-month behaviors as JPM et al. seek to skirt this rule.

Okay, that's not too terrible.  

But this is:

Spot-month position limit levels set at 25% of deliverable supply for a given commodity, with a conditional spot month limit of five times that amount for entities with positions exclusively in cash-settled contracts

That's just horrible.

For anybody like JPM that has no intent of taking physical delivery, they are prevented from accumulating a position that is 125% of the total deliverable supply.  What sort of a limit is that??  That's like trying to limit the damage from auto accidents by limiting freeway speeds to 'no more than' 175 mph.

Also, anybody who might want to actually buy the physical is limited to 25%, so any potential Hunt Bros. need not apply. The outer limits of this game have been exclusively reserved for speculators and manipulators.

That's not even remotely the outcome I was hoping for. This 'ruling' tantamount to saying "carry on!"

And what does 'deliverable supply' mean?  Does it refer to COMEX warehouse deliverables in current storage  or can special players receive additional preferential treatment by including 'deliverables' available to them via contractual arrangements with the LBMA?  Lots of questions are emerging for me here.

But it gets worse:

Exemptions for bona fide hedging transactions (based on the Dodd-Frank Act’s new requirements for such transactions) and for positions that are established in good faith prior to the effective date of specific limits adopted pursuant to the proposed regulations.

Translation: "JPMs silver position is in complete violation of even these generous new 'rules' so we're just going to let them keep it."

Impact:   Just check the price behavior of gold and silver for the impact.  The gold and silver markets have traded upwards of late in part because of the thought that JPM would finally be forced to play fair and reduce their outlandish precious metals short positions.  Nope. Guess not.

Once again, all sense of fair play has been abandoned in the interest of giving a special handout to a set of large banks that are reporting near-record earnings. When, I must ask, is enough enough?

The message that I receive from this ruling is that US markets are now hopelessly and irrevocably captive to the behind-the-scenes wishes of the banking class, for which "everything and then some" seems to be not quite enough.

Worse, an already battered faith in the markets has been kicked again.

Here's my prediction: someday the US commodities markets will experience a very painful set of failures, big banks will be caught on the bad end of that experience, and they will simply, once again, lobby to have the rules changed in their favor.

To everybody who hopes to make money by being on the opposite side of that trade, good luck collecting your winnings. They will simply be rule-changed right out of your hot little hands.

Thank you for playing sir, and sorry about your luck; would you care to try again?

The CFTC is now playing the role of Lucy holding the football. If you don't wish to be Charlie Brown in this story, I'd advise that you take delivery.

Here's CFTC Chairman Gary Gensler describing the rationale, such as it is, for the CFTC's ruling [with my reactions inserted in-line]:

Position limits help to protect the markets both in times of clear skies and when there is a storm on the horizon. In 1981, the Commission said that “the capacity of any contract market to absorb the establishment and liquidation of large speculative positions in an orderly manner is related to the relative size of such positions, i.e., the capacity of the market is not unlimited.” [So far so good!]

Today’s proposal would implement important new authorities in the Dodd-Frank Act to prevent excessive speculation and manipulation in the derivatives markets. The Dodd-Frank Act expanded the scope of the Commission’s mandate to set position limits to include certain swaps. [Still good]

The proposal re-establishes position limits in agriculture, energy and metals markets. It includes one position limits regime for the spot month and another regime for single-month and all-months combined limits. It would implement spot-month limits, which are currently set in agriculture, energy and metals markets, sooner than the single-month or all-months-combined limits. [Okay, spot-month goes first, before single-month and all-months combined.  Got that.  With the grandfather and 'bona fide hedge' exemptions of course.  Left that part out...]

Single-month and all-months-combined limits, which currently are only set for certain agricultural contracts, would be re-established in the energy and metals markets and be extended to certain swaps. These limits will be set using the formula proposed today based upon data on the total size of the swaps and futures market collected through the position reporting rule the Commission hopes to finalize early next year. ["Will be set?" Early next year? Isn't that a year from now?  Why so long?]

It will be some time before position limits for single-month and all-months-combined can be fully implemented. In the interim, if a trader has a position that is above a level of 10 and 2 ½ percent of futures and options on futures open interest in the 28 contracts for which the Commission is proposing position limits, I have directed staff to collect information, including using special call authority when appropriate, to monitor these large positions. [For silver, this amounts to some 5,300 contracts.  Well above the 1,500 contracts Ted Butler called for based on the 1% of world production limit.  It's too high.]

