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2010-1209

  • FR Doc 2010-1209[Federal Register: January 26, 2010 (Volume 75, Number 16)]

    [Proposed Rules]

    [Page 4143-4172]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr26ja10-17]

    [[Page 4143]]

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    Part II

    Commodity Futures Trading Commission

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    17 CFR Parts 1, 20 and 151

    Federal Speculative Position Limits for Referenced Energy Contracts and

    Associated Regulations; Proposed Rule

    [[Page 4144]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1, 20 and 151

    RIN 3038-AC85

    Federal Speculative Position Limits for Referenced Energy

    Contracts and Associated Regulations

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

    ``Commission'') is proposing to implement speculative position limits

    for futures and option contracts in certain energy commodities. The

    Commodity Exchange Act of 1936 (``CEA'' or ``Act'') gives the

    Commission the authority to establish limits on positions to diminish,

    eliminate or prevent excessive speculation causing sudden or

    unreasonable fluctuations in the price of a commodity, or unwarranted

    changes in the price of a commodity. In addition to identifying the

    affected energy contracts and the position limits that would apply to

    them, the notice of proposed rulemaking includes provisions relating to

    exemptions from the position limits for bona fide hedging transactions

    and for certain swap dealer risk management transactions. The notice of

    proposed rulemaking also sets out an application process that would

    apply to swap dealers seeking a risk management exemption from the

    position limits, as well as related definitions and reporting

    requirements. In addition, the notice of proposed rulemaking includes

    provisions regarding the aggregation of positions under common

    ownership for the purpose of applying the limits.

    DATES: Comments must be received on or before April 26, 2010.

    ADDRESSES: Comments should be submitted to David Stawick, Secretary,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581. Comments also may be sent by

    facsimile to (202) 418-5521, or by electronic mail to

    secretary@cftc.gov. Reference should be made to ``Proposed Federal

    Speculative Position Limits for Referenced Energy Contracts and

    Associated Regulations.'' Comments may also be submitted by connecting

    to the Federal eRulemaking Portal at http://www.regulations.gov and

    following comment submission instructions.

    FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Acting Director of

    Surveillance, (202) 418-5452, ssherrod@cftc.gov, David P. Van Wagner,

    Chief Counsel, (202) 418-5481, dvanwagner@cftc.gov, Donald Heitman,

    Senior Special Counsel, (202) 418-5041, dheitman@cftc.gov, or Bruce

    Fekrat, Special Counsel, (202) 418-5578, bfekrat@cftc.gov, Division of

    Market Oversight, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581, facsimile number

    (202) 418-5527.

    SUPPLEMENTARY INFORMATION:

    I. Overview

    The majority of futures and options trading on energy commodities

    in the United States occurs on the New York Mercantile Exchange

    (``NYMEX''), a designated contract market (``DCM'') that operates as

    part of the CME Group.\1\ Energy commodity trading also takes place on

    the Intercontinental Exchange (``ICE''), an Atlanta-based exchange that

    operates as an exempt commercial market (``ECM'') and is, as of July

    2009, a registered entity with respect to its Henry Financial LD1 Fixed

    Price natural gas contract.\2\ NYMEX currently lists physically-

    delivered and cash-settled futures contracts (and options on such

    futures contracts) in crude oil, natural gas, gasoline and heating oil.

    ICE lists a cash-settled look-alike contract on natural gas, and

    options thereon, that settles directly to the settlement price of

    NYMEX's physically-delivered natural gas futures contract.\3\

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    \1\ The CME Group is the parent company of four DCMs: NYMEX, the

    Chicago Board of Trade (``CBOT''), the Chicago Mercantile Exchange

    (``CME''), and the Commodity Exchange (``COMEX'').

    \2\ Under section 2(h)(7) of the Act, ECM contracts that have

    been determined by the Commission to be significant price discovery

    contracts (``SPDCs'') are subject to Commission regulation. 7 U.S.C.

    2(h)(7). ECMs listing SPDCs (``ECM-SPDCs'') are also deemed to be

    registered entities with self-regulatory responsibilities with

    respect to such contracts. To date, ICE's Henry Financial LD1 Fixed

    Price natural gas contract is the first and only ECM contract to

    have been determined by the Commission to be a SPDC under section

    2(h)(7) of the Act. 74 FR 37988 (July 30, 2009).

    \3\ US-based traders also enter into various energy contracts

    listed by the ICE Futures Europe Exchange (``ICE Futures Europe''),

    a London-based exchange. These energy contracts include futures on

    West Texas Intermediate (WTI) light sweet crude oil, a New York

    Harbor heating oil futures contract and a New York Harbor unleaded

    gasoline blendstock futures contract. All of the listed contracts

    directly cash-settle to the price of NYMEX futures contracts that

    are physically-settled. ICE Futures Europe is a foreign board of

    trade (``FBOT'') and, unlike NYMEX and ICE, is not registered in any

    capacity with the Commission. Instead, ICE Futures Europe and its

    predecessor, the International Petroleum Exchange, have operated in

    the US since 1999 pursuant to Commission staff no-action relief.

    CFTC Staff Letter No. 99-69 (November 12, 1999). Since 2008, ICE

    Futures Europe's no-action relief has been conditioned on, among

    other things, the requirement that the Exchange implement position

    limit requirements for its NYMEX-linked contracts that are

    comparable to the position limits that NYMEX applies to its

    contracts. CFTC Staff Letter No. 08-09 (June 17, 2008); CFTC Staff

    Letter No. 08-10 (July 3, 2008). Generally, comparable position

    limits for FBOT contracts that link to CFTC-regulated contracts

    serve to ensure the integrity of prices for CFTC-regulated

    contracts.

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    ICE's Henry Financial LD1 Fixed Price natural gas contract and

    virtually all NYMEX energy contracts are currently subject to exchange-

    set spot-month speculative position limits that are in effect for the

    last three days of trading of the respective contracts. Under an

    exchange's speculative position limit rules, no trader, whether

    commercial or noncommercial, may exceed a specified limit unless the

    trader has requested and received an exemption from the exchange.

    Outside of a contract's spot month, these energy contracts are subject

    to exchange all-months-combined and single-month position

    accountability rules. Under an exchange's position accountability

    rules, once a trader exceeds an accountability level in terms of

    outstanding contracts held, the exchange has the right to request

    supporting justification from the trader for the size of its position,

    and may order a trader to reduce or not increase its positions further.

    As described in detail in section VI of this release, the

    Commission is proposing to impose all-months-combined, single-month,

    and spot-month speculative position limits for contracts based on a

    defined set of energy commodities. Broadly described, the Commission's

    proposal, for non-spot-month positions, would apply exchange-specific

    speculative position limits to a set of economically similar contracts

    that settle in the same manner. In addition, the Commission is

    proposing to implement and enforce aggregate non-spot-month speculative

    position limits that would apply across registered entities that list

    substantially similar energy contracts. As discussed in the Paperwork

    Reduction Act section of this notice of proposed rulemaking, should the

    proposed regulations be adopted, the Commission estimates that the

    total number of traders with significant positions that could be

    affected by the proposed regulations would be approximately ten.

    Particular data concerning the distribution of speculative traders

    in a market and an analysis of market conditions and variables,

    including open interest, can support a range of acceptable speculative

    position limit requirements. The Commission, in structuring the

    speculative position

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    limit framework as proposed, has considered its recent and historical

    actions in setting position limits, its continuous oversight of

    exchange-set speculative position limit and accountability rules, its

    experience in administering Commission-set speculative position limits

    \4\ and its observations of energy commodity market conditions and

    developments, particularly during the past four years. The Commission

    notes that the proposed Federal speculative position limits on energy

    contracts would be in addition to, and not a substitute for, a

    reporting market's existing speculative position limit and

    accountability requirements. Reporting markets, defined in Commission

    regulation 15.00 to include DCMs and ECM-SPDCs, are self-regulatory

    organizations with an independent responsibility for adopting and

    implementing appropriate position limit and accountability rules.

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    \4\ The Commission sets Federal speculative position limits for

    certain agricultural commodities enumerated in section 1a(4) of the

    Act. See 17 CFR 150.2.

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    This notice of proposed rulemaking does not propose regulations

    that would classify and treat differently passive long-only positions.

    The Commission does, however, in section VIII of this notice, solicit

    comment on specific issues related to large, passive long-only

    positions. In particular, the Commission solicits comments on how to

    identify and define such positions and whether such positions should,

    including collectively, be limited in any way.

    II. Statutory Background

    Speculative position limits have been identified as an effective

    regulatory tool for mitigating the potential for market disruptions

    that could result from uncontrolled speculative trading. Section 4a(a)

    of the Act, 7 U.S.C. 6a(a), which in significant part retains language

    that was initially adopted in 1936, provides that:

    Excessive speculation in any commodity under contracts of sale

    of such commodity for future delivery made on or subject to the

    rules of contract markets or derivatives transaction execution

    facilities, or on electronic trading facilities with respect to a

    significant price discovery contract 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.

    Accordingly, section 4a(a) of the Act provides the Commission with

    the following authority:

    For the purpose of diminishing, eliminating, or preventing such

    burden, the Commission shall, from time to time * * * proclaim and

    fix such limits on the amounts of trading which may be done or

    positions which may be held by any person under contracts of sale of

    such commodity for future delivery on or subject to the rules of any

    contract market or derivatives transaction execution facility, or on

    an electronic trading facility with respect to a significant price

    discovery contract, as the Commission finds are necessary to

    diminish, eliminate, or prevent such burden.

    Amendments introduced to the Act by the Futures Trading Act of 1982

    supplemented this longstanding statutory framework for Commission-set

    Federal speculative position limits by explicitly acknowledging the

    role of the exchanges in setting their own speculative position

    limits.\5\ The 1982 legislation also gave the Commission, under section

    4a(5) of the Act, the authority to directly enforce violations of

    exchange-set, Commission-approved speculative position limits in

    addition to position limits established directly by the Commission

    through orders or regulations.\6\ Thus, since 1982, the Act's framework

    explicitly anticipates the concurrent application of Commission and

    exchange-set speculative position limits. The concurrent application of

    limits is particularly consistent with an exchange's close knowledge of

    trading activity on that facility and the Commission's greater capacity

    for monitoring trading and implementing remedial measures across

    interconnected commodity futures and option markets.

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    \5\ Futures Trading Act of 1982, Pub. L. No. 97-444, 96 Stat.

    2299-30 (1983).

    \6\ Section 4a(5) has since been redesignated as section 4a(e)

    of the Act. 7 U.S.C. 4a(e).

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    The Commodity Futures Modernization Act of 2000 (``CFMA'') \7\

    introduced substantial changes to the CEA. Broadly described, the CFMA

    established a principles-based approach to regulating the futures

    markets, allowed for the implementation of exchange rules through a

    certification process without requiring the exchanges to obtain prior

    Commission approval, and delineated specific designation criteria and

    core principles with which a DCM must comply to receive and maintain

    designation. Among these, Core Principle 5 in section 5(d) of the Act

    provides:

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    \7\ Commodity Futures Modernization Act of 2000, Appendix E of

    Public Law No. 106-554, 114 Stat. 2763 (2000).

    Position Limitations or Accountability--To reduce the potential

    threat of market manipulation or congestion, especially during

    trading in the delivery month, the board of trade shall adopt

    position limitations or position accountability for speculators,

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    where necessary and appropriate.

    Most recently the CEA was amended by the CFTC Reauthorization Act

    of 2008.\8\ The 2008 legislation amended the CEA by, among other

    things, adding core principles in new section 2(h)(7) governing SPDCs

    traded on electronic trading facilities operating in reliance on the

    exemption in section 2(h)(3) of the Act.\9\ The 2008 legislation

    amended the Act to impose certain self-regulatory responsibilities on

    ECM-SPDCs through core principles, as did the CFMA with respect to

    DCMs, including a core principle that requires such facilities to

    ``adopt, where necessary and appropriate, position limitations or

    position accountability for speculators in significant price discovery

    contracts * * *'' \10\ The 2008 legislation also amended section 4a(e)

    of the Act to incorporate references to ECM-SPDCs, thereby assuring

    that violation of an ECM-SPDC's position limits, regardless of whether

    such position limits have been approved by or certified to the

    Commission, would constitute a violation of the Act that the Commission

    could independently enforce.

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    \8\ Food, Conservation and Energy Act of 2008, Public Law No.

    110-246, 122 Stat. 1624 (June 18, 2008).

    \9\ 7 U.S.C. 2(h)(3)-(7).

    \10\ 7 U.S.C. 2(h)(7)(C)(ii)(IV).

