[Code of Federal Regulations]
[Title 17, Volume 1]
[Revised as of April 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 17CFR1.46]

[Page 90-92]
 
              TITLE 17--COMMODITY AND SECURITIES EXCHANGES
 
             CHAPTER I--COMMODITY FUTURES TRADING COMMISSION
 
PART 1_GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT--Table 
of Contents
 
Sec.  1.46  Application and closing out of offsetting long and short 
positions.

    (a) Application of purchases and sales. Except with respect to 
purchases or sales which are for omnibus accounts, or where the customer 
or account controller has instructed otherwise, any futures commission 
merchant who, on or subject to the rules of a designated contract market 
or registered derivatives transaction execution facility:
    (1) Purchases any commodity for future delivery for the account of 
any customer when the account of such customer at the time of such 
purchase

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has a short position in the same future of the same commodity on the 
same market;
    (2) Sells any commodity for future delivery for the account of any 
customer when the account of such customer at the time of such sale has 
a long position in the same future of the same commodity on the same 
market;
    (3) Purchases a put or call option for the account of any option 
customer when the account of such option customer at the time of such 
purchase has a short put or call option position with the same 
underlying futures contract or same underlying physical, strike price, 
expiration date and contract market as that purchased; or
    (4) Sells a put or call option for the account of any option 
customer when the account of such option customer at the time of such 
sale has a long put or call option position with the same underlying 
futures contract or same underlying physical, strike price, expiration 
date and contract market as that sold shall on the same day apply such 
purchase or sale against such previously held short or long futures or 
option position, as the case may be, and shall, for futures 
transactions, promptly furnish such customer a statement showing the 
financial result of the transactions involved and, if applicable, that 
the account was introduced to the futures commission merchant by an 
introducing broker and the names of the futures commission merchant and 
introducing broker.
    (b) Close-out against oldest open position. In all instances wherein 
the short or long futures or option position in such customer's or 
option customer's account immediately prior to such offsetting purchase 
or sale is greater than the quantity purchased or sold, the futures 
commission merchant shall apply such offsetting purchase or sale to the 
oldest portion of the previously held short or long position: Provided, 
That upon specific instructions from the customer or option customer the 
offsetting transaction shall be applied as specified by the customer or 
option customer without regard to the date of acquisition of the 
previously held position. Such instructions may also be accepted from 
any person who, by power of attorney or otherwise, actually directs 
trading in the customer's or option customer's account unless the person 
directing the trading is the futures commission merchant (including any 
partner thereof), or is an officer, employee, or agent of the futures 
commission merchant. With respect to every such offsetting transaction 
that, in accordance with such specific instructions, is not applied to 
the oldest portion of the previously held position, the futures 
commission merchant shall clearly show on the statement issued to the 
customer or option customer in connection with the transaction, that 
because of the specific instructions given by or on behalf of the 
customer or option customer the transaction was not applied in the usual 
manner, i.e., against the oldest portion of the previously held 
position. However, no such showing need be made if the futures 
commission merchant has received such specific instructions in writing 
from the customer or option customer for whom such account is carried.
    (c) In-and-out trades; day trades. Notwithstanding the provisions of 
paragraphs (a) and (b) of this section shall not be deemed to require 
the application of purchases or sales closed out during the same day 
(commonly known as ``in-and-out trades'' or ``day trades'') against 
short or long positions carried forward from a prior date.
    (d) Exceptions. The provisions of this section shall not apply to:
    (1) Purchases or sales of commodity options constituting ``bona fide 
hedging transactions'' pursuant to rules of the contract market which 
have been adopted in accordance with the requirements of Sec.  1.61(b) 
and approved by the Commission pursuant to; section 5a(a)(12)(A) of the 
Act Provided, That no contract market or futures commission merchant 
shall permit such option positions to be offset other than by open and 
competitive execution in the trading pit or ring provided by the 
contract market, during the regular hours prescribed by the contract 
market for trading in such commodity option.
    (2) Purchases or sales constituting ``bona fide hedging 
transactions'' as defined in Sec.  1.3(z); nor
    (3) Sales during a delivery period for the purpose of making 
delivery during such delivery period if such sales are

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accompanied by instructions to make delivery thereon, together with 
warehouse receipts or other documents necessary to effectuate such 
delivery.
    (4)-(7) [Reserved]
    (8) Purchases or sales held in error accounts, including but not 
limited to floor broker error accounts, and purchases or sales 
identified as errors at the time they are assigned to an account that 
contains other purchases or sales not identified as errors and held in 
that account (``error trades''), provided that:
    (i) Each error trade does not offset another error trade held in the 
same account;
    (ii) Each error trade is offset by open and competitive means on or 
subject to the rules of a contract market by not later than the close of 
business on the business day following the day the error trade is 
discovered and assigned to an error account or identified as an error 
trade, unless at the close of business on the business day following the 
discovery of the error trade, the relevant market has reached a daily 
price fluctuation limit and the trader is unable to offset the error 
trade, in which case the error trade must be offset as soon as 
practicable thereafter; and
    (iii) No error trade is closed out by transferring such an open 
position to another account also controlled by that same trader.
    (e) The statements required by paragraph (a) of this section may be 
furnished to the customer or the person described in Sec.  1.33(d) by 
means of electronic transmission, in accordance with Sec.  1.33(g).

(Approved by the Office of Management and Budget under control number 
3038-0007)

(Secs. 4g, 5, 42 Stat. 1000, 49 Stat. 1496; 7 U.S.C. 6g, 7; secs. 4g, 5, 
8a; 7 U.S.C. 6g, 7, 12a)

[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 54524, Nov. 3, 1981; 46 
FR 63035, Dec. 30, 1981; 47 FR 57009, Dec. 22, 1982; 48 FR 35289, Aug. 
3, 1983; 49 FR 19972, May 11, 1984; 50 FR 26, Jan. 2, 1985; 51 FR 17473, 
May 13, 1986; 53 FR 614, Jan. 11, 1988; 56 FR 14314, Apr. 9, 1991; 57 FR 
55085, Nov. 24, 1992; 59 FR 5526, Feb. 7, 1994; 66 FR 53517, Oct. 23, 
2001; 69 FR 59545, Oct. 5, 2004]