Staff will brief the Commission and make any appropriate recommendations based upon existing authorities for the Commission’s consideration during its closed surveillance meetings at least monthly on what staff finds. [Oh, so this is not a regulatory action, but a fact-finding mission? It's rather unusual to find a government body that takes care to under-interpret a congressional mandate for regulatory power, but we seem to have one in the CFTC.  Odd that such a loss of regulatory nerve only seems to occur when the interests of big banks are on the line...] 


Let's close with a statement of regret by Bart Chilton who tried very hard to do the right thing, but couldn't get the other four commissioners to see things his (and my/our) way.

Statement of Commissioner Bart Chilton at the 9th CFTC Public Meeting on Rulemaking under the Wall Street Reform and Consumer Protection Act

January 13, 2011

As regulators, I think we have one key mission. It is embodied in the Commodity Exchange Act. We have a singularity of purpose to ensure efficient and effective markets and to prevent and deter fraud, abuse and manipulation. Quite frankly, I think we can do better. We can because the new Wall Street Reform and Consumer Protection Act requires that we develop what many of us consider to be some fairly precious parameters.

Today, I am hopeful we will move forward to propose a position limits rule, a most precious parameter that we should have proposed much earlier in a way that would have implemented the provision as Congress intended. That's not happening.

Yesterday, eight U. S. Senators told us to move forward on limits. That follows two other senatorial letters from last month.

This is a Commission of five individuals, a group of people who make these decisions. That pretty much ensures no individual will get their way all the time. I'm certainly not getting my way on position limits, nor are the Senators who wrote to us.

I am thankful that we will have position points in place as a kind of glide path to position limits. As I've said repeatedly, points are not limits. However, they will help us learn more and do better as we go forward in further developing important—and precious— parameters.


Thank you for trying Bart, I am grateful for your efforts.  I wanted to give Gary Gensler, the former Goldman Sachs executive, the benefit of the doubt and I did that.  All benefit and all doubt now removed.  Once a squid, always a squid I guess.

I am still trying to get my arms around this ruling and its likely impact on gold and silver prices going forward.  Long-term this changes nothing except to reinforce my conviction that I have no interest in playing in rigged markets.  

Further, given the opportunity to do the right thing in an open and transparent manner, the CFTC, quite predictably, caved to large interests - the same large interests that are helping to shape, if not drive, current fiscal and monetary policy.  

For more on rule changing, please read yesterday's piece "Don't Worry, They'll Just Change the Rules". I guess I should append the following to that title "...or decline to enforce them.'

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egdeh orez's picture

wow! WTF!!!

Can't all ZH readers get together and do something about this (and I don't mean death threats to GG)?

Honestly, this fucking corruption is so fucking blatant.  CFTC and SEC, designed to protect the public, is working to screw the public. 

Cheesy Bastard's picture

Can't all ZH readers get together and do something about this

Yeah, we can all buy physical silver and take delivery....Nevermind.  That would only work if there was a rule of law.

Pladizow's picture

"The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth becomes the greatest enemy of the State." 

-- Dr. Joseph Goebbels, Nazi Propaganda Minister

Mark Medinnus's picture

Ok, who's the lapwing flagging insightful comments? 

Triggernometry's picture

Damn that quote looks familiar.

Oh yeah, I posted it earlier.

Kobe Beef's picture

Dear Triggernometry,

You might find the below of interest, then, too.

"As civilization has become more complex, and as
the need for invisible government has been increas-
ingly demonstrated, the technical means have been
invented and developed by which opinion may be

--Edward Bernays, Propaganda


tmosley's picture

No, it will still work.  The LBMA and the COMEX will cease to be functioning exchanges by doing so.  They can play their paper games all they like.  All it will do is cause everyone else to ignore them.  They will have all the effect of the Zimbabwe Stock Exchange on world markets in the end.

Cheesy Bastard's picture

They will cease functioning and pay out in fiat, then move on to the run the next shell game  a few blocks down.  

breezer1's picture

i believe that this may be a defining moment in the demise of the greenback.

Red Neck Repugnicant's picture

I told you guys a month ago... don't bet the devil your head - you'll lose it. 



Chappaquiddick's picture

RNR - this looks like win:win to me.

If anything this latest development will exacerbate the backwardation in the physical market and possibly lead to a paper/physical disconnect.

The physical market is ultimately about the delivery of physical metal from supplier to consumer.  If that supply is exhausted by an incorrectly priced paper market fuelling a larger than supportable demand for the physical then the physical markets will seize.

If this happens and irrespective of the price of the paper the physical will be priced according to the real supply / demand which exists, while the paper market will become just like the MBS farce - backed by nothing.