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    As mentioned above, the CFMA generally replaced the Act's exchange

    rule approval process with a certification process. On a practical

    level, this shift has tended to reduce the Commission's ability to more

    directly shape the specific requirements of exchange-set speculative

    position limit and accountability rules through approving such rules

    prior to implementation. In light of this, the Commission's broad

    authority to independently set position limits under CEA section 4a(a)

    could be viewed as an increasingly important enabling provision that

    allows the Commission to take the initiative in acting, when

    appropriate, to bolster market confidence and curb or prevent excessive

    speculation that may cause sudden, unwarranted, or unreasonable

    fluctuations in commodity prices.

    III. Federal Speculative Position Limits

    A. Historical Background

    From the earliest days of federal regulation of the futures

    markets, Congress made it clear that unchecked speculative positions,

    even without intent to manipulate the market, can cause price

    disturbances.\11\ To protect

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    markets from the adverse consequences associated with large speculative

    positions, Congress expressly authorized the Commodity Exchange

    Commission (``CEC'') \12\ to impose speculative position limits

    prophylactically.\13\ The Congressional endorsement of the Commission's

    prophylactic use of position limits rendered unnecessary a specific

    finding that an undue burden on interstate commerce had actually

    occurred. Additionally, Congress closely restricted exemptions from

    position limits to bona fide hedging transactions, initially defined as

    sales or purchases of futures contracts offset by sales or purchases of

    the same cash commodity.

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    \11\ The Congressional finding that excessive speculation can

    have detrimental consequences even without manipulative intent is

    consistent with the series of studies and reports made to Congress

    urging the adoption of measures to restrict speculative trading

    notwithstanding the absence of ``the deliberate purpose of

    manipulating the market.'' See e.g., Fluctuations in Wheat Futures,

    69th Cong., 1st Sess., Senate Document No. 135 (June 28, 1926).

    \12\ The CEC is the predecessor of the Commodity Exchange

    Authority, which is, in turn, the predecessor of the Commission.

    \13\ Requiring a specific demonstration of the need for position

    limits is contrary to section 4a(a) of the Act, which provides that

    the Commission shall set position limits from time to time, among

    other things, to prevent excessive speculation. 7 U.S.C. 4a(a).

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    In December of 1938, the CEC promulgated the first Federal

    speculative position limits for futures contracts in grains (then

    defined as wheat, corn, oats, barley, flaxseed, grain sorghums and rye)

    after finding that large speculative positions tended to cause sudden

    and unreasonable fluctuations and changes in the price of grain.\14\ At

    that time, the CEC did not impose limits in the other commodities

    enumerated in the 1936 Act.

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    \14\ 3 FR 3145 (December 24, 1938).

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    Over the following years, Federal position limits were extended to

    various other commodities enumerated in the Act. However, no uniform

    approach regarding speculative position limits was applied to those

    enumerated commodities. In some cases (e.g., soybeans), a commodity

    added to the Act's list of enumerated commodities was also added to the

    roster of commodities subject to Federal speculative position limits.

    In other cases (e.g., livestock products, butter, and wool),

    commodities added to the list of enumerated commodities in the Act

    never became subject to Federal position limits.

    In 1974, Congress overhauled the CEA to create the CFTC and

    simultaneously expanded the new agency's jurisdictional scope beyond

    the enumerated agricultural commodities to include futures contracts in

    any commodity. In expanding the CFTC's jurisdiction, Congress

    reiterated a fundamental precept underlying the Act, namely, to

    minimize or prevent the harmful effect of uncontrolled speculation.\15\

    When the Commission came into existence in April 1975, ``various

    contract markets [had] voluntarily placed speculative position limits

    on 23 contracts involving 17 commodities.'' \16\ At that time,

    ``position limits were in effect for almost all actively traded

    commodities then under regulation and the limits for positions in about

    one half of these actively traded commodities had been specified by the

    contract markets.'' \17\ Initially, the Commission retained the

    position limits enacted by the CEC, as then in effect, but did not

    establish position limits for any additional commodities.\18\ In the

    years immediately following, the Commission implemented a few

    relatively minor changes to position limit regulations, but undertook

    no significant expansion of Federal speculative position limits.

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    \15\ ``The fundamental purpose 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.'' S. Rep. No.

    93-1131, 93rd Cong., 2d. Sess. (1974).

    \16\ 45 FR 79831 (December 2, 1980).

    \17\ Id. at 79832. ``Commodity Exchange Authority regulations

    included limits for wheat, corn, oats, soybeans, cotton, eggs and

    potatoes. Exchange rules included limits for live cattle, feeder

    cattle, live hogs, frozen pork bellies, soybean oil, soybean meal,

    and grain sorghums.'' (Id. n.1)

    \18\ Pursuant to section 4l of the Commodity Futures Trading

    Commission Act of 1974, all regulations previously adopted by the

    Commodity Exchange Authority continued in full force and effect, to

    the extent they were not inconsistent with the Act, as amended,

    unless or until terminated, modified or suspended by the Commission.

    Sec. 205, 88 Stat. 1397 (effective July 18, 1975).

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    After the silver futures market crisis during late 1979 to early

    1980, commonly referred to as ``the Hunt Brothers silver

    manipulation,'' \19\ 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.'' \20\

    Accordingly, in 1981 the Commission adopted regulation 1.61, which

    required all exchanges to adopt and submit for Commission approval

    speculative position limits in active futures markets for which no

    exchange or Commission limits were then in effect.\21\ Although

    regulation 1.61 directed the exchanges to implement position limit

    rules, the pre-CFMA exchange rule approval process, on a practical

    level, gave the Commission the ability to shape the requirements of

    exchange-set position limit rules as measures that guarded against

    excessive speculation in accordance with the purposes and findings of

    section 4a(a) of the Act.

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    \19\ See, In re Nelson Bunker Hunt et al., CFTC Docket No. 85-

    12.

    \20\ 45 FR 79831, at 79833 (December 2, 1980).

    \21\ 46 FR 50938 (October 16, 1981).

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    The next significant development occurred in 1986, when the

    Commission undertook a comprehensive review of speculative position

    limit policies, including position limit levels. During the

    Commission's 1986 reauthorization, the CFTC's Congressional authorizing

    committees suggested that this subject should be addressed. The Report

    of the House Agriculture Committee stated:

    [T]he Committee believes that, given the changes in the nature

    of these markets and the influx of new market participants over the

    last decade, the Commission should reexamine the current levels of

    speculative position limits with a view toward elimination of

    unnecessary impediments to expanded market use.\22\

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    \22\ H.R. Rep. No. 624, 99th Cong., 2d Sess., at 4 (1986).

    Subsequently, the Commission reviewed its Federal speculative

    position limit framework and, in October 1987, adopted final amendments

    that raised some of the Federal speculative position limits and revised

    the general structure of the Federal speculative position limit

    regulations.\23\ The amendments introduced in 1987 retained the then

    current spot-month and individual month position limits but increased

    the all-months-combined position limits. The revised limits, which had

    historically been set on a generic commodity basis, established

    position limits for each contract ``according to the individual

    characteristics of that contract market,'' particularly ``the

    distribution of speculative position sizes in recent years and recent

    levels of open interest.'' \24\ In response to a petition by the CBOT,

    the Commission also established position limits for CBOT soybean oil

    and soybean meal contracts, which had been subject solely to exchange-

    set position limits, to provide ``consistency with all other

    agricultural commodities traded at the CBOT.'' \25\

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    \23\ 52 FR 38914 (October 20, 1987).

    \24\ Id. at 38917, 38919.

    \25\ Petition for rulemaking of the CBOT, dated July 24, 1986,

    cited in 52 FR 6814 (March 5, 1987).

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    In 1992, the Commission issued proposed regulations adhering to the

    principle that speculative position limits should be formulaically

    adjusted based upon increases in the size of a contract's open interest

    (in addition to the traditional standard of distribution of speculative

    traders in a market).\26\

    [[Page 4147]]

    The formula was thereafter ``routinely applied [hellip] as a matter of

    administrative practice when reviewing proposed exchange speculative

    position limits under Commission [regulation] 1.61.'' \27\

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    \26\ 57 FR 12766 (April 13, 1992).

    \27\ 63 FR 38525 (July 17, 1998).

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    During this same time frame, the Commission began a process that

    led to the adoption of position accountability rules for contracts that

    were subject to exchange-set speculative position limits. Beginning in

    1991, the Commission approved several exchange rules establishing

    position accountability provisions in lieu of position limits for

    certain contracts exhibiting significant trading volume and open

    interest, a highly liquid underlying cash market and ready

    opportunities for arbitrage between the cash and futures markets.\28\

    An exchange's position accountability rules, as opposed to position

    limits that bar traders from acquiring contracts that quantitatively

    exceed a specific number of outstanding contracts, require persons

    holding a certain number of open contracts to report the nature of

    their positions, trading strategy, and hedging needs to the exchange,

    upon the exchange's request.

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    \28\ See, e.g., 56 FR 51687 (October 15, 1991) and 57 FR 29064

    (June 30, 1992).

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    In 1999, the Commission simplified and reorganized its speculative

    position limit regulations to consolidate requirements for both

    Commission-set limits and exchange-set limits under regulation 1.61 in

    part 150 of the Commission's regulations. Regulation 150.5(e),

    currently, and as initially adopted in 1999, establishes a ``trader

    accountability exemption'' \29\ and generally codifies the position

    accountability conditions that initially were imposed as a matter of

    administrative practice beginning in 1991.\30\

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    \29\ 64 FR 24038, at 24048 (May 5, 1999).

    \30\ Regulation 150.5(e) provides that, for futures and option

    contracts that have been listed for trading for at least 12 months,

    an exchange may submit a position accountability rule, in lieu of a

    numerical limit, as follows:

    ``(1) For futures and option contracts on a financial

    instrument or product having an average open interest of 50,000

    contracts and an average daily trading volume of 100,000 contracts

    and a very highly liquid cash market, an exchange bylaw, regulation

    or resolution requiring traders to provide information about their

    position upon request by the exchange;

    (2) For futures and option contracts on a financial instrument

    or product or on an intangible commodity having an average month-end

    open interest of 50,000 and an average daily volume of 25,000

    contracts and a highly liquid cash market, an exchange bylaw,

    regulation or resolution requiring traders to provide information

    about their position upon request by the exchange and to consent to

    halt increasing further a trader's positions if so ordered by the

    exchange;

    (3) For futures and option contracts on a tangible commodity,

    including but not limited to metals, energy products, or

    international soft agricultural products having an average month-end

    open interest of 50,000 contracts and an average daily volume of

    5,000 contracts and a liquid cash market, an exchange bylaw,

    regulation or resolution requiring traders to provide information

    about their position upon request by the exchange and to consent to

    halt increasing further a trader's positions if so ordered by the

    exchange, provided, however, such contract markets are not exempt

    from the requirement of paragraphs (b) or (c) that they adopt an

    exchange bylaw, regulation or resolution setting a spot month

    speculative position limit with a level no greater than one quarter

    of the estimated spot-month deliverable supply * * *'' 17 CFR

    150.5(e).

    Notably, the Commission's concerns regarding spot-month limits

    were eventually mirrored by the CFMA, which provides in DCM Core

    Principle 5 (section 5(d)(5) of the Act), that ``[t]o reduce the

    potential threat of market manipulation or congestion, especially

    during trading in the delivery month, the board of trade shall adopt

    position limitations or position accountability for speculators,

    where necessary and appropriate.''

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    The reorganized rules also included new regulation 150.5(c), which

    codified the Commission's 1992 formula for calculating Federal

    speculative position limits based upon open interest, and applied it to

    exchanges for their use in calculating the levels of exchange-imposed

    numerical speculative position limits.\31\ The formula provided for

    ``combined futures and option speculative position limits for both a

    single month and for all-months-combined at the level of 10 percent of

    open interest up to an open interest of 25,000 contracts, with a

    marginal increase of 2.5% thereafter.'' \32\ In initially proposing to

    use this formula, the Commission noted that:

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    \31\ The formulaic approach, initially developed by Blake Imel,

    former Acting Director of the Division of Economic Analysis (the

    Division has since been merged into the Division of Market

    Oversight), was premised on limiting the concentration of positions

    in the hands of one or a few traders by requiring a minimum number

    of distinct market participants.

    \32\ 64 FR 24038, at 24039 (May 5, 1999).

