[Federal Register Volume 76, Number 17 (Wednesday, January 26, 2011)]
[Proposed Rules]
[Pages 4752-4777]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-1154]
[[Page 4751]]
Vol. 76
Wednesday,
No. 17
January 26, 2011
Part II
Commodity Futures Trading Commission
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17 CFR Parts 1, 150 and 151
Position Limits for Derivatives; Proposed Rule
Federal Register / Vol. 76 , No. 17 / Wednesday, January 26, 2011 /
Proposed Rules
[[Page 4752]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 150 and 151
RIN 3038-AD15 and 3038-AD16
Position Limits for Derivatives
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act'') requires the Commodity
Futures Trading Commission (``Commission'' or ``CFTC'') to establish
position limits for certain physical commodity derivatives. The
Commission is proposing to simultaneously establish position limits and
limit formulas for certain physical commodity futures and option
contracts executed pursuant to the rules of designated contract markets
(``DCM'') and physical commodity swaps that are economically equivalent
to such DCM contracts. In compliance with the requirements of the Dodd-
Frank Act, the CFTC is also proposing aggregate position limits that
would apply across different trading venues to contracts based on the
same underlying commodity. The Commission is proposing to establish
position limits in two phases: The first phase would involve adopting
current DCM spot-month limits, while the second phase would involve
establishing non-spot-month limits based on open interest levels as
well as establishing Commission-determined spot-month limits. The
proposal includes exemptions for bona fide hedging transactions and for
positions that are established in good faith prior to the effective
date of specific limits that could be adopted pursuant to final
regulations. This notice of rulemaking also proposes new account
aggregation standards, visibility regulations that are similar to
current reporting obligations for large bona fide hedgers, and new
regulations establishing requirements and standards for position limits
and accountability rules that are implemented by registered entities.
The Commission solicits comment on any aspect of the proposal. The
Commission also solicits comment on particular issues throughout the
preamble.
DATES: Comments must be received on or before March 28, 2011.
ADDRESSES: You may submit comments, identified by RIN numbers 3038-AD15
and 3038-AD16, by any of the following methods:
Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow instructions for submitting comments.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that is exempt from disclosure under the Freedom of Information Act, a
petition for confidential treatment of the exempt information may be
submitted according to the procedure established in Sec. 145.9 of the
Commission's regulations (17 CFR 145.9).
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Acting Deputy
Director, Market Surveillance, (202) 418-5452, [email protected], or
Bruce Fekrat, Senior Special Counsel, Office of the Director, (202)
418-5578, [email protected], Division of Market Oversight, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Position Limits for Physical Commodity Futures and Swaps
A. Background
The Commodity Exchange Act (``CEA'' or ``Act'') of 1936,\1\ as
amended by Title VII of the Dodd-Frank Act,\2\ includes provisions
imposing clearing and trade execution requirements on standardized
derivatives as well as comprehensive recordkeeping and reporting
requirements that extend to all swaps, as defined in CEA section
1a(47). Newly amended section 4a(a)(1) of the Act authorizes the
Commission to extend position limits beyond futures and option
contracts to swaps traded on a DCM or swap execution facility
(``SEF''), swaps that are economically equivalent to DCM futures and
option contracts with position limits, and swaps not traded on a DCM or
SEF that perform or affect a significant price discovery function
(``SPDF'') with respect to regulated entities. Further, new section
4a(a)(5) of the Act requires aggregate position limits for swaps that
are economically equivalent to DCM futures and option contracts with
CFTC-set position limits. Similarly, new section 4a(a)(6) of the Act
requires the Commission to apply position limits on an aggregate basis
to contracts based on the same underlying commodity across: (1) DCMs;
(2) with respect to foreign boards of trade (``FBOTs''), contracts that
are price-linked to a DCM or SEF contract and made available from
within the United States via direct access; and (3) SPDF swaps.
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\1\ 7 U.S.C. 1 et seq.
\2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
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Sections 4a(a)(2)(B) and 4a(a)(3) of the Act charge the Commission
with setting spot-month, single-month and all-months-combined limits
for DCM futures and option contracts on exempt and agricultural
commodities \3\ within 180 and 270 days, respectively, of the Dodd-
Frank Act's enactment.\4\ In this notice of rulemaking, the Commission
is proposing to establish limits required by Congress in amended CEA
section 4a in two phases, which could involve multiple final
regulations or different implementation dates.\5\ In the first
[[Page 4753]]
transitional phase the Commission proposes to establish spot-month
position limits at the levels currently imposed by DCMs. This first
phase would include related provisions, such as proposed regulation
151.5, pertaining to bona fide hedging, and proposed Sec. 151.7,
pertaining to account aggregation standards. During the second phase
the Commission proposes to establish single-month and all-months-
combined position limits and to set Commission-determined spot-month
position limits.
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\3\ Section 1a(20) of the Act defines the term ``exempt
commodity'' to mean a commodity that is not an excluded commodity or
an agricultural commodity. Section 1a(19) defines the term
``excluded commodity'' to mean, among other things, an interest
rate, exchange rate, currency, credit risk or measure, debt or
equity instrument, measure of inflation, or other macroeconomic
index or measure. Although the term ``agricultural commodity'' is
not defined in the Act, CEA section 1a(9) enumerates a non-exclusive
list of agricultural commodities. The Commission issued a notice of
rulemaking proposing a definition for the term ``agricultural
commodity'' on October 26, 2010. 75 FR 65586. Although broadly
defined, exempt commodity futures contracts are often viewed as
energy and metals products.
\4\ Section 737 of the Dodd-Frank Act, which amended section 4a
of the Act, became effective on July 21, 2010.
\5\ The Commission may implement the two phases in various ways.
It may, for example, pursuant to this notice of proposed rulemaking,
adopt a single final regulation with two implementation provisions,
or it may adopt two separate final regulations.
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As discussed in further detail below, phased implementation is
possible because spot-month position limits are based on available
information: DCMs currently set spot-month position limits based on
their own estimates of deliverable supply. Spot-month limits can,
therefore, be implemented by the Commission relatively expeditiously.
In contrast, most non-spot-month position limits, as set by the
Commission previously and as proposed herein, are based on open
interest levels. Because the Commission was barred under the Commodity
Futures Modernization Act of 2000 from collecting regular data or
regulating most swaps markets, the Commission does not currently have
the open interest and market structure data necessary to establish non-
spot-month position limits. The Commission has proposed regulations
that would permit it to gather positional data on physical commodity
swaps on a regular basis.\6\
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\6\ See Position Reports for Physical Commodity Swaps, 75 FR
67258, November 2, 2010 (proposing position reports on economically
equivalent swaps from clearing organizations, their members and swap
dealers).
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Because the Commission will not be able to implement a
comprehensive system for gathering swap positional data for some time,
this notice of proposed rulemaking does not propose to determine the
numerical non-spot-month position limits for exempt and agricultural
commodity derivatives resulting from the application of the open
interest formulas in proposed Sec. 151.4. Rather, this notice of
rulemaking provides for the determination of such limits when the
Commission receives data regarding the levels of open interest in the
swap markets to which these limits will apply.
The Commission anticipates fixing initial position limits pursuant
to the formulas proposed herein through the issuance of a Commission
order. As proposed, CFTC-set position limits after the transitional
period would be re-calculated every year based on the formulas set
forth in proposed Sec. 151.4, subject to any changes to the formulas
that may be proposed and adopted based on the Commission's surveillance
of the markets for referenced contracts. In this regard, as discussed
in further detail below, the proposed position visibility regulations,
which would effectuate reporting requirements that are similar to
current reporting requirements for large bona fide hedgers, may
facilitate evaluating the efficacy and appropriateness of the proposed
position limit framework if adopted.
B. Statutory Authority
1. Section 4a of the Act
The Dodd-Frank Act preserves the Commission's broad authority to
set position limits. Thus, for example, section 4a(a)(1) of the Act
expressly permits the Commission to set ``different limits for, among
other things, different commodities, markets, futures, or delivery
months * * *'' Under new CEA section 4a(a)(7), the Commission also has
authority to exempt persons or transactions from any position limits it
establishes.
New section 4a(a)(3) of the Act expressly directs the Commission to
set such limits at levels that would serve, to the maximum extent
practicable, in its discretion:
(i) To diminish, eliminate, or prevent excessive speculation as
described under this section;
(ii) To deter and prevent market manipulation, squeezes, and
corners;
(iii) To ensure sufficient market liquidity for bona fide
hedgers; and
(iv) To ensure that the price discovery function of the
underlying market is not disrupted.\7\
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\7\ 7 U.S.C. 6a(a)(3).
This provision incorporates the Commission's historical approach to
setting limits, and is harmonious with the congressional directive in
section 4a(a)(1) of the Act that the Commission set position limits to
prevent or minimize price disruptions that could be caused by excessive
speculative trading.
Section 4a(a)(5) of the Act requires the Commission to develop,
concurrently with position limits for DCM futures and option contracts,
position limits for swaps that are economically equivalent to such
contracts. Section 4a(a)(5) of the Act requires such position limits,
when developed, to be adopted simultaneously.\8\ The defined term
``referenced contract'' in proposed Sec. 151.1, through its reference
to the core futures contracts listed in proposed Sec. 151.2 (``core
referenced futures contracts'' or ``151.2-listed contract''),
identifies the ``economically equivalent'' derivatives that would be
subject to the concurrent development, simultaneous establishment and
aggregate implementation requirements of CEA section 4a. Referenced
contracts are defined as derivatives (1) that are directly or
indirectly linked to the price of a 151.2-listed contract, or (2) that
are based on the price of the same commodity for delivery at the same
location(s) as that of a 151.2-listed contract, or another delivery
location with substantially the same supply and demand fundamentals as
the delivery location of a 151.2-listed contract.\9\ The second part of
the definition of referenced contract therefore proposes to include
derivatives that are settled to a price series that is not based on,
but is nonetheless highly correlated to, the price of a 151.2-listed
contract. Proposed Sec. 151.2, in turn, enumerates 28 core physical
delivery DCM futures contracts that would be subject to the
Commission's proposed position limit framework. Generally, the 151.2-
listed contracts were selected either because such contracts have high
levels of open interest and significant notional value or because they
otherwise may provide a reference price for a significant number of
cash market transactions.\10\
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\8\ Unlike swaps that are economically equivalent to DCM futures
and option contracts with position limits, the Commission is not
required to develop or establish position limits for SPDF swaps at
the same time that it develops or establishes position limits for
DCM futures and option contracts. The Commission intends to propose
in a subsequent notice of rulemaking a process by which swaps that
perform or affect a significant price discovery function with
respect to regulated entities can be identified.
\9\ 75 FR 67258, at 67260 (discussing the scope of directly and
indirectly linked swaps).
\10\ See 75 FR 67258, at 62758.
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A primary mission of the CFTC is to foster fair, open and efficient
functioning of the commodity derivatives markets.\11\ Critical to
fulfilling this statutory mandate is protecting market users and the
public from undue burdens that may result from ``excessive
speculation.'' Specifically, section 4a of the Act, as amended by the
Dodd-Frank Act, provides that:
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\11\ See section 3 of the Act, 7 U.S.C. 5.
``Excessive speculation in any commodity under contracts of sale
of such commodity for future delivery [(or swaps traded on or
subject to the rules of a designated contract market or swap
execution facility, or swaps that perform a significant price
discovery function with respect to a registered entity)] * * *
causing sudden or unreasonable fluctuations or unwarranted changes
in the price of such commodity, is an undue and unnecessary burden
on interstate commerce in such commodity. For the purpose of
diminishing, eliminating, or preventing such
[[Page 4754]]
burden, the Commission shall * * * proclaim and fix such limits on
the amount of trading which may be done or positions which may be
held by any person * * * as the Commission finds are necessary to
diminish, eliminate or prevent such burden. * * *'' \12\
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\12\ Section 4a(a)(1) of the Act, 7 U.S.C. 6a(a)(1).
Congress has declared that sudden or unreasonable price
fluctuations attributable to ``excessive speculation'' create an
``undue and unnecessary burden'' on interstate commerce and directed
that the Commission shall establish limits on the amounts of positions
which may be held as it finds necessary to ``diminish, eliminate, or
prevent'' such burden. As the plain reading of the statutory text
indicates, the prevention of sudden or unreasonable changes in price
attributable to large speculative positions, even without manipulative
intent, is a congressionally-endorsed regulatory objective of the
Commission.
The Commission is not required to find that an undue burden on
interstate commerce resulting from excessive speculation exists or is
likely to occur in the future in order to impose position limits. Nor
is the Commission required to make an affirmative finding that position
limits are necessary to prevent sudden or unreasonable fluctuations or
unwarranted changes in prices or otherwise necessary for market
protection. Rather, the Commission may impose position limits
prophylactically, based on its reasonable judgment that such limits are
necessary for the purpose of ``diminishing, eliminating, or
preventing'' such burdens on interstate commerce that the Congress has
found result from excessive speculation. A more restrictive reading
would be contrary to the congressional findings and objectives as
embodied in section 4a of the Act.\13\
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\13\ Consistent with the congressional findings and objectives,
the Commission has previously set position limits without finding
that an undue burden of interstate commerce has occurred or is
likely to occur, and in so doing has expressly stated that such
additional determinations by the Commission were not necessary in
light of the congressional findings in section 4a of the Act. In its
1981 rulemaking to require all exchanges to adopt position limits
for commodities for which the Commission itself had not established
limits, the Commission stated:
``As stated in the proposal, the prevention of large and/or
abrupt price movements which are attributable to the extraordinarily
large speculative positions is a congressionally endorsed regulatory
objective of the Commission. Further, it is the Commission's view
that this objective is enhanced by the speculative position limits
since it appears that the capacity of any contract 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.''
Establishment of Speculative Position Limits, 46 FR 50938, Oct.
16, 1981 (adopting then regulation 1.61 (now part of regulation
150.5)).
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2. Legislative History and Discussion
The relevant legislative history, including the congressional
debates and studies preceding the enactment of the CEA, gives further
evidence to the broad mandate conferred on the Commission pursuant to
CEA section 4a. Throughout the 1920s and into the 1930s, a series of
studies and reports found that large speculative positions in the
futures markets for grain, even without manipulative intent, can cause
``disturbances'' and ``wild and erratic'' price fluctuations. To
address such market disturbances, Congress was urged to adopt position
limits to restrict speculative trading notwithstanding the absence of
``the deliberative purpose of manipulating the market.'' \14\ In 1936,
based upon such reports and testimony, Congress provided the Commodity
Exchange Authority (the predecessor of the Commission) with the
authority to impose Federal speculative position limits. In doing so,
Congress expressly acknowledged the potential for market disruptions
resulting from excessive speculative trading and the need for measures
to prevent or minimize such occurrence.\15\
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\14\ See 7, U.S. Fed. Trade Commission, Report of the Federal
Trade Commission on the Grain Trade: Effects of Future Trading 293-
94 (1926). For example, the Federal Trade Commission concluded:
The very large trader by himself may cause important
fluctuations in the market. If he has the necessary resources,
operations influenced by the idea that he has such power are bound
to cause abnormal fluctuations in prices. Whether he is more often
right than wrong and more often successful than unsuccessful, and
whether influenced by a desire to manipulate or not, if he is large
enough he can cause disturbances in the market which impair its
proper functioning and are harmful to producers and consumers.
The FTC recommended that limits be placed on trading,
particularly on the amount of open interest that could be held by
any one trader. Similarly, based on its study of price fluctuations
in the wheat market, the Department of Agriculture urged Congress to
provide the Grain Futures Administration (GFA), which had been
created by the Grain Futures Act, with the authority to impose
position limits. See Fluctuations in Wheat Futures, S. Doc. No. 69-
135 (1st Sess. 1926); see also Speculative Position Limits in Energy
Futures Markets: Hearing Before the U.S. Commodity Futures Trading
Commission (July 28, 2009) (statement of Dan M. Berkovitz, General
Counsel, U.S. Commodity Futures Trading Commission), available at
http://www.cftc.gov/PressRoom/SpeechesTestimony/2009/berkovitzstatement072809.html.
\15\ The report accompanying the 1935 bill that became the Act
stated ``the fundamental purposes of the measure is to insure fair
practice and honest dealing on the commodity exchanges and to
provide a measure of control over those forms of speculative
activity which too often demoralize the markets to the injury of
producers and consumers and the exchanges themselves. H.R. Rep. No.
74-421, at 1 (1935), accompanying H.R. 6772.
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The basic statutory mandate in section 4a of the Act to establish
position limits to prevent ``undue burdens'' associated with
``excessive speculation'' has remained unchanged--and has been
reaffirmed by Congress several times--over the past seven decades. In
1974, when Congress created the Commission as an independent regulatory
agency, it reiterated the purpose of the Act to prevent fraud and
manipulation and to control speculation.\16\ In connection with another
major overhaul of the Act, the Commodity Futures Modernization Act of
2000, Congress expressly authorized exchanges to use position
accountability as an alternative means to limit speculative positions.
However, Congress did not alter the Commission's mandate in CEA section
4a to establish position limits to prevent such undue burdens on
interstate commerce. Then, in the CFTC Reauthorization Act of
[[Page 4755]]
2008,\17\ Congress, among other things, expanded the Commission's
authority to set position limits to significant price discovery
contracts on exempt commercial markets.
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\16\ S. Rep. No. 93-1131, 93rd Cong., 2d Sess. (1974).
\17\ Food, Conservation and Energy Act of 2008, Public Law 110-
246, 122 Stat. 1624 (June 18, 2008).
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Finally, as outlined above, pursuant to the Dodd-Frank Act,
Congress significantly expanded the Commission's authority and mandate
to establish position limits beyond futures and option contracts to
include, for example, economically equivalent derivatives.\18\ Congress
expressly directed the Commission to set limits in accordance with the
standards set forth in sections 4a(a)(1) and 4a(a)(3) of the Act,\19\
thereby reaffirming the Commission's authority to establish position
limits as it finds necessary in its discretion to address excessive
speculation.\20\ As noted earlier, section 4a(a)(3) of the Act
expressly sets forth the Commission's broad discretion in setting
position limits under section 4a(a)(1), and the necessary
considerations in setting such limits. Section 4a(a)(3) effectively
incorporates the Commission's historical approach to setting
limits,\21\ and is harmonious with the congressional directive in
section 4a(a)(1) of the Act that the Commission set position limits in
its discretion to prevent or minimize burdens that could be caused by
excessive speculative trading.
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\18\ Dodd-Frank Act, Public Law 111-203, 737, 124 Stat. 1376
(2010). The Dodd-Frank Act amendments to section 4a of the Act
became effective upon the date of enactment of the Dodd-Frank Act.
