The Commodity Futures Trading Commission Divisions of Market Oversight (DMO), Swap Dealer and Intermediary Oversight (DSIO), and Clearing and Risk (DCR) (together, the Divisions) issued CFTC Letter 20-17 to remind Designated Contract Markets (DCMs), Futures Commission Merchants (FCMs) and Derivatives Clearing Organizations (DCOs) of their obligations to prepare for extreme market volatility, low liquidity and possibly negative pricing for certain contracts. The Divisions issued the advisory in light of unusually high volatility and negative pricing experienced in the May 2020 West Texas Intermediate (WTI), Light Sweet Crude Oil Futures contract on April 20 (the penultimate day of trading and expiration of the contract), although the guidance also applies to trading in other commodities.

To prevent market disruption, DCMs are required to have the capacity to prevent manipulation, price distortion and disruptions of the delivery or cash-settlement process through market surveillance, compliance, and enforcement practices and procedures. DCMs are also required to adopt position limits or position accountability levels for speculators for each contract on the board of trade. Additionally, DCMs are required to maintain rules that provide for the exercise of emergency authority under appropriate circumstances, such as the authority to liquidate or transfer open positions, suspend or restrict trading, and impose special margin requirements.

FCMs are encouraged to assess the effectiveness of their risk management programs, including the risk management requirements under CFTC Rules 1.11 and 1.73, and to make any revisions that are necessary to help ensure that risks are appropriately addressed and customer funds are properly safeguarded. Further, FCMs should consider reminding their customers that, as provided in the risk disclosure statement required under CFTC Rule 1.55, they may incur losses beyond the amounts deposited with the FCM and that this may occur in the event of negative contract prices.

Finally, DCOs are required to test for the adequacy of their initial margin requirements on a daily basis. DCOs also should prepare for the potential that certain contracts may experience significant price volatility, including negative pricing.

A more comprehensive summary of the obligation of DCMs, FCMs and DCOs is available in a recent Katten advisory, available here. CFTC Letter 20-17 is available here.