    [I]ts large trader data indicates that limits based on open

    interest as described above should accommodate the normal course of

    speculative positions in agricultural markets. The levels derived

    using this method of analysis generally are consistent with the

    largest exchange-set speculative limits approved by the Commission

    under Rule 1.61 for contract markets in agricultural commodities at

    corresponding levels of open interest. However, the Commission,

    based on its surveillance experience and monitoring of exchange and

    Federal speculative position limits, is satisfied that the levels

    indicated by this methodology, although near the outer bounds of the

    levels which have been approved previously, nevertheless will

    achieve the prophylactic intent of Section [4a] of the Act and

    Commission Rule 1.61, thereunder [emphasis supplied].\33\

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    \33\ 57 FR 12766, at 12771 (April 13, 1992).

    The Commission also emphasized that particular data can result in a

    range of acceptable speculative position limits, and that based on its

    experience overseeing exchange-set speculative limits and its direct

    administration of the Federal limits establishing ``a single-month and

    all-month limits on futures positions combined with option positions on

    a delta-equivalent basis of no more than ten percent of the combined

    markets' open interest for contracts with combined open interest below

    25,000'' was within the range of acceptable speculative position

    limits.\34\ For those markets with combined average open interest

    greater than 25,000 contracts, the Commission proposed a marginal

    increase of 2.5% after noting that ``the size of the largest individual

    positions in a market do not continue to grow in proportion with

    increases in the overall open interest of the market.''\35\

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    \34\ Id. at 12770.

    \35\ Id.

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    As noted above, Core Principle 5, introduced to the Act in 2000 by

    the CFMA, requires DCMs to implement position limits or position

    accountability rules for speculators ``where necessary and

    appropriate.'' In 2001, the Commission established Acceptable Practices

    for complying with Core Principle 5, set out in Appendix B to part 38

    of the Commission's regulations.\36\ The Acceptable Practices

    specifically reference part 150 of the Commission's regulations as

    providing guidance on how to comply with the requirements of the Core

    Principle.\37\ The CFMA, however, did not change the treatment of the

    enumerated agricultural commodities, which remained subject to Federal

    speculative position limits.

    ---------------------------------------------------------------------------

    \36\ 17 CFR part 38, Appendix B, Core Principle 5(d)(5).

    \37\ 66 FR 42256 (August 10, 2001).

    ---------------------------------------------------------------------------

    In 2005, the Commission increased the all-months-combined Federal

    speculative position limits and reset the single-month levels to

    roughly approximate the existing numerical relationship between all-

    months-combined and single-month levels (i.e., arriving at the single-

    month limits by setting them at about two-thirds of the relevant all-

    months-combined limits), based generally on the 1992 open interest

    formula (as incorporated into regulation 150.5(e)).\38\

    ---------------------------------------------------------------------------

    \38\ 70 FR 24705 (May 11, 2005).

    ---------------------------------------------------------------------------

    In 2008, Congress, in response to high prices and volatility in the

    energy markets and concerns regarding excessive speculation on

    unregulated energy exchanges, including ECMs, adopted the CFTC

    Reauthorization Act of 2008 and amended two CEA provisions aimed at

    curbing possible manipulation and excessive speculation

    [[Page 4148]]

    in the energy markets. Specifically, the 2008 legislation amended CEA

    section 4a(e) to give the CFTC enforcement authority over position

    limits certified by the exchanges and adopted new section 2(h)(7) to

    apply a position limit and position accountability core principle to

    ECM-SPDCs.\39\ Notably, the legislation also extended the Commission's

    authority to set Federal speculative position limits, under CEA section

    4a(a), to ECM-SPDCs.

    ---------------------------------------------------------------------------

    \39\ See 7 U.S.C. 2(h)(7)(C)(IV).

    ---------------------------------------------------------------------------

    B. Statutory Basis and Need for Energy Speculative Position Limits

    Energy futures and option contracts have never been subject to

    CFTC-set speculative position limits. These contracts began to attract

    significant trading volumes in the early 1980s beginning with NYMEX's

    New York Harbor No. 2 heating oil futures contract,\40\ followed by

    NYMEX's gasoline futures contract in 1981 and crude oil futures

    contract in 1983. NYMEX did not initially adopt position limits for

    heating oil futures contracts. However, with the adoption of Commission

    regulation 1.61, effective November 16, 1981, each exchange was

    required to submit for Commission approval speculative position limits

    for each actively traded futures contract. Thereafter, newly designated

    contracts (e.g., NYMEX's crude oil futures contract in 1983) were

    required to be accompanied by exchange speculative position limit rules

    as a condition of designation.

    ---------------------------------------------------------------------------

    \40\ The contract was designated in October 1974, but

    significant volume first developed in 1980.

    ---------------------------------------------------------------------------

    As noted above, in 1999 the Commission reorganized its speculative

    position limit regulations to codify its earlier administrative

    practice of allowing exchanges to adopt position accountability rules

    in lieu of numerical position limits for positions outside of the spot

    month. Currently, virtually all of NYMEX's energy futures and option

    contracts and ICE's single SPDC contract are subject to exchange-set

    position accountability rules during non-spot months and to hard

    speculative position limits during spot months.

    From 2007 to mid 2008, commodity prices generally, and energy

    prices in particular, increased significantly and experienced unusual

    volatility. As a result of this, Commission-regulated energy markets,

    as well as the over-the-counter (``OTC'') energy swap markets over

    which the Commission has no direct regulatory authority, were the

    subject of numerous Congressional hearings \41\ and formal and informal

    studies, including a preliminary review by an Interagency Task Force

    chaired by CFTC staff. \42\ In the summer of 2009, the Commission held

    three days of hearings ``to discuss energy position limits and hedge

    exemptions'' (``Energy Hearings'').\43\ The Commission heard from 26

    witnesses, including members of the U.S. House and Senate, swap

    dealers, money managers, futures market participants (including

    commercial hedgers), trade associations, exchanges, and consumer

    advocates.\44\ In addition, a total of 5,281 email comments were

    received (including some 1,200 identical emails from a single

    commenter).\45\

    ---------------------------------------------------------------------------

    \41\ At the hearings, numerous witnesses expressed concern

    regarding the impact on energy prices of speculation on commodity

    futures markets, including particularly the price impact of trading

    by swap dealers and index funds. Alternatively, many other witnesses

    expressed the view that fundamental market conditions were the

    primary driver of prices.

    \42\ The Task Force included staff representatives from the

    Departments of Agriculture, Energy and the Treasury, the Board of

    Governors of the Federal Reserve, the Federal Trade Commission, and

    the Securities and Exchange Commission. The Task Force looked at the

    crude oil market between January 2003 and June 2008. The staff

    members of the various agencies did not find direct causal evidence

    for the general increase in oil prices between January 2003 and June

    2008. Interagency Task Force on Commodity Markets, Interim Report on

    Crude Oil (July 22, 2008).

    \43\ Commodity Futures Trading Commission, ``CFTC to Hold Three

    Open Hearings to Discuss Energy Position Limits and Hedge

    Exemptions,'' CFTC Release 5681-09 (July 21, 2009).

    \44\ See the following Commission Releases for a listing of

    agendas and witnesses and related links:

    5681-09 (July 21, 2009) http://www.cftc.gov/newsroom/

    generalpressreleases/2009/pr5681-09.html;

    5682-09 (July 27, 2009) http://www.cftc.gov/newsroom/

    generalpressreleases/2009/pr5682-09.html;

    and 5685-09 (July 31, 2009) http://www.cftc.gov/newsroom/

    generalpressreleases/2009/pr5685-09.html.

    \45\ Persons wishing to review these comments may contact the

    Commission's Secretariat at secretary@cftc.gov.

    ---------------------------------------------------------------------------

    As with the Congressional hearings and market studies, there were

    mixed opinions among the Energy Hearing participants as to the causes

    of the price rises and market volatility. With respect to position

    limits for energy commodities, a number of witnesses expressed concern

    over the impact on energy prices of excessive speculation and supported

    position limits.\46\ Others cautioned that such limits could be

    ineffective, hurt market liquidity or distort the price discovery

    process if not properly constructed.\47\

    ---------------------------------------------------------------------------

    \46\ ``This increase in volatility has been associated with a

    massive increase in speculative investment in oil futures.'' Ben

    Hirst, Senior Vice President and General Counsel for Delta Airlines;

    ``* * *[S]peculative trading strategies may not always have a benign

    effect on the markets.'' Laura Campbell, Assistant Manager of Energy

    Resources, Memphis Light, Gas & Water, on behalf of The American

    Public Gas Association; ``That ability [to hedge heating fuel

    costs], however, is now being undermined by an erratic market,

    questionable investment tactics and purely speculative market

    forces.'' Sean Cota, President, Cota & Cota, Inc. Hearings on Energy

    Position Limits and Hedge Exemptions, July 28, July 29 and August 5,

    2009, at the Commodity Futures Trading Commission.

    \47\ ``If [limits] are set too tight, traders who possess

    important market information and provide crucial liquidity are kept

    away.'' Todd E. Petzel. Chief Investment Officer, Offit Capital

    Advisors; ``Simply eliminating or limiting swap dealer hedge

    exemptions will impair liquidity, have other unintended consequences

    and would very likely not achieve the stated objective.'' Donald

    Casturo, Managing Director, Goldman Sachs & Co.; ``Position limits

    no matter how well meaning create real market migration risk and

    pushing price discovery of agricultural, energy or metals markets to

    overseas or other trading venues would be contrary to the purposes

    of the Act.'' Mark D. Young, Kirkland & Ellis LLP. Hearings on

    Energy Position Limits and Hedge Exemptions, July 28, July 29 and

    August 5, 2009, at the Commodity Futures Trading Commission.

    ---------------------------------------------------------------------------

    As discussed above, section 4a(a) represents an explicit

    Congressional finding that extreme or abrupt price fluctuations

    attributable to unchecked speculative positions are harmful to the

    futures markets and that position limits can be an effective

    prophylactic regulatory tool to diminish, eliminate or prevent such

    activity. Accordingly, Congress charged the Commission with

    responsibility for setting contract position limits in any commodity to

    prevent or minimize extreme or abrupt price movements resulting from

    large or concentrated positions. Under the authority granted to it, the

    Commission may impose speculative position limits without finding an

    extant undue burden on interstate commerce resulting from excessive

    speculation.\48\ Section 8a(5) of the Act also provides that the

    Commission may make and promulgate such rules and regulations that in

    its judgment are reasonably necessary to accomplish any of the purposes

    of the Act.

    ---------------------------------------------------------------------------

    \48\ Moreover, the exchanges' independent responsibility to

    monitor trading and implement position limits and position

    accountability rules does not detract from or otherwise impair the

    Commission's broad authority to impose speculative limits.

    ---------------------------------------------------------------------------

    Large concentrated positions in the energy futures and option

    markets can potentially facilitate abrupt price movements and price

    distortions. The prevention of unreasonable and abrupt price movements

    that are attributable to large or concentrated speculative positions is

    a congressionally endorsed regulatory objective. This objective is

    furthered by position limits, particularly given that the capacity of

    any reporting market to absorb the establishment and liquidation of

    large speculative

    [[Page 4149]]

    positions in an orderly manner is related to the relative size of such

    positions and is not unlimited. Specifically, when large speculative

    positions are amassed in a contract, or contract month, the potential

    exists for unreasonable and abrupt price movements should the positions

    be traded out of or liquidated in a disorderly manner. Concentration of

    large positions in one or a few traders' accounts can also create the

    unwarranted appearance of appreciable liquidity and market depth.

    Trading under such conditions can result in greater volatility than

    would otherwise prevail if traders' positions were more evenly

    distributed among market participants.

    Furthermore, concurrent trading in economically similar and

    equivalent energy futures and option contracts on multiple exchanges

    effectively creates a single but fragmented market for such contracts.

    Because individual exchanges have knowledge of positions only on their

    own trading facilities, it is difficult for them to assess the full

    impact of a trader's positions on the greater market. As such,

    monitoring and limiting positions through exchange-specific position

    limits and through the enforcement of exchange position accountability

    rules, though necessary and beneficial, may not sufficiently guard

    against potential market disruptions.

    For these reasons, the Commission is proposing to establish

    reporting market-specific Federal speculative position limits for

    futures and option contracts in certain energy commodities and

    aggregate position limits that would apply across economically similar

    contracts, regardless of whether such contracts are listed on a single

    or on multiple reporting markets, to curb the impact of disruptive

    excessive speculation.

    IV. Exemptions and Account Aggregation

    The Commission's current regulatory framework for Federal

    speculative position limits consists of three elements, (i) the levels

    of the Commission-set speculative position limits (discussed above),

    (ii) certain exemptions from the limits (e.g., for hedging, spreading

    or arbitraged positions), and (iii) the policy on aggregating related

    accounts for purposes of applying the limits.