\19\ Section 4a(a)(2) of the Act provides that the Commission,
in setting position limits, must do so in accordance with the
standards set forth in CEA section 4a(a)(1). 7 U.S.C. 6a(a)(2).
\20\ Senator Lincoln (then the Chair to the Senate Agriculture
Committee) stated that amended section 4a ``will grant broad
authority to the [Commission] to once and for all set aggregate
position limits across all markets on non-commercial market
participants * * * I believe the adoption of aggregate position
limits will help bring some normalcy back to our markets and reduce
some of the volatility we have witnessed over the last few years.''
156 Cong. Rec. S5919 (daily ed. July 15, 2010) (statement of Sen.
Lincoln).
\21\ See 46 FR 50938.
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Large concentrated positions in the physical commodity markets can
potentially facilitate price distortions given that the capacity of any
market to absorb the establishment and liquidation of large positions
in an orderly manner is related to the size of such positions relative
to the market and the market's structure and is, therefore, not
unlimited.\22\ Concentration of large positions in one or a few
traders' accounts can also create the unwarranted appearance of
appreciable liquidity and market depth which, in fact, may not exist.
Trading under such conditions can result in sudden changes to commodity
prices that would otherwise not prevail if traders' positions were more
evenly distributed among market participants.\23\ Position limits
address these risks through ensuring the participation of a minimum
number of traders that are independent of each other and have different
trading objectives and strategies.
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\22\ See Fluctuations in Wheat Futures, S. Doc. No. 69-135 (1st
Sess. 1926); and 7 U.S. Fed. Trade Commission, Report of the Federal
Trade Commission on the Grain Trade: Effects of Future Trading 293-
94 (1926); see also Thomas A. Hieronymus, Economics of Futures
Trading 313 (1971) (``Limits on speculative positions have met with
a high degree of trade acceptance and only recently has the size of
some of the limits began to be called into question. The general
notion is that no one man should be allowed to have such a position
or trade in such volume that he could push the price around with his
sheer bulk'').
\23\ By way of illustration, after the silver futures market
crisis during late 1979 to early 1980, commonly referred to as ``the
Hunt Brothers silver manipulation,'' the Commission concluded that
``[t]he recent events in silver suggest that the capacity of any
futures market to absorb large positions in an orderly manner is not
unlimited.'' Subsequently, the Commission adopted regulation 1.61,
which required all exchanges to adopt and submit for Commission
approval position limits in active futures markets for which no
exchange or Commission limits were then in effect. More recently,
Congress, in response to high prices and volatility in commodity
prices generally, and energy prices in particular, extended the
Commission's authority to set limits to significant price discovery
contracts traded on exempt commercial markets. Food, Conservation
and Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,
2008).
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The Commission currently sets and enforces position limits with
respect to certain agricultural products. For metals and energy
commodities, in 1981 the Commission began to require exchange-set
limits, with a Commission approval process, for any active futures
markets without existing Commission or exchange limits.\24\ This
framework was significantly scaled back in 1991, after which the
Commission began to approve exchange accountability provisions in place
of position limits.\25\ Such accountability provisions took effect with
respect to certain metals derivatives in 1992, and with respect to
energy and soft agricultural derivatives in 2001. Currently, the
Commission authorizes DCMs to set position limits and accountability
rules to protect against manipulation and congestion and price
distortions. The proliferation of economically-equivalent instruments
trading in multiple trading venues, however, warrants extension of the
Commission-set position limits beyond agricultural products to metals
and energy commodities. The Commission anticipates that this market
trend will continue as, consistent with the regulatory structure
established by the Dodd-Frank Act, economically equivalent derivatives
based on exempt and agricultural commodities are executed pursuant to
the rules of multiple DCMs and SEFs and other Commission registrants.
Under these circumstances, uniform position limits should be
established across such venues to prevent regulatory arbitrage and
ensure a level playing field for all trading venues. Because it has the
authority to gather data and impose regulations across trading venues,
the Commission is uniquely situated to establish uniform position
limits and related requirements for all economically equivalent
derivatives.\26\ A uniform approach would also encourage better risk
management and could reduce systemic risk. Despite centralized clearing
arrangements employed by DCMs to reduce systemic risk, a levered market
participant can still take a very large speculative position across
multiple venues. The proposed position limit framework would reduce the
ability of such levered entities to take such positions and to cause
systemic risk.
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\24\ 46 FR 50938.
\25\ See Speculative Position Limits--Exemptions from Commission
Rule 1.61, 56 FR 51687, October 15, 1991; and Speculative Position
Limits--Exemptions from Commission Rule 1.61, 57 FR 29064, June 30,
1992.
\26\ Because individual markets have knowledge of positions on
their own facilities, it is difficult for them to assess the full
impact of a trader's positions on the greater market.
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As noted above, in setting position limits to guard against
excessive speculation, the Commission, pursuant to the factors
enumerated in section 4a(a)(3) of the Act, has endeavored to maximize
the objectives of preventing excessive speculation, deterring and
preventing market manipulation, and ensuring that markets remain
sufficiently liquid so as to afford end users and producers of
commodities the ability to hedge commercial risks and to promote
efficient price discovery.
C. Public Comments in Advance of Commission Action
As with other forthcoming notices of rulemaking proposing
regulations to implement the Dodd-Frank Act, the Commission accepted
public comments in advance of issuing this release. The Commission has
received approximately 350 public comments as of December 16, 2010.\27\
The Commission has reviewed these comments and considered them in
drafting the
[[Page 4756]]
proposed regulations. The majority of commenters submitted letters
advocating the view that position limits should be set at one percent
of the total annual world production for a given commodity. Several
expressed views on a single issue, notably the importance of preventing
market manipulation.
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\27\ These comments may be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/OTC_26_PosLimits.html.
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The view most commonly expressed by certain other commenters,
including the CME Group, Electric Power Supply Association, Futures
Industry Association, Morgan Stanley, and National Gas Supply
Association, was opposition to a provision that resulted in the
``crowding out'' of speculative positions. A ``crowding out'' provision
would have limited the ability of a trader that hedges or acts as a
swap dealer to take on speculative positions once certain positional
thresholds were exceeded.\28\ A concern raised by the commenters was
related to the unintended consequence of excluding knowledgeable
traders, or traders that needed to hold speculative positions, from the
commodity derivatives markets. The Commission has determined to not
propose a ``crowding out'' provision at this time.
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\28\ See Federal Speculative Position Limits for Referenced
Energy Contracts and Associated Regulations, 75 FR 4144, at 4146,
January 26, 2010, withdrawn 75 FR 50950, August 18, 2010.
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Several commenters addressed bona fide hedging exemptions to
position limits. Some of these commenters, for example the CME Group,
presented the view that the Commission should adopt a broad definition
for bona fide positions that would cover ``all non-speculative''
positions. Morgan Stanley recommended that the Commission ``exercise
its discretion to interpret [s]ection 4(a)(c)(2), including the term
`economically appropriate', broadly to permit products and services
similar to [risk management products offered by swap dealers] to
qualify as bona fide hedging transactions or positions.'' The National
Grain and Feed Association (``NGFA'') presented the view that the
Commission ``should use its authority to grant hedge exemptions to
financial institutions, index funds, hedge funds or other
nontraditional participants in agricultural futures markets extremely
sparingly and only if it can be demonstrated clearly that such
exemptions will not harm contract performance for traditional
hedgers.'' The NGFA further recommended that the Commission ```look
through' swap transactions and allow hedge exemptions to be granted
only for that portion of swap dealers' business where the swap dealers'
counterparties are entities that otherwise would have qualified for a
hedge exemption.'' The Commission has seriously considered these views
on the bona fide hedging exemption in light of the express language of
the Act. The Commission has accordingly determined to propose a
definition of bona fide hedging in proposed Sec. 151.5(a)(1)(iv) that
provides for an exemption for a non-bona fide swap counterparty only if
such swap transaction or position represents cash market transactions
and offsets its bona fide counterparty's cash market risks.
Several commenters, including the CME Group, Electric Power Supply
Association, Futures Industry Association, GDF Suez Energy, Morgan
Stanley, and NextEra Energy Power Marketing, expressed concerns
relating to the potential for overly strict account aggregation
standards. The aggregation standards of the proposed regulations
attempt to address some of these concerns by including exemptions for
passive investments in independently controlled and managed commercial
entities as well as exemptions for certain positions held with futures
commission merchants and for traders that are passive pool
participants. The law firm Akin Gump Strauss Hauer & Feld LLP, on
behalf of a commodity trading advisor, specifically argued for the
retention of the independent account controller exemption currently in
force in part 150 of the Commission's regulations, echoing the views of
numerous commenters to the January 2010 proposed rulemaking for
position limits on certain energy contracts. As explained in more
detail in the aggregation section of this preamble, the proposed
regulations address the concern of not having an independent account
controller exemption by establishing the owned non-financial entity
exemption. Some commenters, for example the Electric Power Supply
Association, Futures Industry Association and Morgan Stanley, argued
that aggregation should be based solely on common control, with no
consideration given to common ownership. At this time, the Commission
does not see sufficient justification to change its longstanding
approach of considering both control and ownership in its aggregation
policy. The traditional ten percent ownership standard has proven to be
a useful measure in conjunction with the control standard. In addition,
the proposed owned non-financial entity exemption addresses situations
in which the 10 percent ownership standard has been exceeded but a lack
of common control over trading decisions and strategies warrants
disaggregation.
The CME Group also argued that position limits should not be
imposed until the Commission has gathered sufficient data on the
physical commodity swap markets. In order to address similar concerns,
the Commission proposed regulations in November 2010 that are
specifically designed to gather positional data on physical commodity
swaps.\29\ The Commission anticipates the collection of positional data
to begin during the third quarter of 2011. Furthermore, the Commission
is proposing to fix specific position limits pursuant to formulas
proposed herein (and making other aspects of the proposed regulations
effective) only after collecting positional data on physical commodity
swaps and through the issuance of a Commission order during the first
quarter of 2012, unless the Commission determines that there are
certain commodities for which data is sufficient to implement limits
sooner.
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\29\ See 75 FR 67258.
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In addition to review and consideration of public comments,
Commission staff has held 32 meetings with a variety of market
participants, including bona fide hedgers, swap dealers, hedge funds
and several industry groups, to discuss position limits and in
particular to gather information about the potential impact of
limits.\30\ The Commission has considered information obtained in these
meetings in drafting the proposed regulations.
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\30\ The Commission has made public all meetings that Commission
staff has held with outside organizations in connection with the
implementation of the Dodd-Frank Act, including, for each meeting, a
list of attendees and a summary of the meeting. This information may
be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/otc_meetings.html.
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II. The Proposed Regulations
A. Spot-Month Position Limits
The Commission proposes definitions in Sec. 151.3 that identify
the spot month \31\ for referenced contracts in the same commodity that
would be subject to the proposed position limit framework. These
definitions reference the dates on which a spot month commences and
terminates. The definitions for the spot period are based on existing
spot-month definitions set forth by DCMs for 151.2-listed contracts.
These periods, as defined by the Commission, would
[[Page 4757]]
continue into the delivery period for the core referenced futures
contracts, which in turn determine the spot month for all referenced
contracts in the same commodity.
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\31\ The term ``spot month'' does not refer to a month of time.
Rather, it is the trading period immediately preceding the delivery
period for a physically-delivered futures contract and cash-settled
swaps and futures contracts that are linked to the physically-
delivered contract. The length of this period may thus vary
depending on the referenced contract, as described in proposed
regulation 151.3.
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With three exceptions, the 151.2-listed contracts with DCM-defined
spot months are currently subject to exchange-set spot-month position
limits.\32\ Proposed Sec. 151.4 would impose and aggregately apply
spot-month position limits for the referenced contracts. Consistent
with the Commission's longstanding policy regarding the appropriate
level of spot-month limits for physical delivery contracts, these
position limits would be set at 25 percent of estimated deliverable
supply. The spot-month limits would be adjusted annually thereafter.
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\32\ The only contracts based on a physical commodity that
currently do not have spot-month limits are the COMEX mini-sized
gold, silver, and copper contracts that are cash-settled based on
the futures settlement prices of the physical-delivery contracts.
The cash-settled contracts have position accountability provisions
in the spot month rather than outright spot-month limits. These
cash-settled contracts have relatively small levels of open
interest.
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The proposed deliverable supply formula narrowly targets the
trading that may be most susceptible to, or likely to facilitate, price
disruptions. The formula seeks to minimize the potential for corners
and squeezes by facilitating the orderly liquidation of positions as
the market approaches the end of trading and by restricting the swap
positions which may be used to influence the price of referenced
contracts that are executed centrally. Referenced contracts that are
based on the price of the same commodity but where delivery is at a
location that is different than the delivery location of a 151.2-listed
contract would not be subject to the proposed Federal spot-month
position limit. Because the potential incentive and ability to
manipulate the spot-month delivery process to benefit a derivatives
position providing for delivery at a different delivery location is
less, Federal spot-month limits would apply only to futures, options
and swaps that are directly price-linked to a 151.2-listed core
referenced contract or that settle to a price series that prices the
same commodity at the same delivery location. Finally, the proposed
spot-month limits would apply on an aggregate basis, thereby subjecting
these economically equivalent derivatives to the same spot-month
limits, whether or not they are listed for trading on a DCM, cleared,
or uncleared.
Proposed Sec. 151.4 would apply spot-month position limits
separately for physically-delivered contracts and all cash-settled
contracts, including cash-settled futures and swaps. A trader may
therefore have up to the spot-month position limit in both the
physically-delivered and cash-settled contracts. For example, if the
spot-month limit for a referenced contract is 1,000 contracts, then a
trader may hold up to 1,000 contracts long in the physically-delivered
contract and 1,000 contracts long in the cash-settled contract. A
trader's cash-settled contract position would separately be a function
of the trader's position in referenced contracts based on the same
commodity that are cash-settled futures and swaps.\33\
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\33\ For purposes of applying the limits, a trader would convert
and aggregate positions in swaps on a futures equivalent basis.
Guidance on futures equivalency is provided in Appendix A to the
Commission's proposed part 20 rulemaking on position reports for
physical commodity swaps. 75 FR 67258, at 67269.
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The proposed spot-month position limit formula is based on the
Commission's longstanding approach to setting and overseeing spot-month
limits and is consistent with industry practice and the goals of
preventing manipulation through corners or squeezes. Core Principles 3
and 5 for DCMs address congressional concerns regarding potential
manipulation of the futures market, and the Commission has typically
evaluated compliance with these core principles in tandem. Core
Principle 3 specifies that a board of trade shall list only contracts
that are not readily susceptible to manipulation, while Core Principle
5 obligates a DCM to establish position limits and position
accountability provisions where necessary and appropriate ``to reduce
the threat of market manipulation or congestion, especially during the
delivery month.''
In determining whether a physical delivery contract complies with
Core Principle 3, the Commission considers whether the specified terms
and conditions, considered as a whole, result in a deliverable supply
that is sufficient to ensure that the contract is not conducive to
price manipulation or distortion. In general, the term ``deliverable
supply'' means the quantity of the commodity meeting a derivative
contract's delivery specifications that can reasonably be expected to
be readily available to short traders and saleable by long traders at
its market value in normal cash marketing channels at the derivative
contract's delivery points during the specified delivery period,
barring abnormal movement in interstate commerce. The establishment of
a spot-month limit pursuant to Core Principle 5 is made based on the
analysis of deliverable supplies, and the Acceptable Practices for this
Core Principle state that, for physically delivered contracts, the
spot-month limit should not exceed 25 percent of the estimated
deliverable supply. Likewise, the guidance for DCMs in Commission Sec.
150.5(b) provides that for physical delivery contracts, the spot-month
limit level must be no greater than 25 percent of the estimated spot-
month deliverable supply, calculated separately for each month to be
listed.
In Sec. 151.4, the Commission proposes spot-month limits, for not
only referenced contracts that are futures but also referenced
contracts that are economically equivalent swaps, that would, during
the initial implementation period, be set at the spot-month limit
levels determined by DCMs to be equal to 25 percent of estimated
deliverable supply.\34\ In the second phase of implementation, these
spot-month limits would be based on 25 percent of estimated deliverable
supply as determined by the Commission, which could choose to adopt
exchange-provided estimates or, for example, in the case of
inconsistent estimates from exchanges, issue its own estimates.
Pursuant to current exchange procedures for updating the spot-month
limits, exchanges initially establish and periodically update their
limits through rule amendments that are filed with the Commission under
self-certification or approval procedures. As part of the initial
filing, or in response to subsequent inquiries from the Commission, the
exchanges provide information showing how the spot-month limits comply
with the Commission's regulations and acceptable practices.
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\34\ For the ICE Futures U.S. Sugar No. 16 (SF) and Chicago
Mercantile Exchange Class III Milk (DA), the Commission proposes to
adopt the DCM single-month limits for the nearby month or first-to-
expire referenced contract as spot-month limits. These contracts
currently have single-month limits which are enforced in the spot
month.
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With respect to the existing spot-month limits that currently are
in effect for referenced contracts, the Commission notes that,
irrespective of the manner in which a rule amendment is filed (by self-
certification or for approval), Commission staff currently evaluates
the limits for compliance with the requirements of Core Principle 5 and
the criteria set out in the Commission's Acceptable Practices. For
physically delivered contracts, staff evaluates the information
supplied by the exchange and other available information regarding the
underlying commodity to ensure that the spot-month limit does not
exceed 25 percent of the estimated deliverable supplies. For cash-
settled
[[Page 4758]]
contracts, staff evaluates the information supplied by the exchanges
and independently assesses the nature of the market underlying the
cash-settlement calculation, including the depth and breadth of trading
in that market, to determine the ability of a trader to exert market
power and influence the cash-settlement price, with the aim of having a
spot-month limit level that effectively limits a trader's incentive to
exercise such market power.
With respect to cash-settled contracts, proposed Sec. 151.4
incorporates a conditional-spot-month limit that permits traders
without a hedge exemption to acquire position levels that are five
times the spot-month limit if such positions are exclusively in cash-
settled contracts and the trader holds physical commodity positions
that are less than or equal to 25 percent of the estimated deliverable
supply. The proposed limit maximizes the objectives, enumerated in
section 4a(a)(3) of the Act, of deterring manipulation and excessive
speculation while ensuring market liquidity and efficient price
discovery by establishing a higher limit for cash-settled contracts as
long as such positions are decoupled from large physical commodity
holdings and the positions in physical delivery contracts which set or
affect the value of cash-settled positions. The conditional-spot-month
position limit generally tracks exchange-set position limits currently
implemented for certain cash-settled energy futures and swaps. For
example, the NYMEX Henry Hub Natural Gas Last Day Financial Swap, the
NYMEX Henry Hub Natural Gas Look-Alike Last Day Financial Futures, and
the ICE Henry LD1 swap are all cash-settled contracts subject to a
conditional-spot-month limit that, with the exception of the
requirement that a trader not hold large cash commodity positions, is
identical in structure to the limit proposed herein.
