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Position limits are limits to the permitted size of a single counterparty’s exposure to a single contract. They are commonly applied by derivatives exchanges for risk management purposes. In commodity derivatives markets, position limits have also been legislated for under the European Union’s second Markets in Financial Instruments Directive and the US Dodd-Frank Act.
Mifid II imposes caps on a firm’s net positions in listed and “economically equivalent” bilateral commodity derivatives contracts; the limits vary between contracts. Positions that qualify as hedges are exempt, as are positions by commercial users and producers of commodities provided their trading in commodity derivatives is “ancillary” to their main business.
In the US, the Commodity Futures Trading Commission has proposed to implement the relevant part of Dodd-Frank by introducing limits on speculative positions in 28 physical commodity futures contracts and their economically equivalent futures, options and swaps. The proposal includes hedging and other exemptions.
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