    Commission regulation 150.3, headed ``Exemptions,'' lists certain

    types of positions that may be exempted from (and thus may exceed) the

    Federal speculative position limits delineated in regulation 150.2. In

    particular, under regulation 150.3(a)(1), bona fide hedging

    transactions, as defined in Commission regulation 1.3(z), may exceed

    Commission-set position limits.\49\ The first two parts of the bona

    fide hedging definition include a general definition of bona fide

    hedging (see paragraph (z)(1)) and a listing of certain enumerated

    hedging transactions in the agricultural commodities that are currently

    subject to Federal position limits (see paragraph (z)(2)). Paragraph

    (z)(3) of the definition provides flexibility to the Commission in

    granting exemptions by permitting additional transactions to be

    recognized as bona fide hedging upon a trader's request, made in

    accordance with the application provisions of Commission regulation

    1.47. Regulation 1.47 requires a person seeking a bona fide hedge

    exemption under regulation 1.3(z)(3) to provide the Commission with

    various information that will, among other things, ``demonstrate that

    the purchases and sales are economically appropriate to the reduction

    of risk exposure attendant to the conduct and management of a

    commercial enterprise.'' \50\

    ---------------------------------------------------------------------------

    \49\ Commission regulation 1.3(z) provides:

    ``Bona fide hedging transactions and positions--(1) General

    definition. Bona fide hedging transactions and positions shall mean

    transactions or positions in a contract for future delivery on any

    contract market, or in a commodity option, where such transactions

    or positions normally represent a substitute for transactions to be

    made or positions to be taken at a later time in a physical

    marketing channel, and where they are economically appropriate to

    the reduction of risks in the conduct and management of a commercial

    enterprise, and where they arise from:

    (i) The potential change in the value of assets which a person

    owns, produces, manufactures, processes, or merchandises or

    anticipates owning, producing, manufacturing, processing, or

    merchandising,

    (ii) The potential change in the value of liabilities which a

    person owns or anticipates incurring, or

    (iii) The potential change in the value of services which a

    person provides, purchases, or anticipates providing or purchasing.

    Notwithstanding the foregoing, no transactions or positions

    shall be classified as bona fide hedging unless their purpose is to

    offset price risks incidental to commercial cash or spot operations

    and such positions are established and liquidated in an orderly

    manner in accordance with sound commercial practices and, for

    transactions or positions on contract markets subject to trading and

    position limits in effect pursuant to section 4a of the Act, unless

    the provisions of paragraphs (z)(2) and (3) of this section and

    Sec. Sec. 1.47 and 1.48 of the regulations have been satisfied.

    (2) Enumerated hedging transactions. The definitions of bona

    fide hedging transactions and positions in paragraph (z)(1) of this

    section includes, but is not limited to, the following specific

    transactions and positions:

    (i) Sales of any commodity for future delivery on a contract

    market which do not exceed in quantity:

    (A) Ownership or fixed-price purchase of the same cash commodity

    by the same person; and

    (B) Twelve months' unsold anticipated production of the same

    commodity by the same person provided that no such position is

    maintained in any future during the five last trading days of that

    future.

    (ii) Purchases of any commodity for future delivery on a

    contract market which do not exceed in quantity:

    (A) The fixed-price sale of the same 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; and

    (C) Twelve months' unfilled anticipated requirements of the same

    cash commodity for processing, manufacturing, or feeding by the same

    person, provided that such transactions and positions in the five

    last trading days of any one future do not exceed the person's

    unfilled anticipated requirements of the same cash commodity for

    that month and for the next succeeding month.

    (iii) Offsetting sales and purchases for future delivery on a

    contract market 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

    contract market, provided that no such position is maintained in any

    future during the five last trading days of that future.

    (iv) Sales and purchases for future delivery described in

    paragraphs (z)(2)(i), (ii), and (iii) 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 for future

    delivery are substantially related to the fluctuations in value of

    the actual or anticipated cash position, and provided that the

    positions in any one future shall not be maintained during the five

    last trading days of that future.

    (3) Non-enumerated cases. Upon specific request made in

    accordance with Sec. 1.47 of the regulations, the Commission may

    recognize transactions and positions other than those enumerated in

    paragraph (z)(2) of this section as bona fide hedging in such amount

    and under such terms and conditions as it may specify in accordance

    with the provisions of Sec. 1.47. Such transactions and positions

    may include, but are not limited to, purchases or sales for future

    delivery on any contract market by an agent who does not own or who

    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 position which is being offset.'' 17 CFR

    1.3(z).

    \50\ 17 CFR 1.47(b)(2).

    ---------------------------------------------------------------------------

    In addition to regulation 150.3(a)(1)'s bona fide hedging

    exemption, regulation 150.3(a) includes two other exemptions from the

    Federal speculative position limits. Regulation 150.3(a)(3) exempts

    ``spread or arbitrage positions between single months of a futures

    contract * * * outside of the spot-month, in the same crop year * * *

    .'' Subject to various conditions, regulation 150.3(a)(4) exempts

    positions ``[c]arried for an eligible entity as defined in regulation

    150.1(d), in the separate account or accounts of an independent account

    controller, as defined in regulation 150.1(e) * * * .'' Eligible

    entities include mutual funds, commodity pool operators and commodity

    trading advisors. Entities claiming this exemption are required, upon

    call by the Commission, to provide information supporting their claim

    that the account controllers for

    [[Page 4150]]

    these positions are acting independently.

    Also, in order to achieve the intended effect of the Federal

    speculative position limits, Commission regulation 150.4, headed

    ``Aggregation of positions,'' requires the Commission and the exchanges

    to treat multiple accounts subject to common ownership or control as if

    they are held by a single trader. Such accounts are typically

    considered to be under a common ownership if one or more traders have a

    10% or greater financial interest in the accounts and do not otherwise

    qualify for an exemption from aggregation, such as the independent

    account controller exemption discussed above. The aggregation standards

    are applied in a manner calculated to aggregate related positions. For

    example, each participant with a 10% or greater financial interest in

    an account must aggregate the entire position of that account--not just

    the participant's fractional share--together with other positions that

    the participant may independently hold. Likewise, a commodity futures

    or option contract pool comprised of many traders is allowed only to

    hold positions as if it were a single trader. The Commission also

    treats positions that are not commonly owned, but are traded pursuant

    to an express or implied agreement, as a single aggregated position for

    purposes of applying the Federal speculative position limits.

    Exceptions to the aggregation standards exist for certain pool

    participants, such as limited partners and shareholders that cannot

    exercise control over the positions of the pool.

    V. Bona Fide Hedge Exemptions

    Prior to 1974, the CEA included a limited statutory hedging

    definition that applied only to agricultural commodities. When the

    Commission was created in 1974, the Act's definition of commodity was

    expanded. At that time, Congress was concerned that the limited hedging

    definition, even if applied to newly regulated commodity futures, would

    fail to accommodate the commercial risk management needs of market

    participants that could emerge over time. Accordingly, Congress, in

    section 404 of the Commodity Futures Trading Commission Act of 1974,

    repealed the statutory definition and gave the Commission the authority

    to define bona fide hedging.

    The Commission exercised this authority in 1977 by adopting

    regulations 1.3(z) and 1.47.\51\ Those regulations have remained

    unchanged since 1977. By the mid 1980s, new concerns had emerged. Under

    the Commission's definition, bona fide hedge transactions ``normally

    represent a substitute for transactions to be made or positions to be

    taken at a later time in a physical marketing channel,'' and are

    ``economically appropriate to the reduction of risks in the conduct of

    a commercial enterprise.'' \52\ This aspect of the hedging definition

    proved to be ill fitted to the economic realities of financial futures.

    Portfolio managers utilize the financial futures markets to add

    incremental income to managed assets, to manage overall risk, or to

    rebalance a portfolio. Indeed, futures market positions are often

    acquired entirely as an alternative to cash market transactions (in

    view of the lower transaction costs, speed, and minimal price impact),

    rather than as a temporary substitute for positions that will later be

    taken in the underlying cash market.

    ---------------------------------------------------------------------------

    \51\ 42 FR 42748 (August 24, 1977).

    \52\ 17 CFR 1.3(z)(1).

    ---------------------------------------------------------------------------

    In 1986, in response to concerns raised in testimony regarding the

    constraints on investment decisions imposed by position limits, the

    House Committee on Agriculture, in its report accompanying the

    Commission's 1986 reauthorization legislation, instructed the

    Commission to reexamine its approach to speculative position limits and

    its definition of hedging.\53\ Specifically, the Committee Report

    ``strongly urge[d] the Commission to undertake a review of its hedging

    definition * * * and to consider giving certain concepts, uses, and

    strategies `non-speculative' treatment * * * whether under the hedging

    definition or, if appropriate, as a separate category similar to the

    treatment given certain spread, straddle or arbitrage positions * * *''

    \54\ The Committee Report singled out four categories of trading and

    positions that the Commission should recognize as non-speculative: (i)

    ``Risk management'' trading by portfolio managers as an alternative to

    the concept of ``risk reduction;'' (ii) futures positions taken as

    alternatives to, rather than as temporary substitutes for, cash market

    positions; (iii) other positions acquired to implement strategies

    involving the use of financial futures including, but not limited to,

    asset allocation (altering portfolio exposure in certain areas such as

    equity and debt), portfolio immunization (curing mismatches between the

    duration and sensitivity assets and liabilities to ensure that

    portfolio assets will be sufficient to fund the payment of

    liabilities), and portfolio duration (altering the average maturity of

    a portfolio's assets); and (iv) certain options trading, in particular

    the writing of covered puts and calls.\55\

    ---------------------------------------------------------------------------

    \53\ House Committee on Agriculture, Futures Trading Act of

    1986, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44-46 (1986).

    \54\ Id. at 46.

    \55\ Id.

    ---------------------------------------------------------------------------

    The Senate Committee on Agriculture, Nutrition and Forestry, in its

    report on the 1986 CFTC reauthorization legislation, also directed the

    Commission to reassess its interpretation of bona fide hedging.\56\ The

    Commission heeded Congress's recommendation, and its staff issued

    interpretive statements directing that risk management exemptions be

    included as speculative position limit exemptions in addition to the

    existing exemptions for hedging, arbitrage and spreading.\57\ The

    interpretive statements recognized new types of ``risk reducing'' and

    ``risk shifting'' strategies in financial futures (including ``dynamic

    asset allocation strategies'') as falling within the bona fide hedging

    category.

    ---------------------------------------------------------------------------

    \56\ Senate Committee on Agriculture, Nutrition and Forestry,

    Futures Trading Act of 1986, S. Rep. No. 291, 99th Cong., 2d Sess.

    at 21-22 (1986). Specifically, the Senate Committee directed the

    Commission to consider ``whether the concept of prudent risk

    management [should] be incorporated in the general definition of

    hedging as an alternative to this risk reduction standard.'' Id., at

    22.

    \57\ See, Clarification of Certain Aspect of the Hedging

    Definition, 52 FR 27195 (July 20, 1987); Risk Management Exemptions

    from Speculative Position Limits Approved under Commission

    Regulation 1.61, 52 FR 34633 (September 14, 1987).

    ---------------------------------------------------------------------------

    The next significant change in trading patterns and practices in

    derivatives markets involved an influx of new traders into the market

    seeking exposure to commodities as an asset class through passive,

    long-term investment in commodity indexes as a way of diversifying

    portfolios that might otherwise be limited to equities and debt

    instruments.\58\ New market participants included commodity index

    traders (including pension and endowment funds, as well as individual

    investors participating in commodity index-based funds or trading

    programs) and swap dealers seeking to hedge price risk from OTC trading

    activity (frequently opposite those same commodity index traders).

    ---------------------------------------------------------------------------

    \58\ The argument has also been made that commodities act as a

    general hedge of liability obligations that are linked to inflation.

    ---------------------------------------------------------------------------

    The development of the OTC swaps industry, over which the

    Commission generally has no regulatory authority, is related to the

    exchange-traded futures and options industry in that a swap agreement

    \59\ can either compete with or

    [[Page 4151]]

    complement regulated commodity futures and options trading.\60\ Market

    participants often enter into OTC swap agreements because, unlike more

    standardized futures contracts, they can be customized to match

    particular hedging or price exposure needs. Swap dealers, often

    affiliated with a bank or other large financial institution, act as

    swap counterparties to both commercial firms seeking to hedge price

    risks and speculators seeking to gain price exposure. Swap dealers, in

    turn, utilize the more standardized futures markets to manage the

    residual risk of their swaps book.\61\ In addition, some swap dealers

    also deal directly in the merchandising of physical commodities.

    ---------------------------------------------------------------------------

    \59\ A swap agreement is typically a privately negotiated

    exchange of one asset or cash flow for another asset or cash flow.