This proposed conditional spot-month position limit formula is
consistent with Commission guidance. The Acceptable Practices for Core
Principle 5 state that a spot-month position limit may be necessary if
the underlying cash market is small or illiquid such that traders can
disrupt the cash market or otherwise influence the cash-settlement
price to profit on a futures position. In these cases, the limit should
be set at a level that minimizes the potential for manipulation or
distortion of the futures contract or the underlying commodity's price.
With respect to cash-settled contracts where the underlying product is
a physical commodity with limited supplies where a trader can exert
market power (including agricultural and exempt commodities), the
Commission has viewed the specification of a spot-month limit to be an
essential term and condition of such contracts in order to ensure that
they are not readily susceptible to manipulation, which is the Core
Principle 3 requirement, and to satisfy the requirements of Core
Principle 5 and the Acceptable Practices thereunder. In practice, for
cash-settled contracts on agricultural and exempt commodities where a
trader's market power is of concern, the practice has been to set the
spot-month limit at some percentage of calculated deliverable supply.
Limiting a trader's position at the expiration of cash-settled
contracts diminishes the incentive to exert market power to manipulate
the cash-settlement price or index to advantage a trader's position in
the cash-settlement contract. Accordingly, the Commission has viewed
the presence of a spot-month speculative limit as a key feature of such
cash-settlement contracts, along with the design of the cash-settlement
index, in ensuring that such contracts are not readily susceptible to
manipulation and thus satisfy the requirements of Core Principles 3 and
5.
In view of the above, the Commission generally has required that,
to comply with Core Principles 3 and 5, all futures contracts based on
agricultural or exempt commodities, because they have finite supplies
and are subject to price distortion and manipulation, must have a spot-
month limits, irrespective of whether the contract specifies physical
delivery or cash settlement. In addition, the establishment of position
limits on swaps is consistent with congressional guidance in the CFTC
Reauthorization Act of 2008.\35\ That legislation amended the CEA by,
among other things, adding core principles in new section 2(h)(7)
governing swaps that were significant price discovery contracts traded
on electronic trading facilities operating in reliance on the exemption
in section 2(h)(3) of the Act. The 2008 legislation amended the Act to
impose certain self-regulatory responsibilities with respect to such
swaps through core principles, including a core principle that required
the adoption of position limits or position accountability levels where
necessary and appropriate. The CFTC Reauthorization Act, thus,
recognized the appropriateness of treating certain swaps and futures
contracts in the same manner, thereby authorizing the imposition of
position limits on such swaps (which are cash-settled contracts).
---------------------------------------------------------------------------
\35\ Food, Conservation and Energy Act of 2008, Public Law 110-
246, 122 Stat. 1624 (June 18, 2008).
---------------------------------------------------------------------------
In order to facilitate the annual calculations of spot-month
position limits, the Commission proposes to require each DCM that lists
a referenced physical delivery contract to submit, on an annual basis,
an estimate of deliverable supply to the Commission. This estimate
would include supplies that are available through standard marketing
channels at market prices prevailing during the relevant spot months.
Deliverable supply would not include supplies that could be procured at
unreasonably high prices or diverted from non-standard locations.
Deliverable supply would also not include supply that is committed for
long-term agreements and would therefore not be available to fulfill
the delivery obligations arising from current trading. The Commission
would consider the DCM's estimate in conjunction with analyzing its own
data and reviewing position limit related DCM filings, and make a final
determination as to deliverable supply. In making this determination,
the Commission would weigh more heavily the highest monthly values of
past deliverable supply, provided it did not occur in particularly
unusual market conditions, over a reasonable time period to estimate
the largest deliverable supply.
The Commission invites comments on all aspects of its proposed
spot-month position limit framework. For example, how broadly or
narrowly should the Commission consider what constitutes deliverable
supply? Should the Commission adopt the proposed conditional-spot-month
limits or adopt a uniform spot-month limit? Alternatively, should the
conditional-spot-month limit be set at a higher level relative to the
level of deliverable supply? If so, why?
B. Non-Spot-Month Position Limits
1. Open Interest Formula
While the Commission proposes to set spot-month limits in the
transitional implementation period, the Commission would impose non-
spot-month position limits only in the second phase of implementation.
In contrast to spot-month position limits which are set as a function
of deliverable supply, the class and aggregate single-month and all-
months-combined position limits, as proposed, would be tied to a
specific percentage of overall open interest for a particular
referenced contract in the aggregate or on a per class basis. Under the
proposed regulations, there are two classes of contracts in connection
with
[[Page 4759]]
non-spot-month limits. One class is comprised of all futures and option
contracts executed pursuant to the rules of a DCM. The second class is
comprised of all swaps.
In addition to an aggregate single-month and all-months-combined
position limit that would apply across classes, the proposed
regulations would apply single-month and all-months-combined position
limits to each class separately. Class limits would ensure that market
power is not concentrated in any one submarket, and that a trader is
not flat in the aggregate while holding excessively large offsetting
positions in any one submarket. Class and aggregate position limits
based on a percentage of open interest may help prevent any single
speculative trader from acquiring excessive market power. The formula
proposed herein is intended to ensure that no single speculator can
constitute more than 10 percent of a market, as measured by open
interest, up to 25,000 contracts of open interest, and 2.5 percent
thereafter.\36\
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\36\ See Revision of Federal Speculative Position Limits, 57 FR
12766, April 13, 1992; and Revision of Federal Speculative Position
Limits and Associated Rules, 64 FR 24038, at 24039, May 5, 1999.
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Proposed Sec. 151.4 proposes to use the futures position limits
formula (the 10, 2.5 percent formula) to determine non-spot-month
position limits for referenced contracts. The 10, 2.5 percent formula
is identified in current Commission Sec. 150.5(c)(2). Given the level
of open interest in the futures markets and the likely level of open
swaps based on data available to the Commission, this formula would
yield high position limits that nonetheless would prevent a speculative
trader from acquiring excessively large positions and thereby would
help prevent excessive speculation and deter and prevent market
manipulation, squeezes, and corners. The resultant limits are purposely
designed to be high in order to ensure sufficient liquidity for bona
fide hedgers and avoid disrupting the price discovery process given the
limited information the Commission has with respect to the size of the
physical commodity swap markets.\37\
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\37\ See 57 FR 12766, at 12771.
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As discussed further below, for the agricultural futures contracts
enumerated in current Sec. 150.2, the Commission is proposing legacy
limits that would retain the all-months-combined limits for such
contracts and would make the single-month limits equal to the all-
months-combined limits.
The Commission emphasizes that market data can support a range of
acceptable speculative position limits. The Commission currently
obtains DCM futures and option positional data under parts 15 through
19 and 21 of its regulations, which derive their statutory authority in
significant part from sections 4a, 4g and 4i of the CEA. With regard to
swaps, the Commission receives limited positional data for cleared
swaps that are significant price discovery contracts under part 36 of
its regulations and limited positional data on certain swaps that are
cleared, but not traded, by registered derivatives clearing
organizations. While the Commission requires additional, reliable, and
verifiable swaps data to enforce the position limits proposed herein,
the Commission believes that it has sufficient data to set the overall
concentration-based percentages for the position limits. The Commission
intends to finalize regulations that would provide it with
comprehensive positional data on physical commodity swaps, and would
use such data to fix numerical position limits through the application
of the proposed open-interest-based position limit formula.\38\
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\38\ See 75 FR 67258.
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The trader visibility requirements of Sec. 151.6, as described
below, establish levels that trigger reporting requirements similar to
reports that certain hedgers currently submit pursuant to '04 reports
under part 19 of the Commission's regulations. These reporting
requirements aim to make the physical and derivatives portfolios of the
largest traders in referenced contracts visible to the Commission. This
information would generally allow the Commission to understand large
traders' trading activities and to assess the appropriateness of the
speculative position limits set forth in the proposed part 151. The
Commission would then potentially be able to, among other things, more
readily identify instances where a trader's large positions create an
ability to manipulate the market and cause sudden price changes or
distortions. Moreover, the position visibility-related reports could
potentially enable the Commission to perform some econometric analyses
of the impact of speculative positions on price formation in referenced
contracts. The position visibility levels that trigger reporting
obligations are not intended to function as safe harbors from any
charge of manipulation or excessive speculation. Visibility levels are
in no way intended to imply that positions at or near such levels
cannot constitute excessive speculation or be used to manipulate prices
or for other wrongful purposes.
The Commission solicits comment as to whether the traditional 10,
2.5 percent formula should be uniformly applied to all referenced
contracts as is being proposed. If not, why? In particular, given that
single-month and all-months-combined position limits are not currently
in place for energy and metals markets, should the Commission consider
setting limits initially on these commodities at some higher level,
such as a 10, 5 percent formula based on open interest, in order to
best ensure that hedging activities or price discovery are not
negatively affected? With respect to class limits, the Commission
specifically solicits comment on whether additional classes, such as
separate class categories for cleared and uncleared swaps, should be
adopted to ensure that large positions that result in excessive
concentration of positions in a submarket are not acquired?
2. Calculation of Open Interest
Under the proposed position limit framework, there are six possible
non-spot-month position limits: Aggregate all-months-combined and
single-month limits; futures class all-months-combined and single-month
limits; and swaps class all-months-combined and single-month limits. In
each case, single-month limits are proposed to equal all-months-
combined limit levels. The Commission is proposing this approach in
order to lessen the complexity of the limits and hence compliance
burdens. The Commission is also proposing this approach, which would
result in higher single-month limits, to incorporate a calendar spread
exemption within the single-month limits (including an across crop year
spread exemption) and remove the calendar spread exemption which would
no longer be needed.
As discussed above, the Commission proposes to set non-spot-month
position limits as a function of open interest. The general formula
would set non-spot-month position limits as the sum of 10 percent of
the first 25,000 contracts of open interest base and 2.5 percent of the
open interest base beyond 25,000 contracts. All open interest base
calculations would be derived from month-end open interest values. The
open interest bases would be utilized to determine the average all-
months-combined open interest which, in turn, would be the basis for
the six non-spot-month position limits. Under proposed Sec. 151.4(e),
the average all-months-combined open interest would be the average of
the relevant all-months open interest base for a calendar year. The
open interest base levels would be
[[Page 4760]]
calculated in the same manner described in the Commission's January
2010 release proposing position limits for certain referenced energy
contracts.\39\
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\39\ See 75 FR 4144, at 4153. A list of contracts that
illustrate how open interest values would be calculated is available
at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_26_PosLimits/index.htm. The list enumerates the types of referenced
contracts' open interest that would roll up into a 151.2-listed
contract's open interest for the purpose of determining overall open
interest levels. Once swap open interest data for swaps that are
referenced contracts is collected, the open interest value for such
swaps would also be rolled up into the related 151.2-listed futures
contract's open interest along with the open interest of other
related referenced contracts.
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Cleared referenced swap contract open interest would be based on
month-end open interest figures provided to the Commission by clearing
organizations. The Commission proposes to determine the uncleared swap
open interest based on the month-end average for the sum of swap dealer
positions in all months in uncleared referenced swap contracts. In
order to determine a swap dealer's position in all months in uncleared
referenced swap contracts, the Commission would undertake a four-step
process. First, the Commission would determine a single swap dealer's
net exposure by counterparty by referenced contract month. Second, the
Commission would add the swap dealer's net counterparty exposures in
the same referenced contract month on an absolute basis to determine
the swap dealer's open interest for the referenced contract single
month. Third, the Commission would combine the swap dealer's positions
in the referenced contract month in order to determine its contribution
to the uncleared swap single-month open interest. Finally, the
Commission would combine the swap dealer's positions in single
referenced contract months. At month end, this sum would constitute
that swap dealer's contribution to the uncleared referenced swap
contract all-months open interest (and the aggregate all-months
referenced contract open interest). For example, a swap dealer with the
following referenced contract portfolio would contribute 2,000
contracts to the all-months uncleared swap open interest, 1,000 from
each counterparty, based on positions of 1,100, 500, and 400 contracts
for the January, February, and March referenced single contract months
respectively:
----------------------------------------------------------------------------------------------------------------
Net position January Net position February Net position March
referenced contract referenced contract referenced contract
----------------------------------------------------------------------------------------------------------------
Counterparty 1....................... -600 -200 -200
Counterparty 2....................... +500 -300 -200
----------------------------------------------------------------------------------------------------------------
3. Legacy Position Limits
The proposed regulations would retain the all-months-combined
position limits for enumerated agricultural commodities in current
Sec. 150.2 as an exception to the general open interest based formula.
The single-month limit would be increased to the same level as the
legacy all-months-combined limit, with the elimination of the calendar
month spread exemption.
The Commission requests comment on whether the legacy position
limits should be retained or treated as other derivatives are treated
under this proposal, and if so, whether the levels should be increased,
to the following amounts requested in an April 6, 2010 petition to the
Commission by the Chicago Board of Trade \40\:
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\40\ CME Group Petition for Amendment of Commodity Futures
Trading Commission Regulation (April 6, 2010), available at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_26_PosLimits/index.htm. The CME petition was premised on the
Commission's past reliance on open interest levels for setting
position limits and the increase in open interest levels of the
contracts listed in the petition.
------------------------------------------------------------------------
Single All
Contract month months
------------------------------------------------------------------------
Corn (and Mini-Corn).............................. 20,500 33,000
Soybeans (and Mini-Soybeans)...................... 10,000 15,000
Wheat (and Mini-Wheat)............................ 9,000 12,000
Soybean Oil....................................... 6,500 8,000
------------------------------------------------------------------------
If so adopted, should the limits on wheat at the Minneapolis Grain
Exchange and the Kansas City Board of Trade also be increased to the
level proposed for the wheat contract at the Chicago Board of Trade,
consistent with the Commission's historical approach to setting limits
for wheat contracts?
C. Exemptions for Referenced Contracts
Proposed Sec. 151.5 establishes exemptions from position limits
for bona fide hedging transactions or positions as directed by the
Dodd-Frank Act specifically for exempt and agricultural commodities.
The referenced contracts subject to the proposed position limit
framework would be subject to the bona fide provisions of proposed
Sec. 151.5 and would no longer be subject to Sec. 1.3(z), which would
be retained only for excluded commodities. Sec. 1.47 and Sec. 1.48
would be removed by this notice of proposed rulemaking.
Section 4a(c)(1) of the Act authorizes the Commission to define
bona fide hedging transactions or positions ``consistent with the
purposes of the Act.'' By its terms, the section places no restriction
on the Commission's ability to define bona fide hedging for swaps.
Congress also directed the Commission, in amended CEA section 4a(c)(2),
to adopt a definition for bona fide hedging transactions or positions
for purposes of setting position limits pursuant to section 4a(a)(2),
which refers only to futures contracts or options.\41\ A definition of
bona fide hedging that would exclude swaps would deny a commercial end-
user the option of offsetting price risks with swaps (as opposed to
futures) pursuant to a bona fide hedge exemption. Accordingly, pursuant
to section 4a(c)(1) and (c)(2), the Commission is proposing a
definition for bona fide hedging transactions and positions that would
apply to all referenced contracts, including swaps, as opposed to
referenced futures and option contracts only.
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\41\ The scope of contracts subject to position limits under
section 4a(a)(2) includes physical commodity futures and options
contracts traded on a DCM, other than excluded commodities.
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The statutory definition of a bona fide hedge in section 4a(c)(2)
generally follows the existing definition in Commission Sec.
1.3(z)(1), except: (1) The directive requires all bona fide hedging
transactions and positions to represent a substitute for a physical
market transaction; and (2) as discussed above, the directive provides
an explicit exemption for a trader to reduce the risks of swap
positions, provided the counterparty to the swap transaction would have
qualified for a bona fide hedging transaction exemption or the risk
reducing positions offset a swap that qualifies as a bona fide hedging
transaction.
The definition of bona fide hedging in Sec. 1.3(z) of the Act
provides that a bona fide hedging transaction or position in a futures
contract normally represents a substitute for a physical market
[[Page 4761]]
transaction; thus, the current definition is no longer consistent with
amended CEA section 4a(c)(2). The plain text of the new statutory
definition of bona fide hedging recognizes bona fide hedging for
derivatives that are subject to this rulemaking only if such
transactions or positions represent cash market transactions and offset
cash market risks, as opposed to the acceptance of bona fide hedging
transactions and positions as activity that normally, but not
necessarily, represents a substitute for cash market transactions or
positions.
Proposed Sec. 151.5(a)(2) incorporates the current requirements of
Commission Sec. 1.3(z)(2) for enumerated hedging transactions.
Proposed Sec. 151.5(a)(2)(iv) also provides an exemption for agents
contractually responsible for the merchandising of cash positions with
a person who owns the commodity or holds the cash market commitment
being offset. This agent provision is consistent with Commission Sec.
1.3(z)(3) and Sec. 1.47.
In this regard, should the Commission grant an exemption to an
agent that is not responsible for the merchandising of the cash
positions, but is linked to the production of the physical commodity,
for example, if the agent is the provider of crop insurance?
Proposed Sec. 151.5(b) establishes reporting requirements for a
trader upon exceeding a position limit. The trader is required to
submit information not later than 9:00 a.m. on the business day
following the day the limits were exceeded. The reports would support
hedgers' need for large referenced contract positions and would give
the Commission the ability to verify the positions were a bona fide
hedge.
With respect to the frequency of filing such reports, should the
Commission only require reports to be submitted either when a trader's
position either first exceeds a limit or when a trader's hedging need
increases, with a monthly summary while the trader's position remains
in excess of the limit?
Proposed Sec. 151.5(c) specifies application and approval
requirements for traders seeking an anticipatory hedge exemption,
incorporating the current requirements of Commission Sec. 1.48. As is
the case under current Sec. 1.48, a trader's maximum sales and
purchases shall not exceed the lesser of the approved exemption amount
or the trader's current actual unsold anticipated production or current
unfilled anticipated requirements. In addition, the proposed
regulations require an anticipatory hedger to file a supplement to an
application at least annually or whenever the anticipatory hedging
needs increase beyond that in the most recent filing.
Proposed Sec. 151.5(d) establishes additional reporting
requirements for a trader that exceeds the position limits to reduce
the risks of certain swap transactions, discussed above. Should the
Commission only require such reports to be submitted when the trader's
position either first exceeds a limit or the hedging need increases,
with a monthly summary while the trader's position remains in excess of
the limit?