Following the trend to its conclusion both sides win:  the physical market will be priced according to supply and demand of the physical free of the paper market and the paper market will collapse.  If you are a small time Joe holding physical - you win, prices to the moon.  If you're a big time bankster you win as the paper market implodes and your short position turns into a giant winner.


I will keep buying into this rigged and suppressed market as I know I am buying value.  Let them keep suppressing it.  They can't keep this going forever - they are tearing these markets apart and at some point the markets will disconnect on price.  The obvious moves now at State level on PM collection as an option for taxation are another pointer to massively higher PM prices.  If they reinstate the Gold Standard then we're already looking at close to $60K/oz on gold and that's assuming they actually do have the 8000 tonnes of Au they say they have.  If they don't get a move on and there's less gold than they claim then when they eventually do reinstate the gold standard we could be looking at a 10^4 devaluation in 40 yrs $35:$350000 / oz 1971:2011. 

The Fonz's picture

This is an interesting viewpoint, thank you Chappa :)

TheGoodDoctor's picture

Chap that is all fine and dandy until they issue an new currency. Then what?

Chappaquiddick's picture

Then we'll get screwed all over again.

I'm focusing on silver as I see it as a positive hold whichever way the market moves.  Its money so in deflation everything will deflate against it.  It's an inflation hedge store of value.  It's an industrial metal with wide application and growing demand and its finite and non-renewable.  I think 8-10 years from now it'll be as rare as rocking horse shit and people will be paying large amounts for it in whatever currency comes next - even if that currency is gold.

malikai's picture

No wonder people are going berserk and threatening to kill people from the .gov.

Mark Medinnus's picture

Insensitive to some, perhaps, like the princess who flagged you, but I agree.  As the storm nears, rats'll start jumping ship while rogues'll be shootin' shit.

Quixotic_Not's picture

The 'MeRiKan Sheeple approve of blatant corruption!

It's a similar human trait to Genghis Khan or Timur recruiting mercenaries that only get paid from the rape, looting and pillage of conquered peoples...that is, until the looters themselves are defeated.

Plenty of Lotto culture out there looking for money from nothin', chicks for free...everybody wants to be a pigman!

No worries, the last laugh will be on the blood lust mouth breathers, when the USofA will no longer be able to export inflation to BRIC countries and we start turning on each other!

Until then, Toodle-oo...

nasa's picture

Have pitchfork, will travel

Spigot's picture

More and more it seems to me the USA is ruled by a criminal cartel. They are so confident of their immunity that they do this sh!t in broad daylight without a concern that they will be run down.

One day, my sweets, one day. The fire will not go out for a very long time.

e_goldstein's picture

yeah. get out of all paper markets and anything that has a counter-party risk and go 100% into physical assets. 

for perpetuity.

Turd Ferguson's picture

With the silvergoldsilver bears as inspiration, I created this today for fun and laughs:

strannick's picture

Turd; Im one of your 20000 hits per day, but even guys in big yellow hats gotta upkeep their dignity.

How about a little less advertizing on ZH. This is our Rivendale, gotta keep the glacial spring crystal clear.

RobotTrader's picture

Yep, as I predicted.

JPM "the house" wins.

Never fight the house.

Just look at the stock today.

Spalding_Smailes's picture

.... "Spot-month position limit levels set at 25% of deliverable supply for a given commodity, with a conditional spot month limit of five times that amount for entities with positions exclusively in cash-settled contracts. " ................


One Ton Lady's picture

Don't worry about it numbnutts. We will just keep buying silver and gold. The truth of this matter will win out , soon.

AnAnonymous's picture

Never fight the house.


Until the house starts to fight you. At that moment, you discover that you have no other option than fighting the house but  the house has grown so powerful thanks to your relentless supportive efforts that fighting is useless. And you never fought the house. 

Bill Lumbergh's picture

"Just look at the stock today."

I am looking and all I see is a stock putting in a nice shooting star.

Cdad's picture better check that JPM chart again at the EOD.   Looks like trade over.

Arkadaba's picture

Not an expert on these things but really weird spike down, up and down again at closing bell.

e_goldstein's picture

you don't have to fight.

you just don't play.

Sudden Debt's picture

To take you example "the house" wins like in casino's, there it is the rule that the house must have enough funds in it's vault to ensure the payout of all the bets made.





But why do you think these rules are set in place?

To make it "fair"? The world isn't fair. If you want something you got to take it from someone else, so it's not that.



It's like playing russian roulette with the safety on. As long as the safety is on, the risk of getting shot is like ZERO.