    In a commodity swap, at least one of the assets or cash flows is

    related to the price of one or more commodities.

    \60\ The bilateral contracts that swap dealers create can vary

    widely, from terms tailored to meet the needs of a specific

    customer, to relatively standardized contracts.

    \61\ Because swap agreements can be highly customized, and the

    liquidity for a particular swap contract can be low, swap dealers

    may also use other swap agreements and physical market positions, in

    addition to futures, to offset the residual risks of their swap

    book.

    ---------------------------------------------------------------------------

    In accordance with the above-discussed Congressional

    recommendations, market developments, and the Commission's recognition

    of a risk management exemption for financial futures, beginning in

    1991, the Commission staff extended the concept of risk management

    exemptions from speculative position limits by granting bona fide hedge

    exemptions, in various agricultural futures markets subject to Federal

    speculative position limits, to a number of swap dealers who were

    seeking to manage price risks on their books arising from swap dealing

    activities. The first such hedge exemption involved J. Aron, a large

    commodity merchandising firm that engaged in commodity related swaps as

    a part of a commercial line of business. The firm, through an

    affiliate, wished to enter into an OTC swap transaction with a

    qualified counterparty (a large pension fund) involving an index based

    on the returns afforded by investments in exchange-traded futures

    contracts on certain non-financial commodities meeting specified

    criteria.\62\ The commodities making up the index included contracts in

    certain agricultural commodities subject to Federal speculative

    position limits. As a result of the swap, J. Aron would have, in

    effect, been going short the index. In order to protect itself against

    this risk, the firm planned to establish a portfolio of long futures

    positions in the commodities making up the index, in such amounts as

    would replicate its exposure under the swap transaction. By design, the

    index did not include contract months that had entered the delivery

    period and J. Aron, in replicating the index, stated that it would not

    maintain futures positions based on index-related swap activity into

    the spot month (when physical commodity markets are most vulnerable to

    manipulation and attendant price fluctuations). With this risk

    mitigation strategy, the firm's composite return on its futures

    portfolio would have offset the net payments that the dealer would have

    been required to make to the pension fund counterparty.

    ---------------------------------------------------------------------------

    \62\ The commodities comprising such indexes may include the

    agricultural commodities subject to Federal speculative position

    limits, as well as energy commodities, metals and world agricultural

    commodities (e.g., coffee, sugar, and cocoa).

    ---------------------------------------------------------------------------

    The futures positions J. Aron required to cover its exposure on the

    swap agreement's agricultural component would have been in excess of

    certain Federal speculative position limits. Accordingly, the firm

    requested, and the staff granted, a hedge exemption for those futures

    positions, that offset risks directly related to the OTC swap

    transaction.

    Subsequently, the Commission staff granted a number of similar

    hedge exemptions, pursuant to delegated authority, in other cases where

    the futures positions clearly offset risks related to swap agreements

    or similar OTC positions involving both individual commodities and

    commodity indexes. These non-traditional ``hedges'' were all subject to

    specific limitations to protect the marketplace from potential ill

    effects. The limitations required: (i) The futures positions to offset

    specific price risk; (ii) the dollar value of the futures positions to

    be no greater than the dollar value of the underlying risk; and (iii)

    the futures positions to not be carried into the spot-month.\63\

    ---------------------------------------------------------------------------

    \63\ 72 FR 66097, at 66099 (November 27, 2007).

    ---------------------------------------------------------------------------

    In 2006, Commission staff issued two no-action letters involving

    another type of index-based trading.\64\ Both cases involved trading

    that offered investors the opportunity to participate in a broadly-

    diversified commodity index-based fund or program (``index fund''). The

    futures positions of these index funds differed from the futures

    positions taken by the swap dealers who had earlier received

    exemptions. The swap dealer positions were taken to offset OTC swaps

    exposure that was directly linked to the price of an index. For that

    reason, Commission staff granted hedge exemptions to those swap dealer

    positions. On the other hand, in the index fund positions described in

    the no-action letters, the price exposure resulted from a promise or

    obligation to track an index, rather than from holding an OTC swap

    position whose value was directly linked to the price of an index.

    Commission staff believed that this difference was significant enough

    that the index fund positions would not qualify for a hedge exemption.

    Nevertheless, because the index fund positions represented a legitimate

    and potentially useful investment strategy, Commission staff granted

    the index funds no-action relief, subject to certain conditions

    intended to protect the futures markets from potential ill effects.

    These conditions required: (i) The positions to be passively managed;

    (ii) the positions to be unleveraged (so that financial conditions

    should not trigger rapid liquidations); and (iii) the positions to not

    be carried into the delivery month.

    ---------------------------------------------------------------------------

    \64\ CFTC Letter 06-09 (April 19, 2006); CFTC Letter 06-19

    (September 6, 2006).

    ---------------------------------------------------------------------------

    Prompted by concerns regarding the growing market presence of swap

    dealers and commodity index traders who use futures markets to manage

    risks related to OTC trading activity, in June and July of 2008, CFTC

    staff issued a special call for information from swap dealers and index

    traders. Based upon information collected from its special call, the

    Commission published on September 11, 2008, a ``Staff Report on

    Commodity Swap Dealers and Index Traders with Commission

    Recommendations'' (the ``September 2008 Report''). Most relevant to the

    Commission's proposed rulemaking is the Report's recommendation that

    the Commission consider the elimination of bona fide hedge exemptions

    for swap dealers and the creation of a new, limited risk management

    exemption for the activities of swap dealers and commodity index

    traders.\65\

    ---------------------------------------------------------------------------

    \65\ The Report also made a number of other recommendations for

    Commission action, including: (1) Removing swap dealers from the

    commercial category in the Commitments of Traders Reports (``COT

    Reports'') and creating a new swap dealer classification for

    reporting purposes; (2) Developing and publishing a new periodic

    supplemental report based on OTC swap dealer activity; (3) Creating

    a new CFTC Office of Data Collection dedicated to the collection and

    publication of COT Report data; (4) Establishing more detailed

    reporting standards for large traders; and (5) Conducting a review

    of swap dealers' futures trading activity to ensure that it is

    sufficiently independent of any affiliated commodity research. The

    Commission has largely addressed the Report's recommendations

    regarding COT Reports. The Commission has been publishing a new

    Disaggregated COT Report (``DCOT Report'') for twenty-two different

    physical commodity markets since September 4, 2009 and expanded the

    DCOT Report to the remaining physical markets on December 4, 2009.

    The Commission also began publishing on September 4, 2009 a new

    quarterly report of Index Investment Data which shows for swap

    dealers and index funds their index investments in commodity markets

    in terms of notional values and equivalent futures positions. The

    Commission continues to study the viability of the September 2008

    Report's other recommendations regarding the creation of an Office

    of Data Collection, the establishment of more detailed reporting

    standards for large traders and a review of the relation of swap

    dealers' futures trading and commodity research activities.

    September 2008 Report, at 6.

    ---------------------------------------------------------------------------

    [[Page 4152]]

    In March of 2009, the Commission published a ``Concept Release on

    Whether to Eliminate the Bona Fide Hedge Exemption for Certain Swap

    Dealers and Create a New Limited Risk Management Exemption from

    Speculative Position Limits.''\66\ The concept release reviewed the

    underlying statutory and regulatory background, as well as relevant

    regulatory history and marketplace developments, and posed a number of

    questions designed to help inform the Commission's decision as to: (i)

    Whether to proceed with the recommendation to eliminate the bona fide

    hedge exemption for swap dealers and replace it with a conditional

    limited risk management exemption; and (ii) if so, what form the new

    limited risk management exemptive regulations should take and how they

    might be implemented most effectively.

    ---------------------------------------------------------------------------

    \66\ 74 FR 12282 (March 24, 2009).

    ---------------------------------------------------------------------------

    In response, the Commission received letters from 30 commenters,

    including futures exchanges, agricultural trade associations, financial

    industry trade associations, money management firms (including swap

    dealers), other market participants and various other interested

    parties. The comments were about equally divided between those who

    favored eliminating the bona fide hedge exemption for swap dealers (or

    restricting the exemption to positions offsetting swap dealers'

    exposure to traditional commercial market users) and those who favored

    retaining the swap dealer hedge exemption in its current form, or some

    variation thereof.\67\ Similar views on hedge exemptions were also

    expressed at the Commission's Energy Hearings in July and August

    2009.\68\ As discussed below, the proposed regulations would not

    recognize futures and option transactions offsetting exposure acquired

    pursuant to swap dealing activity as bona fide hedges. Accordingly,

    swap dealers would not be allowed to seek bona fide hedge exemptions

    for such positions. Instead, however, upon compliance with several

    conditions including reporting and disclosure obligations, the proposed

    regulations would allow swap dealers to seek a limited exemption from

    the proposed speculative position limits for the major energy

    contracts.

    ---------------------------------------------------------------------------

    \67\ The comments are available for review on the Commission's

    Web site at http://www.cftc.gov/lawandregulation/federalregister/

    federalregistercomments/2009/09-004.html.

    \68\ Also in August 2009, Commission staff withdrew CFTC Letters

    06-09 and 06-19, which had granted staff no-action relief to two

    index funds (with passively managed positions) from complying with

    the Federal speculative position limits otherwise applicable to

    futures and option contracts in wheat, corn and soybeans.

    ---------------------------------------------------------------------------

    VI. The Proposed Regulations

    A. Overview

    The proposed regulations seek to implement an integrated

    speculative position limit framework for exchange listed natural gas,

    crude oil, heating oil, and gasoline futures and option contracts. In

    addition to identifying the affected energy contracts with

    particularity, the proposed regulations would establish aggregate and

    exchange-specific speculative position limits, including provisions

    relating to exemptions from the proposed limits and related application

    and reporting requirements. The proposed regulations provide position

    limit exemptions for bona fide hedging transactions, certain swap

    dealer risk management transactions, and positions that remain, in

    their totality, in compliance with the applicable limits once option

    contracts that comprise a portion of a trader's overall position are

    delta-adjusted by a demonstrably appropriate risk factor. The proposed

    regulations key the setting of position limits to deliverable supplies

    and open interest. In addition, they seek to apply position limits to a

    set of readily identifiable contracts. By doing so, the proposed

    regulations intend to establish an objective and administerial process

    for fixing specific position limits and identifying the contracts to

    which they apply without relying on the Commission's exercise of

    discretion.

    As discussed in detail below, the proposed spot-month limits

    generally are a function of the estimated deliverable supply for

    physically-settled contracts. The logic behind limiting positions based

    on deliverable supply is readily apparent since, for example, traders

    with sufficiently large positions can squeeze shorts and thereby

    distort the price of the deliverable commodity. In contrast, the

    proposed (non-spot) single-month and all-months-combined position

    limits would limit positions to a specific percentage of overall

    trading activity as represented by open interest. As such, the link

    between open interest and the proposed non-spot-month position limits

    may not be as readily apparent as the link between spot-month limits

    and estimated deliverable supply.

    To illustrate how a formula based on open interest would restrict

    the ability of any single trader to disrupt market operations through

    the acquisition and liquidation of large speculative positions, it may

    be helpful to consider a framework in which there are no exemptions

    from position limits and there exists a single contract with an open

    interest level of 1,000 contracts. With these simplifications in place,

    a position limit that is set at 10% of open interest, given an assumed

    open interest level of 1,000 contracts, would be 100 contracts (i.e.,

    10% of 1,000 contracts). Thus, the position limit, at the assumed open

    interest level of 1,000 contracts, would mean that there must, at a

    minimum, be 10 independent long and 10 independent short traders.\69\

    If there were 9 traders on either side of the market, then at least one

    trader would necessarily hold more than 100 contracts. That trader

    would hold such positions in violation of the contract's position

    limit.

    ---------------------------------------------------------------------------

    \69\ The concept of independence is important because the

    positions of a group of traders acting pursuant to a common plan

    would be aggregated as if the positions were traded by a single

    person.

    ---------------------------------------------------------------------------

    Alternatively, if the position limit is set at a lower percentage

    of the contract's assumed open interest level of 1,000 contracts, then

    the minimum number of independent traders needed as market participants

    would be higher. For example, a position limit that is set at 2.5% of

    the assumed open interest level of 1,000 contracts would be 25

    contracts (i.e., 2.5% of 1,000 contracts). Accordingly, the minimum

    ``size of the trading crowd'' under this scenario would be 40 long and

    40 short traders (40 traders each with 25 contract positions would

    equal the given open interest level of 1,000 contracts). Therefore,

    position limits that are formulaically set as a percentage of open

    interest can prevent any single trader from acquiring excessive market

    power if structured properly as one part of a comprehensive speculative

    position limit framework.