Proposed Sec. 151.5(e) specifies recordkeeping requirements for
traders that acquire positions in reliance on bona fide hedge
exemptions, as well as for swap counterparties for which a counterparty
represents that the transaction would qualify as a bona fide hedging
transaction. Swap dealers availing themselves of a hedge exemption
would be required to maintain a list of such counterparties and make
that list available to the Commission upon request. Proposed Sec.
151.5(g) and (h) provide procedural documentation requirements for such
swap participants.
Proposed Sec. 151.5(f) requires a cross hedger to provide
conversion information, as well as an explanation of the methodology
used to determine such conversion information, between the commodity
exposure and the referenced contracts used in hedging.
Proposed Sec. 151.5(i) requires reports by bona fide hedgers to be
filed for each business day, up to and including the day after the
trader's position level is below the position limit that was exceeded.
Proposed Sec. 151.5(j) provides that a swap counterparty with
respect to bona fide hedging transactions may establish a position in
excess of the position limits, offset that position, and then re-
establish a position in excess of the position limits. For example,
this provision permits a swap participant who has reduced the risk of
swaps using a position in futures contracts (that would otherwise
violate a position limit) to offset those futures contracts and
subsequently, if necessary, re-establish a position in excess of class
position limits in another venue in order to once again reduce the risk
of the swap transactions.
D. Position Visibility
Based on its analysis of the proposed limits as applied to futures
and option contract positions and cleared swaps for which the
Commission has open interest data, the Commission does not anticipate
that the number of traders with positions in referenced base and
precious metals and referenced energy contracts, as further discussed
below in the Cost-Benefit and Paperwork Reduction Act sections of this
release, would constitute a significant segment of the affected
markets, in contrast to the number of traders with positions in
referenced agricultural contracts. Recognizing this, the Commission
proposes to establish, in addition to the position limits discussed
above, position visibility regulations for referenced contracts other
than referenced agricultural contracts, pursuant to the Commission's
authority to establish reporting requirements under section 4t of the
Act, as added by the Dodd-Frank Act, and reporting requirements
necessary for the establishment and enforcement of position limits
under sections 4a and 8a(5) of the Act. The proposed visibility
regulations would set position visibility reporting levels and
establish reporting requirements for all traders exceeding those
levels. The reporting regulations aim to make the physical and
derivatives portfolios of the largest traders in referenced contracts
visible to the Commission.
The position visibility regime would improve the Commission's
ability to monitor the positions of the largest traders in the markets
for referenced base and precious metals and referenced energy contracts
and the effects on the markets of those large positions and their
associated physical commodity and derivatives portfolios. The data for
referenced contracts and related portfolios that the Commission would
receive pursuant to the position visibility regulations would allow the
Commission to better analyze the nature of the largest traders'
positions in referenced contracts.
The Commission has set the visibility levels and its estimates on
the number of traders they would capture based on data it currently
receives on the futures and swaps markets. The Commission may revisit
these levels as it begins to receive more data on the swaps markets.
The Commission proposes to set the visibility reporting levels for
referenced base and precious metals and referenced energy contracts
where it anticipates approximately 20 unique owners over the course of
a year would exceed such levels. Given their importance to the national
economy, the Commission proposes to set visibility levels for the NYMEX
Light Sweet Crude Oil (CL) and Henry Hub Natural Gas (NG) referenced
contracts at a relatively lower level designed to capture approximately
30 unique owners over the course of a year.
Proposed Sec. 151.6 would require traders with positions above
visibility
[[Page 4762]]
levels in referenced base and precious metals and energy commodities to
submit additional information about cash market and derivatives
activity, including data relating to substantially the same commodity,
such as commodities that are different grades or formulations of the
same basic commodity. Proposed Sec. 151.6(c) would require additional
information, through a 402S filing, on a trader's uncleared swaps in
substantially the same commodity. Proposed Sec. 151.6(d) would require
the reportable trader to submit information about cash market positions
in substantially the same commodity, as described in proposed Sec.
151.5(b), through 404 and 404A filings.
The Commission solicits comment on whether position visibility
requirements should also be imposed on referenced agricultural
contracts.
E. Aggregation of Accounts
Proposed Sec. 151.7 would establish account aggregation standards
specifically for positions in referenced contracts. Under the proposed
standards, the Federal position limits in referenced contracts would
apply to all positions in accounts in which any trader, directly or
indirectly, has an ownership or equity interest of 10 percent or
greater or, by power of attorney or otherwise, controls trading. These
standards for aggregation are consistent with the standards delineated
in the Acceptable Practice to DCM Core Principle 5 in Appendix B to
part 38 of the Commission's regulations. Proposed Sec. 151.7 would
also treat positions held by two or more traders acting pursuant to an
express or implied agreement or understanding the same as if the
positions were held by, or the trading of the positions were done by, a
single trader. Proposed Sec. 151.7 would require a trader to aggregate
positions in multiple accounts or pools, including passively managed
index funds, if those accounts or pools had identical trading
strategies.
Proposed Sec. 151.7(c) establishes a limited exemption for
positions in pools in which a person that is a limited partner,
shareholder or similar person has an ownership or equity interest of
between 10 percent and 25 percent, if the person does not have control
over or knowledge of the pool's trading. Proposed Sec. 151.7(e)
establishes a limited exemption for the positions of futures commission
merchants in certain discretionary accounts, if they maintain only
minimum control over trading in the relevant account and if the trading
decisions of that account are independent from trading decisions in the
futures commission merchants' other accounts. Finally, proposed Sec.
151.7(f) establishes a limited exemption for entities to disaggregate
the positions of an independently controlled and managed trader that is
not a financial entity, defined as an owned non-financial entity, in
which it has an ownership or equity interest of 10 percent or greater,
and it provides a non-exhaustive description of indicia that
demonstrate independent control and management to the Commission. In
all three cases, the exemption would only become effective upon the
Commission's approval of an application described in proposed Sec.
151.7(g).
In the aggregation standards currently in force in part 150 of the
Commission's regulations, eligible entities (a broad group that
includes banks, insurance companies, mutual funds, commodity pool
operators and commodity trading advisors) are permitted to disaggregate
positions pursuant to a self-executing independent account controller
framework. Part 150 also provides expansive disaggregation provisions
for commodity pool operators, limited partners and other pool
participants as well as for futures commission merchants.
These disaggregation exceptions may be incompatible with the
proposed Federal position limit framework and used to circumvent its
requirements. Given that the proposed framework sets high position
levels that are reflective of the largest positions held by market
participants, permits for the netting of positions for like referenced
contracts within each applicable position limit, and includes a
conditional-spot-month limit for cash-settled contracts and exemptions
for bona fide hedging (either directly or as a result of the look-
through provision), allowing traders to establish a series of positions
each near a proposed position limit, without aggregation, may not be
appropriate. In addition, the self-executing nature of the exemptions
creates an insufficient and inefficient verification regime and
ultimately diminishes the Commission's ability to properly perform its
market surveillance responsibilities.
Thus, the proposed aggregation standards differ in several respects
from the current standards in part 150. The proposed regulations would
require aggregation for a passive pool participant with a 10 percent or
greater ownership or equity interest (unless the pool operator had
proper information barriers in place and the pool participant did not
have control over the pool's trading decisions). By comparison, under
current part 150, a passive pool participant would aggregate its
positions only if it was also a principal or affiliate of the pool
operator. The proposed regulations would require aggregation for any
passive pool participant with a 25 percent or greater ownership or
equity interest, with no possibility for disaggregation, whereas
current part 150 only follows such an approach for pools with operators
that are exempt from registration under Sec. 4.13. The proposed
regulations would also require aggregation for positions in accounts or
pools with identical trading strategies, which part 150 currently
lacks, in order to prevent circumvention of the aggregation
requirements by, for example, a trader seeking a large long-only
position in a given commodity through specific positions in multiple
pools.
In addition, the proposed regulations do not retain the independent
account controller exemption of part 150. The regulations proposed in
January of 2010 to establish position limits for referenced energy
contracts also did not include an independent account controller
framework; they included only a very narrow exemption thereto for
certain passive pool participants.\42\ Many commenters to the January
2010 proposed regulations expressed opposition to such strict
standards, arguing that they would force aggregation of positions in
situations where meaningful control, management and information
barriers demonstrated sufficient independence to warrant
disaggregation. The current regulations address some of these concerns
by establishing a limited exemption for owned non-financial entities.
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\42\ See 75 FR 4144, at 4146.
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The owned non-financial entity exemption would allow an entity to
disaggregate (1) the positions of a non-financial entity in which it
owns a 10 percent or greater ownership or equity interest from (2) its
own directly held or controlled positions and the positions attributed
to it (through the general 10 percent ownership standard or other
aggregation requirements of the proposed regulations), if it can
demonstrate that the owned non-financial entity is independently
controlled and managed. This limited exemption aims to allow
disaggregation primarily in the case of a conglomerate or holding
company that merely has a passive ownership interest in one or more
non-financial operating companies. In such cases, the operating
companies may have complete trading and management independence and
operate at such a distance from the holding company that it would not
be
[[Page 4763]]
appropriate to aggregate positions. Two of the criteria proposed as
indicia of independence are similar to those currently contained in
part 150, namely the requirements that the entity have no knowledge of
the owned non-financial entity's trading decisions (along with, in the
proposed regulations, the reverse requirement that the owned non-
financial entity have no knowledge of the entity's trading decisions)
and that the owned non-financial entity have written policies and
procedures to protect such knowledge. Two other proposed indicia not
found in current part 150, requiring separate employees and risk
management systems, would provide further evidence of the owned non-
financial entity's independence. As mentioned above, the indicia
described in proposed Sec. 151.7(f) are not meant to form an
exhaustive list; under the proposed application process described in
151.7(g), a departure from the self-executing exemption of part 150,
the applying entity could describe for the Commission any other
relevant circumstances that would warrant disaggregation.
The Commission solicits comments on all aspects of its account
aggregation regulations. In particular, the Commission solicits
comments on the appropriateness of the definition of owned non-
financial entities and the criteria used to determine the independence
of such entities. The Commission also solicits comments on whether and
under what circumstances the Commission should grant exemptions from
account aggregation under its exemptive authority under section
4a(a)(7) of the Act.
F. Preexisting Positions and Exemptions
Consistent with the good faith exemption in section 4a(b)(2) of the
Act, the Commission will provide a limited exemption for positions in
DCM contracts for future delivery or option contracts that are in
excess of a position limit in proposed Sec. 151.2, provided that they
were established in good faith prior to the effective date of a
position limit set by rule, regulation or order. Such persons would not
be allowed to enter into new, additional contracts in the same
direction but could take up offsetting positions and thus reduce their
total combined net position.\43\ Persons who established a net position
below the speculative limit for a contract for future delivery prior to
the enactment of a regulation would be permitted to acquire new
positions. However, consistent with Commission practice, the Commission
would calculate the combined position of a person based on any position
established prior to enactment of a position limit rule, regulation or
order plus any new position.
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\43\ The Commission understands that changes in option deltas
could increase the net level of a person's pre-enactment position.
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In contrast to futures and option contracts, the proposed
regulations would not apply position limits to Dodd-Frank Act pre-
effective date swaps. The Commission is proposing this broad exemption
since swaps generally may be appreciably longer lived than futures
contracts thereby giving rise to concerns that position limits
affecting pre-effective date swaps may unnecessarily disrupt position
hedging through swap positions. The Commission would allow pre-
effective date swaps to be netted with post-effective date swaps for
the purpose of complying with position limits.
The Commission has previously granted certain swap dealers hedge
exemptions under current Sec. 1.47, without regard to the purposes or
hedging needs of swap dealer counterparties. The Commission intends to
permit such swap dealers to continue to manage the risk of a swap
portfolio that exists at the time of implementation of the proposed
regulations. No new swaps will be covered by the exemption.
In this regard, the Commission seeks comment on what additional
reporting requirements, if any, it should impose on swap dealers that
were granted a hedge exemption.
G. Foreign Boards of Trade
Proposed Sec. 151.8 would provide that the aggregate position
limits in proposed Sec. 151.4 apply to a trader's positions in
referenced contracts executed on, or pursuant to the rules of, a
foreign board of trade, subject to the following conditions. First, the
FBOT contract, agreement, or transaction must settle against the price
of a contract executed or cleared pursuant to the rules of a registered
entity. Second, the FBOT must make such linked contracts available to
its members or other participants located in the United States by
direct access to its electronic trading and order matching system.
H. Registered Entity Position Limits
Proposed Sec. 151.11 requires registered entities \44\ to
establish position limits for reference contracts that are at a level
no higher than the position limits specified in proposed Sec. 151.4.
Proposed Sec. 151.11(c) and (d)(1)(i) would require registered
entities to follow the same account aggregation and bona fide exemption
standards set forth by proposed Sec. 151.5 and Sec. 151.7 with
respect to exempt and agricultural commodities.
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\44\ Relevant for these purposes, CEA section 1a(40), as amended
by the Dodd-Frank Act, would define registered entity to include
DCMs and SEFs.
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For excluded commodities,\45\ consistent with current DCM practice,
registered entities would have the discretion to establish position
accountability levels in lieu of position limits. Registered entities
may impose position accountability rules in lieu of position limits
only if either: The open interest in a contract is less than 5,000; or
the contract involves a major currency; or involves an excluded
commodity that has the following three characteristics: (1) An average
daily open interest of 50,000 or more contracts, (2) an average daily
trading volume of 100,000 or more contracts, and (3) a highly liquid
cash market.
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\45\ See section 1a(19) of the Act.
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With respect to excluded commodities, consistent with the current
DCM practice, registered entities may provide for exemptions from their
position limits for ``bona fide hedging.'' The term ``bona fide
hedging,'' as used with respect to excluded commodities, shall be
defined in accordance with amended CFTC Sec. 1.3(z).\46\ Additionally,
consistent with the current DCM practice, registered entities may
continue to provide exemptions for ``risk-reducing'' and ``risk-
management'' transactions or positions consistent with existing
Commission guidelines.\47\ Finally, though the Commission is removing
the procedure to apply to the Commission for bona fide hedge exemptions
for non-enumerated transactions or positions under Sec. 1.3(z)(3), the
Commission will continue to recognize prior Commission determinations
under that section, and registered entities may recognize non-
enumerated hedge transactions subject to Commission review.
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\46\ See Section 151.11(d)(1)(ii) of these proposed regulations.
As explained in section C of this release, the definition of bona
fide hedge transaction or position contained in section 4a(c)(2) of
the Act does not, by its terms, apply to excluded commodities.
\47\ See Clarification of Certain Aspects of Hedging Definition,
52 FR 27195, Jul. 20, 1987; and Risk Management Exemptions From
Speculative Position Limits Approved under Commission Regulation
1.61, 52 FR 34633, Sept. 14, 1987.
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I. Delegation
Proposed Sec. 151.12 delegates certain of the Commission's
proposed part 151 authority to the Director of the Division of Market
Oversight and to other employee or employees as designated by the
Director. The delegated authority
[[Page 4764]]
extends to: (1) Determining open interest levels for the purpose of
setting non-spot-month position limits; (2) granting an exemption
relating to bona fide hedging transactions; and (3) providing
instructions or determining the format, coding structure, and
electronic data transmission procedures for submitting data records and
any other information required under proposed part 151. The purpose of
this delegation provision is to facilitate the ability of the
Commission to respond to changing market and technological conditions
and thus ensure timely and accurate data reporting. In this regard, the
Commission specifically requests comments on whether determinations of
open interest or deliverable supply should be adopted through
Commission orders.
III. Related Matters
A. Cost-Benefit Analysis
Section 15(a) of the Act requires that the Commission, before
promulgating a regulation under the Act or issuing an order, consider
the costs and benefits of its action. By its terms, CEA section 15(a)
does not require the Commission to quantify the costs and benefits of a
new regulation or determine whether the benefits of the regulation
outweigh its costs. Rather, CEA section 15(a) simply requires the
Commission to ``consider the costs and benefits'' of its action.
CEA section 15(a) specifies that costs and benefits shall be
evaluated in light of the following considerations: (1) Protection of
market participants and the public; (2) efficiency, competitiveness,
and financial integrity of futures markets; (3) price discovery; (4)
sound risk management practices; and (5) other public interest
considerations. Accordingly, the Commission could, in its discretion,
give greater weight to any of the five considerations and could, in its
discretion, determine that, notwithstanding its costs, a particular
regulation was necessary or appropriate to protect the public interest
or to effectuate any of the provisions or to accomplish any of the
purposes of the Act.
The proposed position limits and their concomitant limitation on
trading activity could impose certain general but significant costs.
Overly restrictive position limits could cause unintended consequences
by decreasing speculative activity and therefore liquidity in the
markets for the referenced contracts, impairing the price discovery
process in these markets, and encouraging the migration of speculative
activity and perhaps price discovery to markets outside of the
Commission's jurisdiction. The outside spot-month position limits that
would likely result from the application of the 10, 2.5 percent open
interest formula, as proposed, are intended as high levels that
speculators are likely to acquire in order to avoid disrupting or
interfering with beneficial speculative trading.
Congress has charged the Commission with establishing position
limits on traders in certain physical commodity derivatives. In CEA
section 4a(a)(3), Congress directed the Commission to establish such
position limits in order to achieve, to the maximum extent practicable,
in the Commission's discretion, the following objectives: To diminish,
eliminate, or prevent excessive speculation; to deter and prevent
market manipulation; while ensuring sufficient market liquidity for
bona fide hedgers and protecting the price discovery function of
commodity derivatives. Insofar as the provisions of the proposed part
151 effectuate these goals, then the market and the public as a whole
would benefit.
In section 4a of the Act, Congress determined that excessive
speculation in ``any commodity under contracts of sale of such
commodity for future delivery * * * or swaps that perform a significant
price discovery function with respect to regulated entities causing
sudden or unreasonable fluctuations or unwarranted changes in the price
of such commodity, is an undue and unnecessary burden on interstate
commerce.'' In section 4a(a)(3) of the Act, Congress charged the
Commission with the task of setting position limits designed to
diminish, eliminate, or prevent ``excessive speculation.'' Accordingly,
the speculative position limit framework established by the Commission
would be expected to benefit the public and the markets regulated by
the Commission by diminishing, eliminating, or preventing the undue
burdens on interstate commerce that result from excessive speculation
in markets regulated by the Commission.