Remove the safety, and you get a totally different game with MUCH HIGHER RISKS!



Now that they removed the restrictions, removed the safeties, THIS GAME IS SET TO GET INTERESTING.

Why? Their game is a paper game. You can have all the paper you want but if doesn't follow demand/supply the game gets very dangerous and can explode at any time.

Demand for silver will stay high for AT LEAST another 5 to 6 years if we can believe Benny B. that it will take 5 years for the job market to recover and we can really start talking about a recovery.



And if "the house" enables me to keep buying the real stuff at a low price, I should actually send "the house" a thank you letter :)

Xibalba's picture

'Open for public comments' means...."now taking bribes"



malikai's picture

Nah, it means: "Now ignoring you silly plebs"

Mark Medinnus's picture

You're both right.  They multitask.

Al Gorerhythm's picture

Open for public comment, eh?

Let me say what Theodore Buttler might say to Gary Gensler:

Gensler, you misserable piece of snake shit! Yoo have betrayed my trust in you, and as well have betrayed your countrymen and your country. 

You have shown who you pledge your loyalty to. You are a "Grimer Wormtongue", a Quisling, and from this point in time going forward, may you deservidly attract the disgust of the nation.

Your banking background should have been the telltale but I was blind-sided by your sociopathic slick tongue and feigned sincerity. It is now openly advertised as to who you have devoted your weasle fealty to.

You are on the public payroll and yet place yourself in the service of bankers. You are a treasonous cur and deserve the collective disgust of the citizens of the United States.

May you go down in the history of this fine country, as one of the most obvious, bought and paid for regulators ever to have disgraced the office to which you have pledged your loyalty. You cur. You are a traitor. May you be held in contempt by every citizen who comes to study the history of that treasonous entity known as the FED and its satellite banks and supporters.

You image should be placed on every silver coin, as a reminder to the nation as to who sold them down the river.

TheGoodDoctor's picture

I am very interested to see how Ted Butler responds. The CFTC's response is basically a middle finger to him. And Ted tried to be very polite in his assessment of Mr. Gensler.

Pladizow's picture

The USA is easily the most corrupt nation in history!!!!

The country is doomed - the sheeple are asleep and will be rightfuly slaughtered.

BobPaulson's picture

On the corruptometer, it's getting high but there is a lot of competition out there. Currently I'm living in Mexico; let me assure you that honesty is the anomaly, not corruption.

Arkadaba's picture

And it has been going on a long time. I lived for a year in Mexico as part of my misspent youth years ago. Was very naive going in and a lot less so a year later. But I did meet some wonderful people. Also loved the food - atole, corn on the cob with mayonaise and cheese, enchildas verde, chilaquiles ...

BobPaulson's picture

Sorry, double post from internet hiccup trying to get my tiny message down an ADSL line here.

Spigot's picture

Absolutely agree with you. Doomed. Corruption will reap its whirl wind.

Geoff-UK's picture

In history?  Well, that's a pretty high bar fella...


The country as it exists is doomed--but shepherd your local sheep as best you can to physical PMs and food storage.

XPolemic's picture

The USA is easily the most corrupt nation in history!!!!

Not even close. The problem is not the degree of corruption, but the fact that it is occurring in the Imperial Senate, Congress and Presidency. There are far more corrupt nations than the USA, but nobody really gives a rats ass about them.

The world's remaining superpower though .... that's a different story. Better to think of this as war, where the goal is to disrupt the enemies government, forment dissent,sponsor chaos, and win without firing a shot. The USA just happens to be losing that war at the moment (having been the top dog in the game for nearly 50 years).

What will happen is an inevitability, there is no way to stop it. Best just to have an exit plan, or a solid risk mitigation strategy in place.

Cinfultreat's picture

Wasnt the vote 4 - 1 to continue the process and now there would be 60 days of discussion until a final vote?  Which needs to be 5 - 0

junkiebev's picture

doesn't fit the site conspiracy narrative hence it did not happen

Careless Whisper's picture

your avatar is sexy. jus sayin


ronin12's picture

+1 - I love ZH but I do notice a propensity to skew things as negative as possible.

FunkyMonkeyBoy's picture

And the populous still sits idle by while the financial criminals act in the open...

... i truly believe people are so passive now to their criminal overlords actions that Obama could come around your house and stamp on your grandma's face in front of you and you'd let him 'cause he said he was for the greater good. 

God bless America.

cclaeys's picture

most people dont care, if you could attribute the disruption in their cable service to it then sure - not to mention the fact that the masses as a whole have no vested interest in it - just the schlucks that play by the rules.