    B. Identifying Referenced Energy Contracts

    As proposed, the speculative position limits would apply only to

    referenced energy contracts. Proposed regulation 151.1 defines

    referenced energy contracts to mean one of four enumerated contracts--

    the NYMEX Henry Hub natural gas contract, the NYMEX Light Sweet crude

    oil contract, the NYMEX New York Harbor No. 2 heating oil contract, and

    the NYMEX New York Harbor gasoline blendstock (RBOB) contract--and in

    addition, any other contract that is exclusively or partially based on

    the referenced

    [[Page 4153]]

    contracts' commodities and deliverable at locations specified in the

    proposed regulations. Basis contracts and diversified commodity index

    futures that are based on such contracts' commodities, however, would

    not be considered to be referenced energy contracts and, therefore,

    would not be subject to the proposed speculative position limits.

    Basis contracts, as defined in proposed regulation 151.1, are

    futures or option contracts that are cash settled based on the

    difference in price of the same commodity (or substantially the same

    commodity)\70\ at different delivery points. These basis contracts have

    been excluded by the Commission from the speculative position limits

    because they price the difference between the same commodity in two

    different locations and not the underlying commodity itself.\71\

    Similarly, contracts based on diversified commodity indexes, defined in

    proposed regulation 151.1 as commodity indexes that are comprised of

    contracts in energy as well as non-energy commodities, are excluded

    because they may not involve a separate and distinct exposure to the

    price of a referenced energy contract's commodity.\72\

    ---------------------------------------------------------------------------

    \70\ A commodity may be considered ``substantially the same,''

    for instance, if it is of the same grade and quality. If a commodity

    meets an underlying referenced energy contract's deliverable grade

    and quality specifications, then such commodity presumptively is

    substantially similar.

    \71\ It should also be noted that, although a grade may be

    substantially similar to a referenced energy contract's commodity,

    this is not sufficient to render a futures or option contract a

    referenced energy contract. In order to be included as a referenced

    energy contract, a substantially similar commodity must also be

    deliverable at a referenced energy contract's delivery point(s).

    \72\ Examples of diversified commodity indexes include the S&P/

    Goldman Sachs Commodity Index, the Thomson Reuters/Jefferies CRB

    Index and the Dow Jones-UBS Commodity Index.

    ---------------------------------------------------------------------------

    C. Determining Aggregate All-Months-Combined and Single-Month Position

    Limits

    The current Federal speculative position limits of regulation 150.2

    apply only to specific futures contracts (and on a futures-equivalent

    basis) specific option contracts. Historically, all trading volume in a

    specific contract tended to migrate to a single contract on a single

    exchange. Consequently, speculative position limits that applied to a

    single contract and options thereon effectively applied to a single

    market. The current speculative position limits of regulation 150.2 for

    certain agricultural contracts follow this approach.

    In 2005, when the Commission last amended the agricultural

    speculative position limits of regulation 150.2, it codified the

    Commission's practice of grouping positions in a limited set of

    contracts on the same exchange with substantially identical terms for

    the purpose of applying the Federal agricultural speculative position

    limits.\73\ This limited grouping of positions extended only to regular

    and mini-sized contracts on the same exchange, such as the CBOT Corn

    and Mini-Corn futures contracts, and did not extend to contracts that

    were cash settled to physically delivered contracts. At that time and

    subsequently in 2007 (in a notice of proposed rulemaking that was

    subsequently withdrawn), the Commission considered but refrained from

    adopting additional position grouping requirements for the agricultural

    contracts enumerated in regulation 150.2.\74\

    ---------------------------------------------------------------------------

    \73\ 70 FR 24705 (May 11, 2005).

    \74\ See, 70 FR 12621 (March 15, 2005); 72 FR 65483 (November

    21, 2007).

    ---------------------------------------------------------------------------

    With the advent of look-alike energy contracts that are listed on

    different registered entities and contracts that are based on other

    contracts in an attempt to isolate different energy price risks, most

    prominently contracts traded at NYMEX and ICE, applying a speculative

    position to a specific energy contract, and its smaller sized

    counterpart, if any, without consideration of other directly or highly

    related contracts could result in applying a position limit only to a

    very limited segment of a broader regulated market. Accordingly, the

    proposed regulations would, for positions outside the spot month, apply

    the proposed Federal speculative position limits aggregately on and

    across reporting markets to capture a broader segment of the open

    interest that comprises the market for the referenced energy contracts.

    Proposed regulation 151.2(b)(1) would establish aggregate all-

    months-combined and single-month speculative limits for positions held

    outside the spot month. The proposed framework premises its limits on

    open interest levels, and would establish speculative position limits

    aggregately, that is, across contracts of different classes on a single

    exchange and across all reporting markets listing the same referenced

    energy contracts. As defined in proposed regulation 151.1, contracts of

    the same class outside of the spot month include all referenced energy

    contracts (including option contracts on a futures-equivalent basis) on

    a single reporting market that are based on the same commodity and

    settled in the same manner. As proposed, NYMEX's crude oil financial

    calendar spread option, last day financial futures and options thereon,

    and light sweet crude oil e-mini contracts, as cash-settled NYMEX

    contracts, would all be grouped together as contracts of the same

    class. NYMEX's physically-settled light sweet crude oil contract,

    however, would be in a different class because the contract is

    physically-settled as opposed to being a financial futures contract

    like the contracts listed above. Similarly, ICE's natural gas SPDC,

    although financially-settled and related to NYMEX's natural gas

    contracts, would be in a different class because it is on a different

    exchange. As discussed more fully below, categorizing the referenced

    energy contracts in this manner allows for the application of aggregate

    and class-specific speculative position limits and permits for the

    netting of positions as appropriate.

    In fixing aggregate all-months-combined and single-month position

    limits across contract classes, that is, for related contracts of

    different classes on and across the exchanges, the Commission would

    initially identify the referenced energy contracts that are based on

    the same commodity but that constitute a distinct class of contracts

    because, for example, they are cash-settled as opposed to physically-

    settled, or because they are listed on different reporting markets. The

    Commission next would calculate each class's average combined futures

    and delta-adjusted option month-end open interest for all months listed

    on a reporting market during the most recent calendar year as the first

    reference point (``class single-exchange gross open interest value'').

    The proposed regulations would subtract the open interest generated

    from spread contracts, as defined in regulation 151.1, from the class

    single-exchange gross open interest value to arrive at a ``class

    single-exchange final open interest value.'' Proposed regulation 151.1

    would define spread contracts as either a calendar spread contract or

    an inter-commodity spread contract.\75\ Open interest generated from

    [[Page 4154]]

    spread contracts, as defined in proposed regulation 151.1, is not

    included in the class single-exchange final open interest value because

    spread contracts may be indicative of nominal commodity price

    exposures. Traders on both sides of spread contracts, as defined by the

    proposed regulations, hold a single position composed of two highly

    correlated legs. Therefore, open interest from such contracts may be

    excluded from the base open interest value that is used to calculate

    speculative position limits. Although excluded from the class single-

    exchange final open interest value that, as discussed below, is used to

    set the aggregate all-months-combined and single-month position limits,

    such contracts, unlike basis contracts and contracts based on

    diversified commodity indexes, are nonetheless referenced energy

    contracts and therefore are attributable to traders for the purposes of

    determining a trader's compliance with, for example, the proposed

    single-month speculative position limits.

    ---------------------------------------------------------------------------

    \75\ More specifically, proposed regulation 151.1 defines

    ``calendar spread contracts'' as contracts that are settled based on

    the difference between the settlement prices in one expiring month

    of a referenced energy contract and another month's settlement price

    for the same referenced energy contract. The proposed regulations

    would define ``inter-commodity spread'' contracts as contracts that

    are based on the price difference between the settlement price of a

    referenced energy contract and another commodity contract. An

    example of a calendar spread contract is the NYMEX Crude Oil

    Calendar Spread Financially Settled Option Contract (WA). This

    contract represents an option to assume positions in two different

    NYMEX Light Sweet crude oil futures contracts distinguished by

    opposite positions in different delivery months. An example of an

    inter-commodity spread representing the price difference between two

    referenced commodities would be the NYMEX heating oil crack spread

    swap futures (HK) contract, which represents the price difference

    between two referenced energy contracts, the NYMEX New York Harbor

    No. 2 heating oil futures settlement price minus the NYMEX Light

    Sweet crude oil futures settlement price. A different example of an

    inter-commodity spread would be the NYMEX Mars (Argus) vs. WTI

    spread calendar swap (YX) which represents the Mars midpoint price

    from Argus Media minus the NYMEX Light Sweet crude oil futures first

    nearby contract month settlement price.

    ---------------------------------------------------------------------------

    The following table lists the contracts, grouped by class, which

    would be used to determine a class's single-exchange final open

    interest value as described above:

    Contract List Without Spread Contracts

    ----------------------------------------------------------------------------------------------------------------

    Individual All months

    Spot-month month combined

    conversion conversion conversion

    factor factor factor

    Class of contract Contract name Contract code relative to relative to relative to

    referenced referenced referenced

    energy energy energy

    contract contract contract

    ----------------------------------------------------------------------------------------------------------------

    Crude Oil/Physical Delivery/ Light Sweet Crude CL........... 1 1 1

    NYMEX. Oil Futures.

    Light Sweet Crude LO........... 0 1 1

    Oil Option.

    Crude Oil/Cash-Settled/NYMEX.. Crude Oil WS........... 1 1 1

    Financial

    Futures.

    Crude Oil Last 26........... 1 1 1

    Day Financial

    Futures.

    Crude Oil Option 6F........... 0 1 12

    on Calendar

    Strip.

    Crude Oil Option 6E........... 0 1 3

    on Quarterly

    Futures Strip.

    Daily Crude Oil CD........... 0 1 1

    Option.

    E-mini Crude Oil QM........... \1/2\ \1/2\ \1/2\

    Futures.

    NYMEX Crude Oil XK........... 0 \1/5\ \1/5\

    Backwardation/

    Contango (B/C)

    Index.

    NYMEX Crude Oil XC........... 0 \1/5\ \1/5\

    MACI Index.

    NYMEX Crude Oil 4T........... 1 1 1

    Minute-Marker

    Calendar Month

    Swap Futures.

    NYMEX Crude Oil 6C........... 1 1 1

    Minute-Marker

    Futures.

    WTI Average Price AO........... 0 1 1

    Option.

    WTI Calendar Swap CS........... 1 1 1

    Futures.

    WTI Look-Alike LC........... 0 1 1

    Option.

    Gasoline/Physical Delivery/ RBOB Gasoline RB........... 1 1 1

    NYMEX. Futures.

    RBOB Gasoline OB........... 0 1 1

    Option.

    Gasoline/Cash-Settled/NYMEX... E-mini RBOB QU........... \1/2\ \1/2\ \1/2\

    Gasoline Futures.

    NYMEX RBOB 5T........... 1 1 1

    Gasoline Minute-

    Marker Calendar

    Month Swap

    Futures.

    NYMEX RBOB 6R........... 1 1 1

    Gasoline Minute-

    Marker Futures.

    RBOB Gasoline RA........... 1 1 1

    Average Price

    Option.

    RBOB Gasoline 1D........... 1 1 1

    BALMO Swap

    Futures.

    RBOB Gasoline RL........... 1 1 1

    Calendar Swap

    Futures.

    RBOB Gasoline RT........... 1 1 1

    Financial

    Futures.

    RBOB Gasoline 27........... 1 1 1

    Last Day

    Financial

    Futures.

    RBOB Gasoline RF........... 0 1 1

    Look-Alike

    European Option.

    Heating Oil/Physical Delivery/ Heating Oil OH........... 0 1 1

    NYMEX. Option.

    New York Harbor HO........... 1 1 1

    No. 2 Heating

    Oil Futures.

    Heating Oil/Cash-Settled/NYMEX E-mini Heating QH........... \1/2\ \1/2\ \1/2\

    Oil Futures.

    Heating Oil AT........... 1 1 1

    Average Price

    Option.

    Heating Oil BALMO 1G........... 1 1 1

    Swap Futures.

    Heating Oil MP........... 1 1 1

    Calendar Swap

    Futures.

    Heating Oil BH........... 1 1 1

    Financial

    Futures.

    Heating Oil Last 23........... 1 1 1

    Day Financial

    Futures.

    Heating Oil Look- LB........... 0 1 1

    Alike Option.

    NYMEX Heating Oil 7T........... 1 1 1

    Minute-Marker

    Calendar Month

    Swap Futures.

    [[Page 4155]]

    NYMEX Heating Oil 6H........... 1 1 1

    Minute-Marker

    Futures.