In addition, the proposed visibility levels and associated
reporting requirements of proposed Sec. 151.6 would enable the
Commission to better understand generally the portfolio compositions,
including bona fide hedging needs, of the largest position holders of
referenced contracts. This data would enable the Commission to
determine whether to readjust the speculative position limits to
continue to ensure the statutory objectives are met. Visibility reports
would allow the Commission to have a better sense of the relative
distribution of speculative versus non-speculative positions and
activity, as well as the nature and effect of the largest speculative
traders in referenced contracts.
Section 4a(a)(3) of the Act also charges the Commission with
setting position limits designed to ``deter and prevent market
manipulation.'' The limitation on a trader's ability to take a very
large position, not justified by a bona fide hedging need, may reduce a
trader's ability to manipulate a market. By reducing a trader's ability
to manipulate a market, a position limit regime would prevent
manipulation and therefore avoid the resulting price distortions,
economic harm, and misallocation of resources. In addition, the
visibility levels and associated reporting obligations, as proposed in
Sec. 151.6, would provide the Commission greater visibility into the
portfolios of large speculative traders, thereby potentially
facilitating early regulatory intervention when potential manipulative
conduct or price distortions are detected.
In addition to reducing the undue burdens arising from excessive
speculation and manipulation, by reducing the ability of a market
participant to gain very large speculative exposure in referenced
contracts, proposed part 151 would encourage better risk management,
reduce the likelihood of default, and may thereby reduce systemic risk.
Although futures markets employ centralized clearing arrangements that
reduce systemic risk, a very large speculative position taken by a
levered participant across futures markets, other trading facilities,
and in over-the-counter derivatives can result in a default risk not
properly accounted for by any one trading venue or counterparty. The
proposed regulations may therefore promote the financial integrity of
the markets and protect the public by reducing systemic risk insofar as
the provisions of the proposed part 151 would reduce the likelihood of
such levered entities to generate systemic risk by either limiting
their ability to amass a very large speculative position or by making
such entities more visible to the Commission pursuant to proposed Sec.
151.6.
The Commission invites public comment on its cost-benefit
considerations. Commenters are also invited to submit any data or other
information that they may have quantifying or qualifying the costs and
benefits of proposed part 151.
[[Page 4765]]
B. The Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that agencies consider the impact of their regulations on
small businesses. The requirements related to the proposed amendments
fall mainly on registered entities, exchanges, futures commission
merchants, swap dealers, clearing members, foreign brokers, and large
traders. The Commission has previously determined that exchanges,
futures commission merchants and large traders are not ``small
entities'' for the purposes of the RFA.\48\ Similarly, swap dealers,
clearing members, foreign brokers and traders would be subject to the
proposed regulations only if carrying or holding large positions.
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies, pursuant to 5 U.S.C 605(b), that the actions proposed to be
taken herein would not have a significant economic impact on a
substantial number of small entities.
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\48\ 44 U.S.C. 601 et seq.
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C. Paperwork Reduction Act
1. Overview
The Paperwork Reduction Act (``PRA'') \49\ imposes certain
requirements on Federal agencies in connection with their conducting or
sponsoring any collection of information as defined by the PRA. Certain
provisions of the proposed regulations would result in new collection
of information requirements within the meaning of the PRA. An agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless it displays a currently valid
control number. The Office of Management and Budget (``OMB'') has not
yet assigned a control number to the new collections associated with
these proposed regulations. Therefore, the Commission is submitting
this proposal to OMB for review in accordance with 44 U.S.C. 3507(d)
and 5 CFR 1320.11. The title for this proposed collection of
information is ``Part 151--Position Limit Framework for Referenced
Contracts'' (OMB control number 3038-NEW).
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\49\ 44 U.S.C. 3501 et seq.
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If adopted, responses to this collection of information would be
mandatory. The Commission will protect proprietary information
according to the Freedom of Information Act and 17 CFR part 145, headed
``Commission Records and Information.'' In addition, the Commission
emphasizes that section 8(a)(1) of the Act strictly prohibits the
Commission, unless specifically authorized by the Act, from making
public ``data and information that would separately disclose the
business transactions or market positions of any person and trade
secrets or names of customers.'' \50\ The Commission also is required
to protect certain information contained in a government system of
records pursuant to the Privacy Act of 1974.\51\
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\50\ 7 U.S.C. 12(a)(1).
\51\ 5 U.S.C. 552a.
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Under the proposed regulations, market participants with positions
in referenced contracts, as defined in proposed Sec. 151.2, would be
subject to the position limit framework established by proposed part
151. Proposed part 151 prescribes reporting requirements for traders
claiming compliance with the conditional spot-month position limit
(proposed Sec. 151.4(a)(2)), reporting requirements for DCMs that list
a referenced contract (proposed Sec. 151.4(c)), traders claiming a
bona fide hedging exemption (proposed Sec. 151.5(b) and (c)), traders
claiming a bona fide hedge that does not involve the same quantity or
commodity as the quantity or commodity associated with positions in
referenced contracts that are used to hedge risk (proposed Sec.
151.5(f)), traders claiming a bona fide swap counterparty exemption
(proposed Sec. 151.5(d)), traders with positions above a visibility
level (proposed Sec. 151.6(a)), and entities seeking an exemption to
mandatory account aggregation regulations (proposed Sec. 151.7(g)). In
addition to these reporting requirements, proposed Sec. 151.5(e) and
(g) specify recordkeeping requirements for traders who receive bona
fide hedge exemptions, as well as for swap counterparties for which the
transaction would qualify as a bona fide hedging transaction.
2. Information Provided and Recordkeeping Duties
Proposed Sec. 151.4(a)(2) provides for a special conditional spot-
month limit for traders under certain conditions, including the
submission of a certification that the trader meets the required
conditions. These certifications would be filed within a day after the
trader exceeds a conditional spot-month limit.
The Commission anticipates that approximately one-hundred traders a
year will submit conditional spot-month limit certifications. The
Commission estimates that these one-hundred entities would incur a
total burden of 2,400 annual labor hours resulting in a total of
$189,000 in annual labor costs \52\ and $1 million in annualized
capital and start-up costs \53\ and annual total operating and
maintenance costs.
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\52\ The Commission staff's estimates concerning the wage rates
are based on salary information for the securities industry compiled
by the Securities Industry and Financial Markets Association
(``SIFMA''). The $78.61 per hour is derived from figures from a
weighted average of salaries and bonuses across different
professions from the SIFMA Report on Management & Professional
Earnings in the Securities Industry 2010, modified to account for an
1800-hour work-year and multiplied by 1.3 to account for overhead
and other benefits. The wage rate is a weighted national average of
salary and bonuses for professionals with the following titles (and
their relative weight): ``programmer (senior)'' (30% weight);
``programmer'' (30%); ``compliance advisor (intermediate);'' (20%),
``systems analyst;'' (10%); and ``assistant/associate general
counsel'' (10%).
\53\ The capital/start-up cost component of ``annualized
capital/start-up, operating, and maintenance costs'' is based on an
initial capital/start-up cost that is straight-line depreciated over
five years.
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Proposed Sec. 151.4(c) requires that DCMs submit an estimate of
deliverable supply by the 31st of December of each calendar year for
each referenced contract that is subject to a spot-month position limit
and listed or executed pursuant to the rules of the DCM. The Commission
estimates that this proposed reporting regulation will affect
approximately six entities annually resulting in a total marginal
burden, across all of these entities, of 6,000 annual labor hours and
$55,000 in annualized capital and start-up costs and annual total
operating and maintenance costs.
Proposed Sec. 151.5 sets forth the application procedure for bona
fide hedgers and counterparties to bona fide hedging swap transactions
that seek an exemption from the proposed Commission-set federal
position limits for referenced contracts. If a bona fide hedger seeks
to claim an exemption from position limits because of cash market
activities, then the hedger would submit a 404 filing pursuant to
proposed Sec. 151.5(b). The 404 filing would be submitted when the
bona fide hedger claims an exemption or when its hedging needs
increase. Parties to bona fide hedging swap transactions would be
required to submit a 404S filing to qualify for a hedging exemption,
which would also be submitted when the bona fide hedger claims an
exemption or when its hedging needs increase. If a bona fide hedger
seeks an exemption for anticipated commercial production or
anticipatory commercial requirements, then the hedger would submit a
404A filing pursuant to proposed Sec. 151.5(c). The 404A filing would
be submitted at least ten days in advance of the date that transactions
and positions would be established that would exceed a position limit.
Further, on an annual basis or whenever a trader's anticipated hedge
requirements exceed the amount of the most recent 404A filing,
[[Page 4766]]
whichever is earlier, the trader would be required to file a
supplemental report updating the information provided in the most
recent 404A filing. Traders hedging commercial activity (or hedging
swaps that in turn hedge commercial activity) that does not involve the
same quantity or commodity as the quantity or commodity associated with
positions in referenced contracts that are used to hedge shall submit
the conversion methodology and information along with the appropriate
404, 404A, or 404S filing. The Commission anticipates that the
compliance cost associated with all of these filings will be
substantial, particularly in the case of the 404S filings, which may
require the collection and storage of information on counterparties
that firms have hitherto not conducted.
The Commission estimates that these bona fide hedging-related
reporting requirements would affect approximately two hundred entities
annually and result in a total burden of approximately $37.6 million
across all of these entities, of 168,000 annual labor hours resulting
in a total of $13.2 million in annual labor costs and $25.4 million in
annualized capital and start-up costs and annual total operating and
maintenance costs. 404 filings proposed reporting regulations would
affect approximately ninety entities annually resulting in a total
burden, across all of these entities, of 108,000 total annual labor
hours and $11.7 million in annualized capital and start-up costs and
annual total operating and maintenance costs. 404A filings proposed
reporting regulations would affect approximately sixty entities
annually resulting in a total burden, across all of these entities, of
6,000 total annual labor hours and $4.2 million in annualized capital
and start-up costs and annual total operating and maintenance costs.
404S filings proposed reporting regulations would affect approximately
forty-five entities annually resulting in a total burden, across all of
these entities, of 54,000 total annual labor hours and $9.5 million in
annualized capital and start-up costs and annual total operating and
maintenance costs.
Proposed Sec. 151.5(e) specifies recordkeeping requirements for
traders who claim bona fide hedge exemptions. These recordkeeping
requirements include ``complete books and records concerning all of
their related cash, futures, and swap positions and transactions and
make such books and records, along with a list of swap
counterparties.'' Proposed Sec. 151.5(g) and (h) provide procedural
documentation requirements for those availing themselves of a bona fide
hedging transaction exemption. These firms would be required to
document a representation and confirmation by at least one party that
the swap counterparty is relying on a bona fide hedge exemption, along
with a confirmation of receipt by the other party to the swap.
Paragraph (h) of Section 151.5 also requires that the written
representation and confirmation be retained by the parties and
available to the Commission upon request. The marginal impact of this
requirement is limited because of its overlap with existing
recordkeeping requirements under Sec. 15.03. The Commission estimates
that bona fide hedging-related proposed recordkeeping regulations would
affect approximately one-hundred and sixty entities resulting in a
total burden, across all of these entities, of 40,000 total annual
labor hours and $10.4 million in annualized capital and start-up costs
and annual total operating and maintenance costs.
Proposed Sec. 151.6 would require those traders with positions
exceeding visibility levels in referenced base and precious metals and
energy commodities to submit additional information about cash market
and derivatives activity in substantially the same commodity. Proposed
Sec. 151.6(b) would require the submission of a 401 filing which would
provide basic position information on the position exceeding the
visibility level. Proposed Sec. 151.6(c) would require additional
information, through a 402S filing, on a trader's uncleared swaps in
substantially the same commodity. Proposed Sec. 151.6(d) would require
the reportable trader to submit information about cash market positions
or anticipated commercial requirements or production in substantially
the same commodity, as described in proposed Sec. 151.5(b) and (c),
through a 404 or 404A filing, respectively. All of the proposed 151.6
reports would be submitted on a monthly basis for as long as a trader
exceeds a visibility level.
The Commission estimates that visibility level-related proposed
reporting regulations will affect approximately one-hundred and forty
entities annually resulting in a total burden, across all of these
entities, of 30,400 annual labor hours resulting in a total of $2.4
million in annual labor costs and $27.3 million in annualized capital
and start-up costs and annual total operating and maintenance costs.
Proposed 401 filing reporting regulations would affect approximately
one-hundred and forty entities annually resulting in a total burden,
across all of these entities, of 168,000 total annual labor hours and
$15.4 million in annualized capital and start-up costs and annual total
operating and maintenance costs. Proposed 402S filing reporting
regulations would affect approximately seventy entities annually
resulting in a total burden, across all of these entities, of 5,600
total annual labor hours and $4.9 million in annualized capital and
start-up costs and annual total operating and maintenance costs.
Proposed visibility level-related 404 filing reporting regulations \54\
would affect approximately sixty entities annually resulting in a total
burden, across all of these entities, of 4,800 total annual labor hours
and $4.2 million in annualized capital and start-up costs and annual
total operating and maintenance costs. Proposed visibility level-
related 404A filing reporting regulations would affect approximately
forty entities annually resulting in a total burden, across all of
these entities, of 3,200 total annual labor hours and $2.8 million in
annualized capital and start-up costs and annual total operating and
maintenance costs.
---------------------------------------------------------------------------
\54\ For the visibility level-related 404 and 404A filing
requirements, the estimated burden is based on reporting duties not
already accounted for in the burden estimate for those submitting
404 or 404A filings pursuant to proposed regulation 151.5. For many
of these firms, the experience and infrastructure developed
submitting or preparing to submit a 404 or 404A filing under
proposed regulation 151.5 would reduce the marginal burden imposed
by having to submit filings under proposed regulation 151.6.
---------------------------------------------------------------------------
Proposed Sec. 151.7 concerns the aggregation of trader accounts.
Proposed Sec. 151.7(g) would provide for a disaggregation exemption
for: (1) A limited partner, shareholder or similar person with an
ownership or equity interest of between 10 percent and 25 percent in a
pool, if the trader does not have control over or knowledge of a pool's
trading; (2) futures commission merchants that meet certain independent
trading requirements; and (3) an independently controlled and managed
trader, that is not a financial entity, in which another entity has an
ownership or equity interest of 10 percent or greater. In all three
cases, the exemption would become effective upon the Commission's
approval of an application described in proposed Sec. 151.7(g). These
applications for exemptions would be submitted at the time a trader
claims an exemption and within thirty calendar days of January 1 of
each year following the initial application for exemption. The
Commission estimates that these proposed reporting regulations will
affect approximately sixty entities resulting in a total burden, across
all of these entities, of 300,000 annual labor
[[Page 4767]]
hours and $9.9 million in annualized capital and start-up costs and
annual total operating and maintenance costs.
3. Comments on Information Collection
The Commission invites the public and other federal agencies to
comment on any aspect of the reporting and recordkeeping burdens
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission
solicits comments in order to: (1) Evaluate whether the proposed
collections of information are necessary for the proper performance of
the functions of the Commission, including whether the information will
have practical utility; (2) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collections of information; (3)
determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected; and (4) minimize the burden
of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at [email protected]. Please provide the Commission with a copy of
comments submitted so that all comments can be summarized and addressed
in the final regulation preamble. Refer to the Addresses section of
this notice for comment submission instructions to the Commission. A
copy of the supporting statements for the collection of information
discussed above may be obtained by visiting RegInfo.gov. OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication of this release. Consequently,
a comment to OMB is most assured of being fully considered if received
by OMB (and the Commission) within 30 days after the publication of
this notice of proposed rulemaking.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 150
Commodity futures, Cotton, Grains.
17 CFR Part 151
Position limits, Bona fide hedging, Referenced contracts.
In consideration of the foregoing, pursuant to the authority
contained in the Commodity Exchange Act, the Commission hereby proposes
to amend chapter I of title 17 of the Code of Federal Regulations as
follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by Title VII of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.
111-203, 124 Stat. 1376 (2010).
2. Amend Sec. 1.3(z) as follows:
a. Amend the heading in paragraph (z) by adding ``for excluded
commodities'' after the phrase ``positions.''
b. Amend paragraph (z)(1) introductory text by removing the phrase
``transactions or positions in a contract for future delivery on any
contract market, or in a commodity option'' after the phrase ``Bona
fide hedging transactions or positions shall mean,'' and by adding, in
its place, the phrase ``any agreement, contract or transaction in an
excluded commodity on a registered entity, as that term is defined in
Section 1a(40) of the Act.''
c. Amend paragraph (z)(1) concluding text by removing ``and
Sec. Sec. 1.47 and 1.48 of the regulations.''
d. Amend paragraph (z)(2)(i) by removing the phrase ``commodity for
future delivery on a contract market'' after ``Sales of any'' and by
adding, in its place, the phrase ``agreement, contract or transaction
in a excluded commodity on a registered entity.''
e. Amend paragraph (z)(2)(i)(B) by removing the phrase ``future
during the five last trading days of that future'' and by adding, in
its place, the phrase ``agreement, contract or transaction during the
five last trading days.''
f. Amend paragraph (z)(2)(ii) by removing the phrase ``commodity
for future delivery on a contract market'' after ``Purchases of any''
and by adding, in its place, the phrase ``agreement, contract or
transaction in a excluded commodity on a registered entity.''
g. Amend paragraph (z)(2)(ii)(C) by removing the phrase ``one
future'' and by adding, in its place, the phrase ``agreement, contract
or transaction.''
h. Amend paragraph (z)(2)(iii) by removing the phrase ``for future
delivery on a contract market'' after ``Offsetting sales and
purchases'' and by adding, in its place, the phrase ``in any agreement,
contract or transaction in a excluded commodity on a registered
entity.''
i. Amend paragraph (z)(2)(iii) by removing the phrase ``future
during the five last trading days of that future'' and by adding, in
its place, the phrase ``agreement, contract or transaction during the
five last trading days.''
j. Redesignate paragraph (z)(2)(iv) as paragraph (z)(2)(v).
k. Amend newly redesignated paragraph (z)(2)(v) by removing the
phrase ``for future delivery described in paragraphs (z)(2)(i),
(z)(2)(ii) and (z)(2)(iii)'' and by adding, in its place, the phrase
``described in paragraphs (z)(2)(i), (z)(2)(ii), (z)(2)(iii) and
(z)(2)(iv).''
l. Amend newly redesignated paragraph (z)(2)(v) by removing the
phrase ``for future delivery'' after the phrase ``fluctuations in value
of the position'' and by adding, in its place, the phrase ``in any
agreement, contract or transaction.''
m. Amend newly redesignated paragraph (z)(2)(v) by removing the
phrase ``positions in any one future shall not be maintained during the
five last trading days of that future'' and by adding, in its place,
the phrase ``positions in any agreement, contract or transaction shall
not be maintained during the five last trading days.''
n. Add new paragraph (z)(2)(iv) and revise paragraph (z)(3) to read
as follows:
Sec. 1.3 Definitions.