    Natural Gas/Physical Delivery/ Henry Hub Natural NG........... 1 1 1

    NYMEX. Gas Futures.

    Henry Hub Natural ON........... 1 1 1

    Gas Option.

    Natural Gas/Cash-Settled/NYMEX Daily Natural Gas KD........... 0 1 1

    Option.

    E-mini Henry Hub NP........... \1/4\ \1/4\ \1/4\

    Natural Gas

    Penultimate

    Financial

    Futures.

    E-mini Natural QG........... \1/4\ \1/4\ \1/4\

    Gas Futures.

    Henry Hub Natural HH........... 1 1 1

    Gas Last Day

    Financial

    Futures.

    Henry Hub Natural E7........... 1 1 1

    Gas Last Day

    Financial Option.

    Henry Hub Natural LN........... 1 1 1

    Gas Look-Alike

    Option.

    Henry Hub Natural HP........... 1 1 1

    Gas Penultimate

    Financial

    Futures.

    Henry Hub Natural NN........... \1/4\ \1/4\ \1/4\

    Gas Swap Futures.

    Natural Gas 6J........... 0 \1/4\ 3

    Option on

    Calendar Futures

    Strip.

    Natural Gas 4D........... 0 \1/4\ 1 \3/4\

    Option on Summer

    Futures Strip.

    Natural Gas 6I........... 0 \1/4\ 1 \1/4\

    Option on Winter

    Futures Strip.

    Natural Gas/Cash-Settled/ICE.. Henry Hub Natural H............ \1/4\ \1/4\ \1/4\

    Gas Swap.

    ----------------------------------------------------------------------------------------------------------------

    Once a class single-exchange final open interest value is

    determined, under the proposed regulations, the Commission would sum

    this value for all related classes on and across all reporting markets

    to arrive at an ``aggregated market open interest value'' as a third

    reference point for each of the four referenced energy contracts. The

    proposed regulations would establish an all-months-combined aggregate

    position limit that is fixed by the Commission at 10% of the aggregated

    open interest value discussed above, up to 25,000 contracts, with a

    marginal increase of 2.5% thereafter.\76\ This proposed formula is

    similar to the formula provided in current regulation 150.5(c).

    ---------------------------------------------------------------------------

    \76\ Proposed regulation 151.2(e)(3) provides that the result of

    the formula is rounded up to the nearest one hundred to calculate

    the level of the limit.

    ---------------------------------------------------------------------------

    The proposed regulations would set the single-month aggregate

    position limit at two-thirds of the position limit fixed for the all-

    months-combined aggregate position limit. This means that the aggregate

    all-months-combined position limit level would be 150% of the aggregate

    single-month position limit level. As previously discussed, in 2005 the

    Commission increased the all-months-combined Federal speculative

    position limits and reset the single-month levels to approximate the

    then existing ratio between all-months-combined and single-month levels

    (i.e., arriving at the single-month limits by setting them at about

    two-thirds of the relevant all-months-combined limits). The proposed

    regulation's reliance on this approach for determining single non-spot-

    month limits is therefore consistent with prior Commission

    determinations.

    As proposed, the intent of the aggregate position limits is to

    permit for the netting of positions in a referenced energy contract's

    different classes on a single exchange and across the exchanges for the

    purpose of determining compliance with the aggregate all-months-

    combined and aggregate single-month speculative position limits.

    Accordingly, no trader would be permitted to hold net long or net short

    referenced energy contract positions that, when combined with net long

    or net short positions in the same referenced energy contract on

    another exchange, would exceed the aggregate all-months-combined and

    aggregate single-month speculative position limits.

    D. Single-Exchange Limits

    In order to prevent the excessive concentration of positions in a

    particular class of contracts, for each reporting market separately,

    the proposed regulations would also establish an all-months-combined

    position limit that would apply specifically to contracts of the same

    class at the lower of the aggregate position limit for a referenced

    energy contract or 30% of a class's single exchange final open interest

    value. Accordingly, for the purpose of applying these exchange and

    class-specific speculative position limits, netting would only be

    permitted between contracts of the same class.

    For each reporting market separately, the proposed regulations also

    would establish a single-month position limit for contracts of the same

    class that would be two-thirds of the all-months-combined position

    limit fixed for that class of contracts. Thus, the single-month limit

    on each reporting market for a class of contracts would be no greater

    than 20% of a class's single exchange final open interest value (i.e.,

    two-thirds of 30% of a class's single exchange final open interest

    value).

    Proposed regulation 151.2 also establishes a minimum position limit

    for a reporting market of 5,000 contracts or 1% of the aggregated open

    interest value, whichever is greater. The Commission notes that the

    5,000 contract level is consistent with its guidance on acceptable

    practices for exchanges setting all-months-combined position limits for

    newly listed energy contracts in current regulation

    [[Page 4156]]

    150.5(b)(3). Levels set by reference to the 1% of aggregated open

    interest value and the 5,000 contract limit are intended to give newly

    listed contracts or contracts with low open interest the opportunity to

    attract liquidity. The concentration of positions held by a single

    trader on a particular reporting market, such as a market marker,\77\

    given the minimal impact that such trading may have on commodity

    prices, is acceptable because such levels promote innovation and

    competition.

    ---------------------------------------------------------------------------

    \77\ A market maker is a trader that quotes both a buy and a

    sell price in an attempt to profit from the spread.

    ---------------------------------------------------------------------------

    In addition to the above mentioned position limits, as proposed, a

    trader's positions in contracts of the same class in a single month on

    a reporting market, measured on a gross basis, would be limited to no

    greater than two times the all-months-combined class position limit

    fixed for that reporting market. A limit on a trader's gross positions

    in a single month would serve to prevent sudden or unreasonable

    fluctuations or unwarranted changes in commodity prices that could

    arise from traders holding large positions that would otherwise net out

    (e.g., offsetting positions in last trading day and penultimate

    contracts of the same class for the same month) for the purpose of

    applying the class single-month position limits.

    The following table groups contracts by the classes in which they

    would be included under the proposed regulations:

    Contract List with Spread Contracts

    ----------------------------------------------------------------------------------------------------------------

    Individual All months

    Spot-month month combined

    conversion conversion conversion

    Contract factor factor factor

    Class of contract Contract name code relative to relative to relative to

    referenced referenced referenced

    energy energy energy

    contract contract contract

    ----------------------------------------------------------------------------------------------------------------

    Crude Oil/Physical Delivery/ Light Sweet Crude CL 1 1 1

    NYMEX. Oil Futures.

    Light Sweet Crude LO 0 1 1

    Oil Option.

    Heating Oil Crack HC -1 -1 -1

    Spread Option.

    RBOB Gasoline Crack RX -1 -1 -1

    Spread Option.

    WTI Calendar Spread WA 1 1 0

    Option.

    Crude Oil/Cash-Settled/NYMEX. Crude Oil Financial 7A 1 1 1

    Calendar Spread

    Option.

    Crude Oil Financial WS 1 1 1

    Futures.

    Crude Oil Last Day 26 1 1 1

    Financial Futures.

    Crude Oil Option on 6F 0 1 12

    Calendar Strip.

    Crude Oil Option on 6E 0 1 3

    Quarterly Futures

    Strip.

    Daily Crude Oil CD 0 1 1

    Option.

    E-mini Crude Oil QM \1/2\ \1/2\ \1/2\

    Futures.

    Gulf Coast No. 2 RD -1 -1 -1

    (Platts) Crack

    Spread Swap Futures.

    Gulf Coast No. 6 MG -1 -1 -1

    Fuel Oil (Platts)

    Crack Spread Swap

    Futures.

    Gulf Coast ULSD CF -1 -1 -1

    (Argus) Crack

    Spread Swap Futures.

    Gulf Coast ULSD GY -1 -1 -1

    (Platts) Crack

    Spread Swap Futures.

    Gulf Coast Unl 87 CK -1 -1 -1

    (Argus) Crack

    Spread Swap Futures.

    Gulf Coast Unl 87 1J -1 -1 -1

    (Platts) Crack

    Spread BALMO Swap

    Futures.

    Gulf Coast Unl 87 RU -1 -1 -1

    (Platts) Crack

    Spread Swap Futures.

    Heating Oil Crack 3W -1 -1 -1

    Spread Average

    Price Option.

    Heating Oil Crack 1H -1 -1 -1

    Spread BALMO Swap

    Futures.

    Heating Oil Crack HK -1 -1 -1

    Spread Swap Futures.

    Mars (Argus) vs. WTI YX -1 -1 -1

    Spread Calendar

    Swap Futures.

    Mars (Argus) vs. WTI YV -1 -1 -1

    Spread Trade Month

    Swap Futures.

    New York Harbor ML -1 -1 -1

    Residual Fuel

    (Platts) Crack

    Spread Swap Futures.

    New York Ultra Low YU -1 -1 -1

    Sulfur Diesel

    (ULSD) Crack Spread

    Swap.

    NYMEX Crude Oil XK 0 \1/5\ \1/5\

    Backwardation/

    Contango (B/C)

    Index.

    NYMEX Crude Oil MACI XC 0 \1/5\ \1/5\

    Index.

    NYMEX Crude Oil 4T 1 1 1

    Minute-Marker

    Calendar Month Swap

    Futures.

    NYMEX Crude Oil 6C 1 1 1

    Minute-Marker

    Futures.

    RBOB Gasoline Crack 3Y -1 -1 -1

    Spread Average

    Price Option.

    [[Page 4157]]

    RBOB Gasoline Crack 1E -1 -1 -1

    Spread BALMO Swap

    Futures.

    RBOB Gasoline Crack RM -1 -1 -1

    Spread Swap Futures.

    WTI Average Price AO 0 1 1

    Option.

    WTI Calendar Swap CS 1 1 1

    Futures.

    WTI Look-Alike LC 0 1 1

    Option.

    WTS (Argus) vs. WTI FF -1 -1 -1

    Spread Calendar

    Swap Futures.

    WTS (Argus) vs. WTI FH -1 -1 -1

    Spread Trade Month

    Swap Futures.

    Gasoline/Physical Delivery/ RBOB Gasoline RB 1 1 1

    NYMEX. Futures.

    RBOB Gasoline Option OB 0 1 1

    RBOB Gasoline ZA 1 1 0

    Calendar Spread

    Option.

    RBOB Gasoline Crack RX 0 1 1

    Spread Option.

    Gasoline/Cash-Settled/NYMEX.. Chicago Unleaded 3C -1 -1 -1

    Gasoline (Platts)

    vs. RBOB Gasoline

    Spread Swap Futures.

    E-mini RBOB QU \1/2\ \1/2\ \1/2\

    Gasoline Futures.

    Group Three Unleaded A8 -1 -1 -1

    Gasoline (Platts)

    vs. RBOB Spread

    Swap.

    Gulf Coast Gasoline 4F -1 -1 -1

    (OPIS) vs. RBOB

    Gasoline Spread

    Swap Futures.

    Gulf Coast Unl 87 UZ -1 -1 -1

    (Argus) Up-Down

    Swap Futures.

    Gulf Coast Unl 87 1K -1 -1 -1

    (Platts) Up-Down

    BALMO Swap Futures.

    Gulf Coast Unl 87 RV -1 -1 -1

    (Platts) vs. RBOB

    Gasoline Spread

    Swap Futures.

    Los Angeles CARBOB JL -1 -1 -1

    Gasoline (OPIS)

    Spread Swap Futures.

    New York Harbor RZ -1 -1 -1

    Conv. Gasoline

    (Platts) vs. RBOB

    Gasoline Swap

    Futures.

    NY RBOB (Platts) vs. RI -1 -1 -1

    NYMEX RBOB Gasoline

    Spread Swap Futures.

    NYMEX RBOB Gasoline 5T 1 1 1

    Minute-Marker

    Calendar Month Swap

    Futures.

    NYMEX RBOB Gasoline 6R 1 1 1

    Minute-Marker

    Futures.

    RBOB Gasoline RA 1 1 1

    Average Price

    Option.

    RBOB Gasoline BALMO 1D 1 1 1

    Swap Futures.

    RBOB Gasoline RL 1 1 1

    Calendar Swap

    Futures.

    RBOB Gasoline Crack 3Y 1 1 1

    Spread Average

    Price Option.

    RBOB Gasoline Crack 1E 1 1 1

    Spread BALMO Swap.

    RBOB Gasoline Crack RM 1 1 1

    Spread Swap Futures.

    RBOB Gasoline RT 1 1 1

    Financial Futures.

    RBOB Gasoline Last 27 1 1 1

    Day Financial

    Futures.

    RBOB Gasoline Look- RF 0 1 1

    Alike European

    Option.