* * * * *
(z) * * *
(2) * * *
(iv) Purchases or sales by an agent who does not own or has not
contracted to sell or purchase the offsetting cash commodity at a fixed
price, provided that the person is responsible for the merchandising of
the cash positions which is being offset and the agent has a
contractual arrangement with the person who owns the commodity or holds
the cash market commitment being offset.
* * * * *
(z)(3) Non-Enumerated cases. A registered entity may recognize,
consistent with the purposes of this section, transactions and
positions other than those enumerated in paragraph (2) of this section
as bona fide hedging. Prior to recognizing such non-enumerated
transactions and positions, the registered entity shall submit such
rules for Commission review under section 5c of the Act and Sec. 40 of
this chapter.
* * * * *
Sec. 1.47 [Removed and Reserved]
3. Remove and reserve Sec. 1.47.
Sec. 1.48 [Removed and Reserved]
4. Remove and reserve Sec. 1.48.
[[Page 4768]]
PART 150--[REMOVED AND RESERVED]
5. Remove and reserve part 150.
6. Add part 151 to read as follows:
PART 151--LIMITS ON POSITIONS
Sec.
151.1 Definitions.
151.2 Core referenced futures contracts.
151.3 Referenced contract spot months.
151.4 Position limits for referenced contracts.
151.5 Exemptions for referenced contracts.
151.6 Position visibility.
151.7 Aggregation of positions.
151.8 Foreign boards of trade.
151.9 Preexisting positions.
151.10 Form and manner of reporting and submitting information or
filings.
151.11 Registered entity position limits.
151.12 Delegation of authority to the Director of the Division of
Market Oversight.
Appendix A to Part 151
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 6g, 6t, 12a, 19, as
amended by Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
Sec. 151.1 Definitions.
As used in this part--
Basis contract means an agreement, contract or transaction that is
cash settled based on the difference in price of the same commodity (or
substantially the same commodity) at different delivery points;
Calendar spread contract means a cash settled agreement, contract
or transaction that represents the difference between the settlement
price in one or a series of contract months of an agreement, contract
or transaction and another contract month's or another series of
contract months' settlement price for the same agreement, contract or
transaction.
Contracts of the same class mean referenced contracts based on the
same commodity that are:
(1) Futures or option contracts executed pursuant to the rules of a
designated contract market; or
(2) Cleared or uncleared swaps.
Commodity index contract means an agreement, contract or
transaction that is not a basis or spread contract, based on an index
comprised of prices of commodities that are not the same nor
substantially the same, provided that, a commodity index contract that
incorporates the price of a commodity underlying a referenced
contract's commodity which is used to circumvent speculative position
limits shall be considered to be a referenced contract for the purpose
of applying the position limits of Sec. 151.4.
Core referenced futures contract means a futures contract that is
listed in Sec. 151.2.
Entity means a ``person'' as defined in section 1a of the Act.
Excluded commodity means an ``excluded commodity'' as defined in
section 1a of the Act.
Financial entity means any entity that, regardless of any asset or
capital threshold or any other condition in section 1a(18) of the Act,
is an entity identified in section 1a(18)(A)(i) through (iv), (vi),
(viii) through (x) and (B)(ii) of the Act.
Futures contract class means referenced contracts that are based on
the same commodity and are futures and option contracts executed
pursuant to the rules of a designated contract market.
Intercommodity spread contract means a cash-settled agreement,
contract or transaction that represents the difference between the
settlement price of a referenced contract and the settlement price of
another contract, agreement, or transaction that is based on a
different commodity.
Owned non-financial entity means any entity that is not a financial
entity and in which another entity directly or indirectly has a 10
percent or greater ownership or equity interest.
Referenced contract means, on a futures equivalent basis with
respect to a particular core referenced futures contract, a futures
listed in Sec. 151.2, or a referenced paired futures contract, option
contract, swap or swaption, other than a basis contract or contract on
a commodity index.
Referenced paired futures contract, option contract, swap or
swaption means, respectively, an open futures contract, option
contract, swap or swaption that is:
(1) Directly or indirectly linked, including being partially or
fully settled on, or priced at a differential to, the price of any core
referenced futures contract; or
(2) Directly or indirectly linked, including being partially or
fully settled on, or priced at a differential to, the price of the same
commodity for delivery at the same location, or at locations with
substantially the same supply and demand fundamentals, as that of any
core referenced futures contract.
Spot month means, for referenced contracts based on a commodity
identified in Sec. 151.3, the spot month corresponding to the spot
month of the core futures contract that overlies the same commodity.
Spot-month, single-month, and all-months-combined position limits
mean, for referenced contracts based on a commodity identified in Sec.
151.3, the position limit corresponding to the position limit of the
core futures contract that overlies the same commodity.
Spread contract means either a calendar spread contract or an
intercommodity spread contract.
Swap means ``swap'' as defined in section 1a of the Act and as
further defined by the Commission.
Swap contract class means referenced contracts that are based on
the same commodity and are swaps.
Swaption means an option to enter into a swap or a physical
commodity option.
Swap dealer means ``swap dealer'' as that term is defined in
section 1a of the Act and as further defined by the Commission.
Trader means a person that, for its own account or for an account
that it controls, makes transactions in referenced contracts or has
such transactions made.
Sec. 151.2 Core referenced futures contracts.
(a) Agricultural commodities. The core referenced futures contracts
include:
(1) ICE Futures U.S. Cocoa (CC) contract based on a trading unit of
10 metric tons delivered at licensed warehouses in the Port of New York
District, Delaware River Port District, Port of Hampton Roads, Port of
Albany, or Port of Baltimore;
(2) ICE Futures U.S. Coffee C (KC) contract based on a trading unit
of 37,500 pounds delivered at the Port of New York District, the Port
of New Orleans, the Port of Houston, the Port of Bremen/Hamburg, the
Port of Antwerp, the Port of Miami, or the Port of Barcelona;
(3) Chicago Board of Trade Corn (C) contract based on a trading
unit of 5,000 bushels delivered at Chicago and Burns Harbor, Indiana
Switching District, Lockport-Seneca Shipping District, Ottawa-
Chillicothe Shipping District, or Peoria-Pekin Shipping District;
(4) ICE Futures U.S. Cotton No. 2 (CT) contract based on a trading
unit of 50,000 pounds net weight delivered at Galveston, Texas;
Houston, Texas; New Orleans, Louisiana; Memphis, Tennessee, or
Greenville/Spartanburg, South Carolina;
(5) Chicago Mercantile Exchange Feeder Cattle (FC) contract based
on a trading unit of 50,000 pounds priced based on the CME Feeder
Cattle Index or any other contract based on a sample of feeder cattle
sales transactions in Colorado, Iowa, Kansas, Missouri, Montana,
Nebraska, New Mexico, North
[[Page 4769]]
Dakota, Oklahoma, South Dakota, Texas, and Wyoming;
(6) ICE Futures U.S. FCOJ-A (OJ) contract based on a trading unit
of 15,000 pounds delivered at licensed warehouses in Florida, New
Jersey, and Delaware;
(7) Chicago Mercantile Exchange Lean Hog (LH) contract based on a
trading unit of 40,000 pounds priced based on the CME Lean Hog Index;
(8) Chicago Mercantile Exchange Live Cattle (LC) contract based on
a trading unit of 40,000 pounds delivered at livestock yards in Wray,
Colorado, Worthing, South Dakota; Syracuse, Kansas; Tulia, Texas;
Columbus, Nebraska; Dodge City, Kansas; Amarillo, Texas; Norfolk,
Nebraska; North Platte, Nebraska; Ogallala, Nebraska; Pratt, Kansas;
Texhoma, Oklahoma; or Clovis, New Mexico;
(9) Chicago Mercantile Exchange Class III Milk (DA) contract based
on a trading unit of 200,000 pounds priced based on the USDA Class III
price for milk;
(10) Chicago Board of Trade Oats (O) contract based on a trading
unit of 5,000 bushels delivered at Chicago Switching District, the
Burns Harbor, Indiana Switching District, Minneapolis, St. Paul,
Minnesota Switching Districts, Duluth Minnesota, or Superior,
Wisconsin;
(11) Chicago Board of Trade Rough Rice (RR) contract based on a
trading unit of 200,000 pounds delivered at warehouses in the Arkansas
counties of Craighead, Jackson, Poinsett, Woodruff, Cross, St. Francis,
Lonoke, Prairie, Monroe, Jefferson, Arkansas, or DeSha;
(12) Chicago Board of Trade Soybeans (S) contract based on a
trading unit of 5,000 bushels delivered at Chicago and Burns Harbor,
Indiana Switching District, Lockport-Seneca Shipping District, Ottawa-
Chillicothe Shipping District, Peoria-Pekin Shipping District, Havana-
Grafton Shipping District, or St. Louis-East St. Louis and Alton
Switching Districts;
(13) Chicago Board of Trade Soybean Meal (SM) contract based on a
trading unit of 100 short tons shipped from plants located in the
Central Territory, Northeast Territory, Mid South Territory, Missouri
Territory, Eastern Iowa Territory, or Northern Territory;
(14) Chicago Board of Trade Soybean Oil (BO) contract based on a
trading unit of 60,000 pounds delivered at warehouses located in the
Illinois Territory, Eastern Territory, Eastern Iowa Territory,
Southwest Territory, Western Territory or Northern Territory;
(15) ICE Futures U.S. Sugar No. 11 (SB) contract based on a trading
unit of 112,000 pounds delivered at a port in the country of origin or
in the case of landlocked countries, at a berth or anchorage in the
customary port of export for the countries of Argentina, Australia,
Barbados, Belize, Brazil, Colombia, Costa Rica, Dominican Republic, El
Salvador, Ecuador, Fiji Islands, French Antilles, Guatemala, Honduras,
India, Jamaica, Malawi, Mauritius, Mexico, Mozambique, Nicaragua, Peru,
Republic of the Philippines, South Africa, Swaziland, Taiwan, Thailand,
Trinidad, United States, and Zimbabwe;
(16) ICE Futures U.S. Sugar No. 16 (SF) contract based on a trading
unit of 112,000 pounds delivered at New York, Baltimore, Galveston, New
Orleans, or Savannah;
(17) Chicago Board of Trade Wheat (W) contract based on a trading
unit of 5,000 bushels delivered at Chicago Switching District, the
Burns Harbor, Indiana Switching District, the Northwest Ohio Territory,
on Ohio River, on Mississippi River or the Toledo, Ohio Switching
District, or the St. Louis-East St. Louis and Alton Switching
Districts;
(18) Minneapolis Grain Exchange Hard Red Spring Wheat (MWE)
contract based on a trading unit of 5,000 bushels delivered at
elevators located in Minneapolis/St. Paul, Red Wing, Duluth/Superior,
Minnesota;
(19) Kansas City Board of Trade Hard Winter Wheat (KW) contract
based on a trading unit of 5,000 bushels delivered at elevators in
Kansas City, Missouri/Kansas; Hutchinson, Kansas; Salina/Abilene,
Kansas; or Wichita, Kansas.
(b) Metals. The core referenced futures contracts include:
(1) Commodity Exchange, Inc. Gold (GC) contract based on a trading
unit of 100 troy ounces delivered at Exchange-licensed warehouses;
(2) Commodity Exchange, Inc. Silver (SI) contract based on a
trading unit of 5,000 troy ounces delivered at Exchange-licensed
warehouses;
(3) Commodity Exchange, Inc. Copper (HG) contract based on a
trading unit of 25,000 pounds delivered at licensed warehouses;
(4) New York Mercantile Exchange Palladium (PA) contract based on a
trading unit of 100 troy ounces delivered at licensed warehouses; and
(5) New York Mercantile Exchange Platinum (PL) contract based on a
trading unit of 50 troy ounces pounds delivered at licensed warehouses.
(c) Energy commodities. The core referenced futures contracts
include:
(1) New York Mercantile Exchange Light Sweet Crude Oil (CL)
contract based on a trading unit of 1,000 U.S. barrels (42,000 gallons)
delivered at the Cushing crude oil storage complex in Cushing,
Oklahoma;
(2) New York Mercantile Exchange New York Harbor No. 2 Heating Oil
(HO) contract based on a trading unit of 1,000 U.S. barrels (42,000
gallons) delivered at an ex-shore facility in New York Harbor;
(3) New York Mercantile Exchange New York Harbor Gasoline
Blendstock (RB) contract based on a trading unit of 1,000 U.S. barrels
(42,000 gallons) delivered at an ex-shore facility in New York Harbor;
and
(4) New York Mercantile Exchange Henry Hub Natural Gas (NG)
contract based on a trading unit of 10,000 million British thermal
units (mmBtu) delivered at the Henry Hub pipeline interchange in Erath,
Louisiana.
Sec. 151.3 Referenced contract spot months.
(a) Agricultural commodities. For referenced contracts based on
agricultural commodities, the spot month shall be the period of time
commencing:
(1) At the close of business on the business day prior to the first
notice day for any delivery month and terminating at the end of the
delivery month for the following contracts:
(i) ICE Futures U.S. Cocoa (CC) contract;
(ii) ICE Futures U.S. Coffee C (KC) contract;
(iii) ICE Futures U.S. Cotton No. 2 (CT) contract;
(iv) ICE Futures U.S. FCOJ-A (OJ) contract;
(2) At the close of business three business days prior to the first
trading day in the delivery month and terminating at the end of the
delivery month for the following contracts:
(i) Chicago Board of Trade Corn (C) contract;
(ii) Chicago Board of Trade Oats (O) contract;
(iii) Chicago Board of Trade Rough Rice (RR) contract;
(iv) Chicago Board of Trade Soybeans (S) contract;
(v) Chicago Board of Trade Soybean Meal (SM) contract;
(vi) Chicago Board of Trade Soybean Oil (BO) contract;
(vii) Chicago Board of Trade Wheat (W) contract;
(viii) Minneapolis Grain Exchange Hard Red Spring Wheat (MW)
contract;
(ix) Kansas City Board of Trade Hard Winter Wheat (KW) contract;
(3) At the close of business two business days after the fifteenth
calendar day of the contract month or the first business day after the
fifteenth should the fifteenth day be a non-business day and
terminating at the end
[[Page 4770]]
of the delivery month for the following contracts:
(i) ICE Futures U.S. Sugar No. 11 (SB) contract;
(ii) ICE Futures U.S. Sugar No. 16 (SF) contract;
(4) At the close of business on the business day immediately
preceding the last five business days of the contract month and
terminating at the end of the delivery month for the Chicago Mercantile
Exchange Live Cattle (LC) contract;
(5) At the close of business on the eleventh day prior to the last
trading day and terminating on the last day of trading for the contract
month for the following contracts:
(i) Chicago Mercantile Exchange Feeder Cattle (FC) contract;
(ii) Chicago Mercantile Exchange Class III Milk (DA) contract;
(6) At the period commencing at the close of business on the fifth
day prior to the last trading day and terminating at the end of the
delivery month for the Chicago Mercantile Exchange Lean Hog (LH)
contract.
(b) Metals. The spot month shall be the period of time commencing
at the close of business on the business day prior to the first notice
day for any delivery month and terminating at the end of the delivery
month for the following contracts:
(1) Commodity Exchange, Inc. Gold (GC) contract; and
(2) Commodity Exchange, Inc. Silver (SI) contract.
(3) Commodity Exchange, Inc. Copper (HG) contract;
(4) New York Mercantile Exchange Palladium (PA) contract; and
(5) New York Mercantile Exchange Platinum (PL) contract.
(c) Energy commodities. The spot month shall be the period of time
commencing at the close of business three business days prior to the
last day of trading in the underlying referenced futures contract and
terminating at the end of the delivery period for the following
contracts:
(1) New York Mercantile Exchange Light Sweet Crude Oil (CL)
contract;
(2) New York Mercantile Exchange New York Harbor No. 2 Heating Oil
(HO) contract;
(3) New York Mercantile Exchange New York Harbor Gasoline
Blendstock (RB) contract; and
(4) New York Mercantile Exchange Henry Hub Natural Gas (NG)
contract.
Sec. 151.4 Position limits for referenced contracts.
(a) Spot-month position limits. Except as provided in paragraph (h)
of this section for initial spot-month position limits, or as otherwise
authorized by Sec. 151.5, no trader may hold or control positions,
separately or in combination, net long or net short, in referenced
contracts in the same commodity when such positions are in excess of:
(1) For physical delivery referenced contracts, a spot-month
position limit that shall be one-quarter of the estimated spot-month
deliverable supply for a core referenced futures contract in the same
commodity as fixed by the Commission pursuant to paragraph (c) of this
section; or
(2) For cash-settled referenced contracts, a spot-month position
limit, equal to the level fixed by paragraph (a)(1) of this section, or
a conditional-spot-month position limit, that is five times the spot-
month position limit fixed by paragraph (a)(1) of this section,
provided that the trader:
(i) For cash-settled contracts in the spot month, shall not hold or
control positions exceeding the level of any single month position
limit;
(ii) Does not hold or control positions in the physical delivery
referenced contract based on the same commodity that is in such
contract's spot month;
(iii) Does not hold or control cash or forward positions in the
referenced contract's spot month in an amount that is greater than one-
quarter of the deliverable supply in the referenced contract's
underlying commodity deliverable at the location or locations specified
in the core referenced futures contract in the same commodity; and
(iv) Has submitted a certification to the Commission, in the form
and manner provided for in Sec. 151.10, that the trader meets the
conditions of paragraphs (a)(2)(ii) and (iii) of this section.
(b) Limited application of spot-month position limits. Spot-month
position limits shall only apply to positions in physical delivery or
cash settled referenced contracts with delivery locations that match
the delivery locations of a core referenced futures contracts in the
same commodity.
(c) Deliverable supply.
(1) For the purpose of applying the spot-month position limit or
conditional spot-month-position limit in paragraph (a) of this section,
the Commission shall set the levels of deliverable supply in accordance
with the procedure in paragraph (h) of this section.
(2) Each designated contract market shall submit to the Commission
an estimate of deliverable supply by the 31st of December of each
calendar year for each physical delivery referenced contract that is
subject to a spot-month position limit and listed or executed pursuant
to the rules of the designated contract market.
(3) The estimate submitted under paragraph (c)(2) of this section
shall be accompanied by a description of the methodology used to derive
the estimate along with any statistical data supporting the designated
contract market's estimate of deliverable supply.
(4) In fixing spot-month position limits under paragraph (a)(1) of
this section, the Commission shall rely on the estimate provided under
paragraph (c)(2) of this section unless the Commission determines to
rely on its own estimate of deliverable supply.
(d) Non-spot position limits. Except as otherwise authorized in
Sec. 151.5, no person may hold or control positions, separately or in
combination, net long or net short, in referenced contracts in the same
commodity when such positions, in all months combined (including the
spot month) or in a single month, are in excess of:
(1) An all-months-combined aggregate and single-month position
limits, fixed by the Commission at 10 percent of the first 25,000
contracts of average all-months-combined aggregated open interest, as
calculated by the Commission pursuant to paragraph (e) of this section,
with a marginal increase of 2.5 percent thereafter;
(2) A class all-months-combined and single-month position limit,
fixed by the Commission, for referenced contracts that are contracts of
the same class, at a level equal to the all-months-combined aggregate
position limit.
(3) Legacy position limits. Except as otherwise authorized by Sec.
151.5, no trader may hold or control positions, separately or in
combination, net long or net short, in referenced contracts in the same
commodity for the commodities enumerated below, when such positions, in
all-months-combined or in a single-month, are in excess of the
following position limits:
------------------------------------------------------------------------
Position
Referenced contract limits
------------------------------------------------------------------------
Chicago Board of Trade Corn (C) contract................ 22,000
Chicago Board of Trade Oats (O) contract................ 2,000
Chicago Board of Trade Soybeans (S) contract............ 10,000
Chicago Board of Trade Wheat (W) contract............... 6,500
Chicago Board of Trade Soybean Oil (BO) contract........ 6,500
Chicago Board of Trade Soybean Meal (SM) contract....... 6,500
Minneapolis Grain Exchange Hard Red Spring Wheat (MW) 6,500
contract...............................................
ICE Futures U.S. Cotton No. 2 (CT) contract............. 5,000
[[Page 4771]]
Kansas City Board of Trade Hard Winter Wheat (KW) 6,500
contract...............................................
------------------------------------------------------------------------
(e) Aggregated open interest calculations. For the purpose of
determining the speculative position limits in paragraph (d) of this
section and in accordance with the procedure in paragraph (h) the
Commission shall determine:
(1) For determining aggregate and class all-month-combined and
single-month position limits under paragraph (d) of this section, the
average all-months-combined aggregate open interest, is the sum for a
calendar year of values obtained under paragraphs (e)(2) and (e)(3) of
this section, then divided by 12, for the twelve months prior to the
effective date.
(2) The all-months futures open interest is, at month end, the sum
of all of a referenced contract's all-months-combined open futures and
option contract (on a delta adjusted basis) open interests across all
designated contract markets;
(3) The all-months swaps open interest, at month end, the sum of
all of a referenced contract's all-months-combined open swaps and
swaptions open interest, combining, open interest attributed to cleared
and uncleared swaps and swaptions, where the uncleared all-months-
combined swap open interest shall be the absolute sum of all swap
dealers' net uncleared open swaps and swaptions exposures by
counterparty and by single referenced contract month.
(f) Netting of positions. (1) For referenced contracts in the spot
month, a trader's positions in physical delivery and cash-settled
contracts are calculated separately and traders can have up to the
spot-month position limit in both the physically delivered and cash
settled contracts unless the cash settled contract positions are held
pursuant to the conditional-spot-month position limit.
(2) For the purpose of applying non-spot-month position limits, a
trader's position shall be combined and the net resulting position
shall be applied towards determining the trader's aggregate single-
month and all-months-combined position.
(3) For the purpose of applying non-spot-month class limits, a
trader's position in contracts of the same class shall be combined and
the net resulting position shall be applied towards determining the
trader's class single-month and all-months-combined position.
(g) Additional provisions. In determining or calculating all levels
and limits under this section, a resulting number shall be rounded up
to the nearest hundred contracts.
(h) Process for fixing and publishing position limits. (1) With the
exception of initial position limits, the Commission shall fix position
limits under this part by January 31st of each calendar year;
(2) The initial spot-month position limits for referenced contracts
shall be as provided in Appendix A to this part.
(3) The initial spot-month, single-month and all-months-combined
position limits must be made effective pursuant to a Commission order
and may be made on any date.
(4) The Commission shall publish position limits on the
Commission's Web site at http://www.cftc.gov prior to making such
limits effective, and such limits, other than initial limits, shall
become effective on the 1st day of March immediately following the
fixing date and shall remain effective up until and including the last
day of the immediately following February.
Sec. 151.5 Exemptions for referenced contracts.
(a) Bona fide hedging transactions or positions.
(1) Any trader that complies with the requirements of this section
may exceed the position limits set forth in Sec. 151.4 to the extent
that a transaction or position in a referenced contract:
(i) Represents a substitute for transactions made or to be made or
positions taken or to be taken at a later time in a physical marketing
channel;
(ii) Is economically appropriate to the reduction of risks in the
conduct and management of a commercial enterprise; and
(iii) Arises from the potential change in the value of--
(A) Assets that a person owns, produces, manufactures, processes,
or merchandises or anticipates owning, producing, manufacturing,
processing, or merchandising;
(B) Liabilities that a person owns or anticipates incurring; or
(C) Services that a person provides or purchases, or anticipates
providing or purchasing; or
(iv) Reduces risks attendant to a position resulting from a swap
that--
(A) Was executed opposite a counterparty for which the transaction
would qualify as a bona fide hedging transaction pursuant to paragraph
(a)(1)(i) through (a)(1)(iii) of this section; or
(B) Meets the requirements of paragraphs (a)(1)(i) through
(a)(1)(iii) of this section. Notwithstanding the foregoing, no
transactions or positions shall be classified as bona fide hedging for
purposes of Sec. 151.4 unless such transactions or positions are
established and liquidated in an orderly manner in accordance with
sound commercial practices and the provisions of paragraph (a)(2) of
this section have been satisfied.
(2) Enumerated Hedging Transactions. The definition of bona fide
hedging transactions and positions in paragraph (a)(1) of this section
includes the following specific transactions and positions:
(i) Sales of any commodity underlying referenced contracts which do
not exceed in quantity:
(A) Ownership or fixed-price purchase of the contract's underlying
cash commodity by the same person; or
(B) Unsold anticipated production of the same commodity, which may
not exceed one year for referenced agricultural contracts, by the same
person provided that no such position is maintained in any referenced
contract during the five last trading days of that referenced contract.
(ii) Purchases of referenced contracts which do not exceed in
quantity:
(A) The fixed-price sale of the contract's underlying cash
commodity by the same person;
(B) The quantity equivalent of fixed-price sales of the cash
products and by-products of such commodity by the same person; or
(C) Unfilled anticipated requirements of the same cash commodity,
which may not exceed one year for referenced agricultural contracts,
for processing, manufacturing, or feeding by the same person, provided
that such transactions and positions in the five last trading days of
any referenced contract do not exceed the person's unfilled anticipated
requirements of the same cash commodity for that month and the next
succeeding month.
(iii) Offsetting sales and purchases in referenced contracts which
do not exceed in quantity that amount of the same cash commodity which
has been bought and sold by the same person at unfixed prices basis
different delivery months of the referenced contract, provided that no
such position is maintained during the five last trading days of any
referenced contract.
(iv) Purchases or sales by an agent who does not own or has not
contracted to sell or purchase the offsetting cash commodity at a fixed
price, provided that the person is responsible for the merchandising of
the cash positions which is being offset and the agent has a
contractual arrangement with the person who owns the commodity or
[[Page 4772]]
holds the cash market commitment being offset.
(v) Sales and purchases in referenced contracts described in
paragraphs (a)(2)(i), (a)(2)(ii), (a)(2)(iii), and (a)(2)(iv) of this
section may also be offset other than by the same quantity of the same
cash commodity, provided that the fluctuations in value of the position
in referenced contracts are substantially related to the fluctuations
in value of the actual or anticipated cash position, and provided that
the positions shall not be maintained during the five last trading days
of any referenced contract.
(b) Information on cash market commodity activities. Any trader
with a position that exceeds the position limits set forth in Sec.
151.4 pursuant to paragraph (a) of this section shall submit to the
Commission a 404 filing, in the form and manner provided for in Sec.
151.10, containing the following information with respect to such
position:
(1) The cash market commodity hedged, the units in which it is
measured, and the corresponding referenced contract that is used for
hedging the cash market commodity;
(2) The number of referenced contracts used for hedging;
(3) The entire quantity of stocks owned of the cash market
commodity that is being hedged by a position in a referenced contract;
(4) The entire quantity of open fixed price purchase commitments in
the hedged commodity outside of the spot month of the corresponding
referenced contract;
(5) The entire quantity of open fixed price purchase commitments in
the hedged commodity in the spot month of the corresponding referenced
contract;
(6) The entire quantity of open fixed price sale commitments in the
hedged commodity outside of the spot month of the corresponding
referenced contract; and
(7) The entire quantity of open fixed price sale commitments in the
hedged commodity in the spot month of the corresponding referenced
contract.
(c) Anticipatory hedge exemptions. (1) Initial statement. Any
trader who wishes to exceed the position limits set forth in Sec.
151.4 pursuant to paragraph (a) of this section in order to hedge
unsold anticipated commercial production or unfilled anticipated
commercial requirements connected to a commodity underlying a
referenced contract, shall submit to the Commission a 404A filing at
least ten days in advance of the date that such transactions or
positions would be in excess of the position limits set forth in Sec.
151.4. The 404A filing shall be made in the form and manner provided in
Sec. 151.10 and shall contain the following information with respect
to such position:
(i) The cash market commodity and units for which the anticipated
production or requirements pertain;
(ii) The dates for the beginning and end of the period for which
the person claims the anticipatory hedge exemption is required, which
may not exceed one year;
(iii) The production or requirement of that cash market commodity
for the three complete fiscal years preceding the current fiscal year;
(iv) The anticipated production or requirements for the period
hedged, which may not exceed one year;
(v) The unsold anticipated production or unfilled anticipated
requirements across the period hedged, which may not exceed one year;
(vi) The referenced contract that the trader will use to hedge the
unfilled, anticipated production or requirements; and
(vii) The number of referenced contracts that will be used for
hedging.
(2) Approval. All or a specified portion of the unsold anticipated
production or unfilled anticipated requirements described in these
filings shall not be considered as offsetting positions for bona fide
hedging transactions or positions if such person is so notified by the
Commission within ten days after the Commission is furnished with the
information required under this paragraph (c).
(i) The Commission may request the person so notified to file
specific additional information with the Commission to support a
determination that the statement filed accurately reflects unsold
anticipated production or unfilled anticipated requirements.
(ii) The Commission shall consider all additional information filed
and, by notice to such person, shall specify its determination as to
what portion of the production or requirements described constitutes
unsold anticipated production or unfilled anticipated requirements for
the purposes of bona fide hedging.
(3) Supplemental reports. Whenever the sales or purchases which a
person wishes to consider as bona fide hedging of unsold anticipated
production or unfilled anticipated requirements shall exceed the
amounts in the most recent filing or the amounts determined by the
Commission to constitute unsold anticipated production or unfilled
anticipated requirements pursuant to paragraph (c)(2) of this section,
such person shall file with the Commission a statement which updates
the information provided in the person's most recent filing, and for
instances anticipated needs exceed the amounts in the most recent
filing, at least ten days in advance of the date that person wishes to
exceed these amounts.
(d) Additional information from swap counterparties to bona fide
hedging transactions. All persons that enter into swap transactions or
maintain swap positions pursuant to paragraph (a)(1)(iv) of this
section shall also submit to the Commission a 404S filing not later
than 9:00 a.m. on the business day following that to which the
information pertains. The 404S filing shall be done in the form and
manner provided for in Sec. 151.10 and shall contain the following
information:
(1) The commodity reference price for the swaps that would qualify
as a bona fide hedging transaction or position;
(2) The entire gross long and gross short quantity underlying the
swaps that were executed in a transaction that would qualify as a bona
fide hedging transaction, and the units in which the quantity is
measured;
(3) The referenced contract that is used to offset the exposure
obtained from the bona fide hedging transaction or position of the
counterparty;
(4) The gross long or gross short size of the position used to
offset the exposure obtained from a bona fide hedging transaction or
position of the counterparty;
(5) The gross long or gross short size of the position used to
offset the exposure obtained from a bona fide hedging swap transaction
or position that is in the spot month.
(e) Recordkeeping. Traders who qualify for bona fide hedge
exemptions for cash market positions, anticipatory hedging, and swaps
opposite counterparties that would qualify as bona fide hedging
transactions or positions shall maintain complete books and records
concerning all of their related cash, futures, and swap positions and
transactions and make such books and records, along with a list of swap
counterparties, available to the Commission upon request.
(f) Conversion methodology for swaps not involving the same
commodity. In addition to the information required under this section,
traders engaged in the hedging of commercial activity or positions
resulting from swaps that are used for the hedging of commercial
activity that does not involve the same quantity or commodity as the
quantity or commodity associated with positions in referenced contracts
that are used to hedge shall submit to the Commission a 404, 404A, or
404S filing, as
[[Page 4773]]
appropriate, containing the following information:
(1) Conversion information both in terms of the actual quantity and
commodity used in the trader's normal course of business and in terms
of the referenced contracts that are sold or purchased; and
(2) An explanation of the methodology used for determining the
ratio of conversion between the actual or anticipated cash positions
and the trader's positions in referenced contracts.
(g) Requirements for bona fide hedging swap counterparties. Upon
entering into a swap transaction where at least one party is relying on
a bona fide hedge exemption to exceed the position limits of Sec.
151.4 with respect to such a swap:
(1) The party not hedging a cash market commodity risk, or both
parties to the swap if both parties are hedging a cash market commodity
risk, shall:
(i) Ask for a written representation from its counterparty
verifying that the swap qualifies as a bona fide hedging transaction
under paragraph (a)(1)(iv) of this section; and
(ii) Upon receipt of such written representation from the
counterparty, provide written confirmation of such receipt to the
counterparty.
(2) The party relying on the bona fide hedging exemption to enter
into the swap transaction shall submit a written representation to its
counterparty verifying that the swap qualifies as a bona fide hedging
transaction, as defined in paragraph (a)(1)(iv) of this section.
(h) The written representation and receipt confirmation described
in paragraph (g) of this section shall be retained by the parties to
the swap and provided to the Commission upon request.
(i) Filing requirement for bona fide hedgers. Any party with cash
market commodity risk relying on a bona fide hedging exemption to enter
into and maintain a referenced contract position shall submit to the
Commission a 404S filing, in the form and manner provided for in Sec.
151.10, containing the information in paragraphs (b) and (c) of this
section, for each business day on which such position was maintained,
up to and including the day after the trader's position level is below
the position limit that was exceeded.
(j) Positions that are maintained. For a swap that satisfies the
requirements of paragraph (a) of this section, the party to whom the
cash market commodity risk is transferred may itself establish, lift
and re-establish a position in excess of the position limits of Sec.
151.4 provided that:
(1) The party and its counterparty comply with the requirements of
paragraphs (g) through (i) of this section; and
(2) The party may only exceed such position limit to the extent and
in such amounts that the qualifying swap directly offsets, and
continues to offset, the cash market commodity risk of a bona fide
hedging counterparty.
Sec. 151.6 Position visibility.
(a) Visibility levels. A trader holding or controlling, separately
or in combination, net long or net short, referenced contracts in the
following commodities when such positions in all months or in any
single month (including the spot month) are in excess of the following
position levels, shall comply with the reporting requirements of
paragraphs (b) through (d) of this section:
Visibility Levels for Referenced Metals Contracts
------------------------------------------------------------------------
------------------------------------------------------------------------
New York Mercantile Exchange Copper (HG)..................... 4,200
New York Mercantile Exchange Palladium (PA).................. 900
New York Mercantile Exchange Platinum (PL)................... 1,400
New York Mercantile Exchange Gold (GC)....................... 10,700
New York Mercantile Exchange Silver (SI)..................... 4,500
------------------------------------------------------------------------
Visibility Levels for Referenced Energy Contracts
------------------------------------------------------------------------
------------------------------------------------------------------------
New York Mercantile Exchange Light Sweet Crude Oil (CL)...... 22,500
New York Mercantile Exchange New York Harbor Gasoline 7,800
Blendstock (RB).............................................
New York Mercantile Exchange Henry Hub Natural Gas (NG)...... 21,000
New York Mercantile Exchange New York Harbor No. 2 Heating 9,900
Oil (HO)....................................................
------------------------------------------------------------------------
(b) Statement of trader exceeding visibility level. Upon acquiring
a position in referenced contracts in the same commodity that reaches
or exceeds a visibility level, a trader shall submit to the Commission
a 401 filing for the position in a referenced contract, separately by
futures, options, swaps, or swaptions that comprise the position in the
form and manner provided for in Sec. 151.10, and shall containing the
following information:
(1) The date on which the trader's position initially reached or
exceeded the visibility level;
(2) Gross long and gross short positions on an all-months-combined
basis (using economically reasonable and analytically supported
deltas);
(3) If the visibility levels are reached or exceeded in any single
month, the contract month and the trader's gross long and short
positions in the relevant single month (using economically reasonable
and analytically supported deltas); and
(4) If applicable, the trader shall also certify that they do not
hold or control positions subject to the filing requirements of
paragraphs (c) and (d) of this section.
(c) Related uncleared swaps position report. Upon acquiring a
position in referenced contracts in the same commodity that reaches or
exceeds a visibility level, a trader shall submit to the Commission a
402S filing for any uncleared swap positions that are based on
substantially the same commodity as that which underlies the referenced
contract. The 402S filing shall be done in the form and manner provided
for in Sec. 151.10 and shall contain the following information for the
date on which the trader's position initially reached or exceeded the
visibility level:
(1) By commodity reference price;
(2) By swaps or swaptions;
(3) By open swap end dates within 30 days, 90 days, one year or
outside of one year from the date on which the trader's position
initially reached or exceeded the visibility level; and
(4) Gross long and gross short positions on a futures equivalent
basis in terms of the referenced contract; or
(5) With the express written permission of the Commission or its
designees, the submission of a swaps portfolio summary statement
spreadsheet in digital format, only insofar as the spreadsheet provides
at least the same data as that required by the 402S filing, may be
substituted for the reporting requirements of the 402S filing.
(d) Any trader above a visibility level that holds or controls cash
market commodity positions or has anticipated commercial requirements
or unsold anticipated commercial production in the same or
substantially the same commodity shall submit to the Commission 404 and
404A filings respectively. Such 404 and 404A filings shall be done in
the form and manner provided for in Sec. 151.10 and shall contain
information regarding such positions as described in Sec. 151.5(b) and
(c). Notwithstanding this requirement, a visible trader may
alternatively, upon written permission by the Commission or its
designees, submit in digital format a physical commodity portfolio
[[Page 4774]]
summary statement spreadsheet, provided that such spreadsheet contains
at least the same data as that required by the 404 or 404A filing.
(e) Reporting obligations imposed by regulations other than those
contained in this section shall supersede the reporting requirements of
paragraphs (b), (c), and (d) of this section but only insofar as other
reporting obligations provide at least the same data and are submitted
to the Commission or its designees at least as often as the reporting
requirements of paragraphs (b), (c), and (d) of this section.
Sec. 151.7 Aggregation of positions.
(a) Positions to be aggregated. The position limits set forth in
Sec. 151.4 shall apply to all positions in accounts for which any
trader by power of attorney or otherwise directly or indirectly holds
positions or controls trading and to positions held by two or more
traders acting pursuant to an expressed or implied agreement or
understanding the same as if the positions were held by, or the trading
of the position were done by, a single individual.
(b) Ownership of accounts generally. For the purpose of applying
the position limits set forth in Sec. 151.4, any trader holding
positions in more than one account, or holding accounts or positions in
which the trader by power of attorney or otherwise directly or
indirectly has a 10 percent or greater ownership or equity interest,
must aggregate all such accounts or positions.
(c) Ownership by limited partners, shareholders or other pool
participants. (1) Except as provided in paragraphs (c)(2) and (c)(3) of
this section, a trader that is a limited partner, shareholder or other
similar type of pool participant with an ownership or equity interest
of 10 percent or greater in a pooled account or positions need not
aggregate such pooled positions or accounts if:
(i) The pool operator has, and enforces, written procedures to
preclude the trader from having knowledge of, gaining access to, or
receiving data about the trading or positions of the pool;
(ii) The trader does not have direct, day-to-day supervisory
authority or control over the pool's trading decisions; and
(iii) The pool operator has complied with the requirements of
paragraph (g) of this section and has received an exemption from
aggregation on behalf of the trader or a class of traders from the
Commission.
(2) A commodity pool operator having ownership or equity interest
of 10 percent or greater in an account or positions as a limited
partner, shareholder or other similar type of pool participant must
aggregate those accounts or positions with all other accounts or
positions owned or controlled by the commodity pool operator.
(3) Each limited partner, shareholder, or other similar type of
pool participant having an ownership or equity interest of 25 percent
or greater in a commodity pool must aggregate the pooled account or
positions with all other accounts or positions owned or controlled by
that trader.
(d) Identical trading. For the purpose of applying the position
limits set forth in Sec. 151.4, any trader that holds or controls the
trading of positions, by power of attorney or otherwise, in more than
one account, or that holds or controls trading of accounts or positions
in multiple pools, with identical trading strategies must aggregate all
such accounts or positions.
(e) Trading control by futures commission merchants. The position
limits set forth in Sec. 151.4 shall be construed to apply to all
positions held by a futures commission merchant or its separately
organized affiliates in a discretionary account, or in an account which
is part of, or participates in, or receives trading advice from a
customer trading program of a futures commission merchant or any of the
officers, partners, or employees of such futures commission merchant or
its separately organized affiliates, unless:
(1) A trader other than the futures commission merchant or the
affiliate directs trading in such an account;
(2) The futures commission merchant or the affiliate maintains only
such minimum control over the trading in such an account as is
necessary to fulfill its duty to supervise diligently trading in the
account;
(3) Each trading decision of the discretionary account or the
customer trading program is determined independently of all trading
decisions in other accounts which the futures commission merchant or
the affiliate holds, has a financial interest of 10 percent or more in,
or controls; and
(4) The futures commission merchant has complied with the
requirements of paragraph (g) of this section and has received an
exemption from aggregation from the Commission.
(f) Owned non-financial entities. An entity need not aggregate its
positions with the positions of one of its owned non-financial
entities, as defined in Sec. 151.1, if it can sufficiently
demonstrate, in an application for exemption submitted under paragraph
(g) of this section, that the owned non-financial entity's trading is
independently controlled and managed, indicia of which include:
(1) The entity and its other affiliates have no knowledge of
trading decisions by the owned non-financial entity, and the owned non-
financial entity has no knowledge of trading decisions by the entity or
any of the entity's other affiliates;
(2) The owned non-financial entity's trading decisions are
controlled by persons employed exclusively by the owned non-financial
entity, who do not in any way share trading control with persons
employed by the entity;
(3) The owned non-financial entity maintains and enforces written
policies and procedures to preclude the entity or any of its affiliates
from having knowledge of, gaining access to, or receiving information
or data about its positions, trades or trading strategies, including
document routing and other procedures or security arrangements; and
(4) The owned non-financial entity maintains a risk management
system that is separate from the risk management system of the entity
and any of its other affiliates.
(5) Any other factors the Commission may consider, in its
discretion, that indicate that the owned non-financial entity's trading
is independently controlled and managed.
(g) Applications for exemption. (1) Entities seeking an exemption
from the position limits established by the Commission pursuant to this
section, shall file an initial application for an exemption providing
as part of the application all information required by the Commission,
including but not limited to information:
(i) Describing the relevant circumstances that warrant
disaggregation;
(ii) Providing an independent assessment report on the operation of
the policies and procedures described in Sec. 151.9(c)(1)(iii) for
pool operators and Sec. 151.9(f)(3) for owned non-financial entities;
(iii) Designating an office and employee(s) of the entity, with
salaries and compensation that are independent of trading profits and
losses, which shall be responsible for the coordination of aggregation
rules and position limit compliance;
(iv) Providing an organizational chart that includes the name, main
business address, main business telephone number, main facsimile number
and main e-mail address of the entity and each of its affiliates;
(v) Providing the names of pertinent employees of the entity
(trading, operations, compliance, risk
[[Page 4775]]
management and legal) and their work locations and contact information;
(vi) Providing a description of all information-sharing systems,
bulletin boards, and common e-mail addresses;
(vii) Providing an explanation of the entity's risk management
system;
(viii) Providing an explanation of how and to whom the trade data
and position information is distributed, including which officers
receive reports and their respective titles; and
(ix) A signature by a representative duly authorized to bind the
entity.
(2) An application shall be submitted within the time specified by
the Commission and in the form and manner provided for in Sec. 151.10.
Sec. 151.8 Foreign boards of trade.
The aggregate position limits in Sec. 151.4 shall apply to a
trader with positions in referenced contracts executed on, or pursuant
to the rules of a foreign board of trade, provided that:
(a) Such referenced contracts settle against the price (including
the daily or final settlement price) of one or more contracts listed
for trading on a registered entity; and
(b) The foreign board of trade makes available such referenced
contracts to its members or other participants located in the United
States through direct access to its electronic trading and order
matching system.
Sec. 151.9 Preexisting positions.
(a) The position limits set forth in Sec. 151.2 of this chapter
may be exceeded to the extent that such positions remain open and were
entered into in good faith prior to the effective date of any rule,
regulation, or order that specifies a position limit under this part.
(b) Swap and swaption positions entered into in good faith prior to
the effective date of any rule, regulation, or order that specifies a
position limit under this part may be netted with post-effective date
swap and swaptions for the purpose of applying any position limit.
(c) Swap and swaption positions entered into in good faith prior to
the effective date of any rule, regulation or order that specifies a
position limit under this part shall not be aggregated with positions
in referenced contracts that were entered into after the effective date
of such a rule, regulation or order.
Sec. 151.10 Form and manner of reporting and submitting information
or filings.
Unless otherwise instructed by the Commission or its designees, any
person submitting reports under this section shall submit the
corresponding required filings and any other information required under
this part to the Commission as follows:
(a) Using the format, coding structure, and electronic data
transmission procedures approved in writing by the Commission; and
(b) Not later than 9 a.m. on the next business day following the
reporting or filing obligation is incurred unless:
(1) A 404A filing is submitted pursuant Sec. 151.5(c), in which
case the filing must be submitted at least ten days in advance of the
date that transactions and positions would be established that would
exceed a position limit set forth in Sec. 151.4;
(2) A 404 or 404S filing is submitted pursuant to Sec. 151.5, in
which case the filing must be submitted the day after a position limit
is exceeded and all days the trader exceeds such levels and the first
day after the trader's position is below the position limit;
(3) The filing is submitted pursuant to Sec. 151.6 and not under
any other part under this title, then the 401, 402S, 404, or 404A
filing, or their respective substitutes as provided for under Sec.
151.6(c)(5) and (d), shall be submitted after the establishment of a
position exceeding a visibility level on the latter of either (i) 9
a.m. five business day after such time or (ii) 9 a.m. the first
business day of the subsequent calendar month. If the filing is
submitted pursuant to Sec. 151.6 and not under any other part under
this title, the filing trader shall be required to submit a 401, 402S,
404, or 404A filing, or their respective substitutes, no more often
than once per calendar month; or
(4) An application for exemption renewal is filed pursuant to Sec.
151.7(g)(1), in which case the filing shall be submitted within 30
calendar days of January 1 of each year following the initial
application for exemption.
Sec. 151.11 Registered entity position limits.
(a) Generally. (1) Registered entities shall adopt, and establish
rules and procedures for monitoring and enforcing spot-month, single-
month, and all-months-combined position limits with respect to
agreements, contracts or transactions executed pursuant to their rules
that are no greater than the position limits specified in Sec. 151.4.
(2) For agreements, contracts or transactions with no Federal
limits, or with respect to levels of open interest to which no Federal
limits apply, registered entities that are trading facilities shall
adopt spot-month, single-month and all-months-combined position limits
based on the methodology in 151.4, provided, however, that a registered
entity may adopt, notwithstanding the methodology in 151.4, single-
month or all-months-combined limit levels of 1,000 contracts for
tangible commodities other than energy products and 5,000 contracts for
energy products and non-tangible commodities, including contracts on
financial products.
(3) Securities futures products. Position limits for securities
futures products are specified in Part 41.
(b) Alternatives. For a contract that is not subject to a Federal
position limit, registered entities may adopt position accountability
rules with respect to any agreement, contract or transaction:
(1) On a major foreign currency, for which there is no legal
impediment to delivery and for which there exists a highly liquid cash
market; or
(2) On an excluded commodity that is an index or measure of
inflation, or other macroeconomic index or measure; or
(3) On an excluded commodity that meets the definition of section
1.13(ii), (iii), or (iv) of the Act; or
(4) On an excluded commodity having an average open interest of
50,000 contracts and an average daily trading volume of 100,000
contracts and a highly liquid cash market.
(c) Aggregation. Position limits or accountability rules
established under this section shall be subject to the aggregation
standards of Sec. 151.7.
(d) Exemptions. (1) Hedge exemptions. (i) For purposes of exempt
and agricultural commodities, no designated contract market or swap
execution facility bylaw, rule, regulation, or resolution adopted
pursuant to this section shall apply to any position that would
otherwise be exempt from the applicable Federal speculative position
limits as determined by Sec. 151.5; provided, however, that the
designated contract market or swap execution facility may limit bona
fide hedging positions or any other positions which have been exempted
pursuant to Sec. 151.5 which it determines are not in accord with
sound commercial practices or exceed an amount which may be established
and liquidated in an orderly fashion.
(ii) For purposes of excluded commodities, no designated contract
market or swap execution facility bylaw, rule, regulation or resolution
adopted pursuant to this section shall apply to any transaction or
position defined under Sec. 1.3(z); provided, however, that the
designated contract market or swap execution facility may limit bona
fide hedging positions which it determines are not in accord with sound
commercial practices or exceed an amount which may be established and
liquidated in an orderly fashion.
[[Page 4776]]
(2) Procedure. Persons seeking to establish eligibility for an
exemption must comply with the procedures of the designated contract
market or swap execution facility for granting exemptions from its
speculative position limit rules. In considering whether to permit or
grant an exemption, a contract market or swap execution facility must
take into account sound commercial practices and paragraph (d)(1) of
this section apply principles while remaining consistent with Sec.
151.5.
(f) Other exemptions. Speculative position limits adopted pursuant
to this section shall not apply to:
(1) any position acquired in good faith prior to the effective date
of any bylaw, rule, regulation, or resolution which specifies such
limit; or
(2) any person that is registered as a futures commission merchant
or as a floor broker under authority of the Act, except to the extent
that transactions made by such person are made on behalf of or for the
account or benefit of such person.
(g) Ongoing responsibilities. Nothing in this Part shall be
construed to affect any provisions of the Act relating to manipulation
or corners or to relieve any designated contract market, swap execution
facility, or governing board of a designated contract market or swap
execution facility from its responsibility under other provisions of
the Act and regulations.
Sec. 151.12 Delegation of authority to the Director of the Division
of Market Oversight.
(a) The Commission hereby delegates, until it orders otherwise, to
the Director of the Division of Market Oversight or such other employee
or employees as the Director may designate from time to time, the
authority:
(1) In Sec. 151.4(e) for determining levels of open interest;
(2) In Sec. 151.5 for granting exemptions relating to bona fide
hedging transactions; and
(3) In Sec. 151.10 for providing instructions or determining the
format, coding structure, and electronic data transmission procedures
for submitting data records and any other information required under
this part.
(b) The Director of the Division of Market Oversight may submit to
the Commission for its consideration any matter which has been
delegated in this section.
(c) Nothing in this section prohibits the Commission, at its
election, from exercising the authority delegated in this section.
Appendix A to Part 151
------------------------------------------------------------------------
Spot month
------------------------------------------------------------------------
Current federal Current
Contract limit exchange limit
------------------------------------------------------------------------
Agricultural Contracts
------------------------------------------------------------------------
Cocoa............................... ................ 1,000
Coffee.............................. ................ 500
Corn................................ 600 600
Cotton No. 2........................ 300 300
Feeder Cattle....................... ................ 300
Frozen Concentrated Orange Juice.... ................ 300
Lean Hogs........................... ................ 950
Live Cattle......................... ................ 450
Milk Class III...................... ................ 1,500
Oats................................ 600 600
Rough Rice.......................... ................ 600
Soybeans............................ 600 600
Soybean Meal........................ 720 720
Soybean Oil......................... 540 540
Sugar No. 11........................ ................ 5,000
Sugar No. 16........................ ................ 1,000
Wheat (CBOT)........................ 600 600
Wheat, Hard Red Spring.............. 600 600
Wheat, Hard Winter.................. 600 600
------------------------------------------------------------------------
Base Metals Contracts
------------------------------------------------------------------------
Copper Grade 1............. ................ 1,200
------------------------------------------------------------------------
Precious Metals Contracts
------------------------------------------------------------------------
Gold................................ ................ 3,000
Palladium........................... ................ 650
Platinum............................ ................ 150
Silver.............................. ................ 1,500
------------------------------------------------------------------------
Energy Contracts
------------------------------------------------------------------------
Crude Oil, Light Sweet (``WTI'').... ................ 3,000
Gasoline Blendstock (RBOB).......... ................ 1,000
Natural Gas......................... ................ 1,000
No. 2 Heating Oil, New York Harbor.. ................ 1,000
------------------------------------------------------------------------
[[Page 4777]]
Issued by the Commission, this 13th day of January 2011, in
Washington, DC.
David Stawick,
Secretary of the Commission.
Appendices to Position Limits for Derivatives--Commission Voting
Summary and Statements of Commissioners
Note: The following appendices will not appear in the Code of
Federal Regulations
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Dunn, Chilton
and O'Malia voted in the affirmative; Commissioner Sommers voted in
the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the proposed rulemaking to establish position limits
for physical commodity derivatives. The CFTC does not set or
regulate prices. Rather, the Commission is directed to ensure that
commodity markets are fair and orderly to protect the American
public.
When the CFTC set position limits in the past, the agency sought
to ensure that the markets were made up of a broad group of market
participants with a diversity of views. At the core of our
obligations is promoting market integrity, which the agency has
historically interpreted to include ensuring markets do not become
too concentrated.
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.''
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. 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. 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. It is only with the passage and implementation of the
Dodd-Frank Act that the Commission will have broad authority to
collect data in the swaps market.
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\1/2\;
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.
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.
Collecting this data relating to large traders with positions in
the futures markets above such levels or points of 10 and 2\1/2\;
percent would give the Commission a better look into the market and
help us identify potential concerns. For example, if a trader does
not have a bona fide hedge exemption, we can look into the details
of its position and its intentions. It may also give us additional
information as to how the position limits in the proposed rulemaking
would affect traders in these markets.
These levels, or points, are the positions at which CFTC staff
will brief the Commission under its existing authorities. They would
not be a substitute for current position limits or accountability
levels, and they should not be interpreted to be a level that will
automatically trigger any additional regulatory action.
Appendix 3--Statement of Commissioner Bart Chilton
I reluctantly concur in the Commission's approval of publication
of notice of a proposed rulemaking on position limits for
derivatives. I support the Commission's issuance of a position
limits proposal, but I do not support the timing.
I have said repeatedly that it is of paramount importance to
adhere to the deadlines imposed by Congress in the Wall Street
Reform and Consumer Protection Act of 2010. Position limits is one
of the rulemakings with an earlier target date. The current proposal
does not meet the statutory time limits of imposition of limits
within 180 days from the date of enactment for energy and metal
commodities and 270 days for agricultural commodities. The agency
does not have the authority to delay these statutory deadlines.
At the open Commission meeting of the agency on December 9,
2010, the Chairman indicated an intent to move forward with two
proposals on speculative position limits and to move
``expeditiously'' to implement spot month limits. This bifurcation
of spot and single month/aggregate rulemakings was a good attempt to
meet the January deadline set by Congress. At the meeting on
December 16, 2010, however, the Commission was presented with a
single proposed rule, with a 60-day comment period, addressing spot,
single month, and aggregate limits. Accordingly, it is now clear
that spot month limits will not be implemented for many months, at
best, and single month/aggregate limits--and the corresponding new
bona fide hedging rule--may take more than a year to implement.
We need to address excessive speculation in these markets now.
We already have more speculative positions in the commodities
markets than ever before. There are some who suggest that certain
commodity prices are currently delinked from supply and demand
fundamentals, and are being impacted by excessive speculation.
Should these conditions worsen, I will not hesitate to continue to
criticize the delay that the Commission's position limits proposed
rulemaking exacerbates.
I commend the position point agreement that the Chairman
publicly directed the staff to undertake. This interim measure will
give the agency a window into the ``largest of the large'' traders
in our markets, and is an appropriate provisional effort as we
transition to include the swaps market into our traditional
surveillance systems.
The Commission should have acted so as to implement position
limits as directed by Congress, pursuant to the statutory deadlines.
I am disappointed that it failed to do so, and I will continue to
aggressively advocate for rules that will appropriately address
excessive speculatio
.[FR Doc. 2011-1154 Filed 1-25-11; 8:45 am]
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