    RBOB Gasoline vs. RH 1 1 1

    Heating Oil Swap

    Futures.

    Heating Oil/Physical Delivery/ New York Harbor No. HO 1 1 1

    NYMEX. 2 Heating Oil

    Futures.

    Heating Oil Option.. OH 0 1 1

    Heating Oil Calendar FA 1 1 0

    Spread Options.

    Heating Oil Crack HC 0 1 1

    Spread Option.

    Heating Oil/Cash-Settled/ Chicago ULSD 5C -1 -1 -1

    NYMEX. (Platts) vs.

    Heating Oil Spread

    Swap.

    E-mini Heating Oil QH \1/2\ \1/2\ \1/2\

    Futures.

    Group Three ULSD A6 -1 -1 -1

    (Platts) vs.

    Heating Oil Spread

    Swap Futures.

    Gulf Coast Jet JU -1 -1 -1

    (Argus) Up-Down

    Swap Futures.

    Gulf Coast Jet W7 -1 -1 -1

    (OPIS) vs. Heating

    Oil Spread Swap

    Futures.

    Gulf Coast Jet 1M -1 -1 -1

    (Platts) Up-Down

    BALMO Swap Futures.

    Gulf Coast Jet ME -1 -1 -1

    (Platts) vs.

    Heating Oil Spread

    Swap Futures.

    Gulf Coast Low YL -1 -1 -1

    Sulfur Diesel (LSD)

    (Platts) Up-Down

    Spread Swap Futures.

    Gulf Coast ULSD US -1 -1 -1

    (Argus) Up-Down

    Swap Futures.

    [[Page 4158]]

    Gulf Coast ULSD 5Q -1 -1 -1

    (OPIS) vs. Heating

    Oil Spread Swap

    Futures.

    Gulf Coast ULSD LT -1 -1 -1

    (Platts) Up-Down

    Spread Swap Futures.

    Gulf Coast ULSD 1L -1 -1 -1

    (Platts) Up-Down

    Swap Futures.

    Heating Oil Arb : HA 1 1 1

    NYMEX Heating Oil

    vs. ICE Gasoil.

    Heating Oil Average AT 1 1 1

    Price Option.

    Heating Oil BALMO 1G 1 1 1

    Swap Futures.

    Heating Oil Calendar MP 1 1 1

    Swap Futures.

    Heating Oil Crack 3W 1 1 1

    Spread Average

    Price Option.

    Heating Oil Crack 1H 1 1 1

    Spread BALMO Swap

    Futures.

    Heating Oil Crack HK 1 1 1

    Spread Swap Futures.

    Heating Oil BH 1 1 1

    Financial Futures.

    Heating Oil Last 23 1 1 1

    Day Financial

    Futures.

    Heating Oil Look- LB 0 1 1

    Alike Option.

    Los Angeles CARB KL -1 -1 -1

    Diesel (OPIS)

    Spread Swap Futures.

    Los Angeles Jet JS -1 -1 -1

    (OPIS) Spread Swap

    Futures.

    Los Angeles Jet Fuel MQ -1 -1 -1

    (Platts) vs.

    Heating Oil Spread

    Swap Futures.

    NY Jet Fuel (Argus) 5U -1 -1 -1

    vs. Heating Oil

    Spread Swap Futures.

    NY Jet Fuel (Platts) 1U -1 -1 -1

    vs. Heating Oil

    Swap Futures.

    NY ULSD (Platts) vs. UY -1 -1 -1

    NYMEX Heating Oil

    Spread Swap Futures.

    NYMEX Heating Oil 7T 1 1 1

    Minute-Marker

    Calendar Month Swap

    Futures.

    NYMEX Heating Oil 6H 1 1 1

    Minute-Marker

    Futures.

    RBOB Gasoline vs. RH -1 -1 -1

    Heating Oil Swap

    Futures.

    ULSD (Argus) vs. 7Y -1 -1 -1

    Heating Oil Spread

    Swap Futures.

    Natural Gas/Physical Delivery/ Henry Hub Natural NG 1 1 1

    NYMEX. Gas Futures.

    Henry Hub Natural ON 1 1 1

    Gas Option.

    Henry Hub Natural IA 1 1 0

    Gas Calendar Spread

    Options.

    Natural Gas/Cash-Settled/ Daily Natural Gas KD 0 1 1

    NYMEX. Option.

    E-mini Henry Hub NP \1/4\ \1/4\ \1/4\

    Natural Gas

    Penultimate

    Financial Futures.

    E-mini Natural Gas QG \1/4\ \1/4\ \1/4\

    Futures.

    Henry Hub Natural HH 1 1 1

    Gas Last Day

    Financial Futures.

    Henry Hub Natural E7 1 1 1

    Gas Last Day

    Financial Option.

    Henry Hub Natural LN 1 1 1

    Gas Look-Alike

    Option.

    Henry Hub Natural HP 1 1 1

    Gas Penultimate

    Financial Futures.

    Henry Hub Natural NN \1/4\ \1/4\ \1/4\

    Gas Swap Futures.

    Henry Natural Gas G4 1 1 0

    Financial Calendar

    Spread Option.

    Natural Gas Option 6J 0 \1/4\ 3

    on Calendar Futures

    Strip.

    Natural Gas Option 4D 0 \1/4\ 1 \3/4\

    on Summer Futures

    Strip.

    Natural Gas Option 6I 0 \1/4\ 1 \1/4\

    on Winter Futures

    Strip.

    Natural Gas/Cash-Settled/ICE. Henry Hub Natural H \1/4\ \1/4\ \1/4\

    Gas Swap.

    ----------------------------------------------------------------------------------------------------------------

    E. Spot-Month Classes of Contracts

    An energy contract that is in its spot month, pursuant to industry

    practice and as defined in proposed regulation 151.1, is a futures

    contract that is ``next to expire during that period of time beginning

    at the close of trading on the trading day preceding the first day on

    which delivery notices can be issued to the clearing organization of a

    registered entity.'' \78\ In practice, the spot-month for the major

    energy contracts generally is

    [[Page 4159]]

    three days in duration. In view of the heightened potential for

    manipulation, corners, squeezes as well as excessive speculation during

    this concentrated period of time, only those contracts that expire on

    the same day would be deemed to be contracts of the same class under

    the proposed regulations. This would mean that, for example, during the

    spot month, a cash-settled last trading day contract would not be in

    the same class as a cash-settled penultimate contract. The most

    significant impact of defining a class of contracts in a narrower

    manner during the spot-month is to prohibit the netting of spot-month

    contracts that expire on different days for the purpose of applying the

    proposed speculative position limits. By way of example, a trader that

    is 4,000 contracts long in a cash-settled last trading day contract,

    and 4,000 contracts short in a cash-settled penultimate contract on the

    same exchange in a referenced energy contract, would be subject to

    spot-month position limits for each contract and would not be deemed to

    be holding a flat position. In contrast, outside the spot month, each

    leg of this spread would be considered to be in the same class and

    therefore subject to netting for the purpose of applying the proposed

    class all-months-combined and single-month position limits.

    ---------------------------------------------------------------------------

    \78\ For a contract that does not allow trading concurrently

    with the issuance of delivery notices, spot-month means ``the

    futures contract next to expire during that period of time beginning

    at the close of trading on the third trading day preceding the last

    trading day.'' For a contract that cash-settles based on the price

    of one or more physically-delivered contracts, spot-month means

    ``the period of time that is the spot-month for such physically-

    delivered contracts.'' The Commission intends the spot-month for

    options on futures contracts to be the same period of time as for

    the underlying futures contract.

    ---------------------------------------------------------------------------

    F. Determining and Complying With the Proposed Spot-Month Limits

    For physically-delivered contracts, a spot-month position limit

    would be fixed by the Commission at one-quarter of the estimated

    deliverable supply for a spot-month class of contracts. This proposed

    formula is consistent with current regulation 150.5(b) and the

    Acceptable Practices for Core Principle 5, in Appendix B to part 38,

    and the Commission's Guideline No. 1, in Appendix A to part 40.

    Proposed regulation 151.2(d) would require a reporting market listing

    physically-delivered contracts to submit to the Commission an estimate

    of deliverable supply for its contracts by December 31st of each

    calendar year. The Commission, in setting the spot-month limits, would

    take into consideration the estimates of deliverable supply provided by

    the reporting markets and would base its own determination of

    deliverable supply on data submitted by the reporting markets unless

    the Commission has a basis for questioning the accuracy of the

    submitted data, in which case the Commission would derive its own

    estimates of deliverable supply.

    For cash-settled contracts based on the prices of physically-

    delivered futures contracts, the proposed regulations would establish a

    default spot-month position limit equal to that of the cash-settled

    contract's physically-delivered counterpart. The proposed regulations

    would allow a trader to acquire or hold positions in a spot-month class

    of contracts, pursuant to reporting market rules specifically

    implemented to address such positions, that is five times greater than

    the default spot-month limit upon satisfying certain conditions. A

    trader would be permitted to hold positions under this conditional-

    spot-month limit only if that trader does not hold a position in any

    physically-delivered referenced energy contract to which its cash-

    settled positions are linked in the spot month and satisfies the

    reporting requirements of proposed regulation 20.00.

    Proposed regulation 20.00 sets forth reporting requirements for

    persons that would acquire positions in a referenced energy contract

    pursuant to the conditional-spot-month position limit of proposed

    regulation 151.2(a)(2). Specifically, this regulation would require

    such persons to file a completed CFTC Form 40 and Part A of new CFTC

    Form 404. CFTC Form 40, among other things, facilitates the

    Commission's identification of the persons controlling the trading of

    an account. Part A of new CFTC Form 404 would collect information on: A

    trader's spot and forward positions priced in relation to the relevant

    referenced energy contract or the contract's underlying commodity; the

    trader's spot and forward positions in contracts priced to a cash

    market index that includes quotations or prices for spot or forward

    contracts in the referenced energy contract's underlying commodity; the

    trader's positions in swaps priced in relation to the referenced energy

    contract or the contract's underlying commodity; and the trader's

    positions in other physically or financially settled contracts related

    to the trader's positions held pursuant to the conditional-spot-month

    position limit. The collection of this information would facilitate the

    Commission's surveillance program with respect to detecting and

    deterring trading activity that may tend to cause sudden or

    unreasonable fluctuations or unwarranted changes in the prices of the

    referenced energy contracts and their underlying commodities during the

    spot-month.

    G. Exemptions and Related Requirements

    1. Bona Fide Hedges

    Proposed regulation 151.3(a) would establish three exemptions for

    the following transactions and positions: (i) Bona fide hedging

    transactions generally consistent with paragraphs (1) and (2) of

    regulation 1.3(z); (ii) swap dealer risk management transactions

    outside of the spot-month that are held to offset risks associated with

    certain swap agreements; and (iii) positions that would be in

    compliance with the speculative position limits when adjusted by an

    appropriate contemporaneous risk factor.

    As proposed, a reporting market may establish an exemption process

    for traders holding positions in proprietary accounts that are shown to

    be bona fide hedging positions consistent with, but that may differ

    from (to the extent such differences are consistent with commercial

    activity in the physical energy markets), paragraphs (1) and (2) of

    regulation 1.3(z). As is currently the case for traders seeking

    exemptions from exchange-set spot-month position limits applicable to

    the referenced energy contracts, the Commission intends for traders

    seeking such bona fide hedging transactions to apply to a reporting

    market for exemptions from the applicable spot and non-spot-month

    limits. The Commission would audit this process to ensure that the

    reporting markets act appropriately in reviewing and acting on trader

    bona fide hedge exemption requests. In this manner, the Commission

    would also enable a reporting market to act expeditiously on exemption

    requests.

    Under the proposed regulations, traders holding positions pursuant

    to a bona fide hedge exemption would generally be prohibited from also

    trading speculatively. If bona fide hedging positions outside the spot

    month exceed twice an otherwise applicable all-months-combined or

    single-month position limit, then such traders would also be prohibited

    from holding positions as swap dealers. In contrast, however, traders

    holding positions in the spot-month pursuant to a bona fide hedge

    exemption would not be prohibited from holding positions speculatively

    outside the spot month. The intent of this proposed exception is to not

    affect liquidity generated by speculative trading outside the spot

    month that would otherwise be prohibited by virtue of a trader's need

    to invoke a hedge exemption to exceed the lower spot-month position

    limits.

    These ``crowding out'' provisions would restrict a trader

    controlling large positions used for hedging from also entering into

    large speculative positions or large swap dealer risk management

    positions. The proposed regulations would not impede a trader's ability

    to engage in bona fide hedging in any way,

    [[Page 4160]]

    but would limit a trader's ability to acquire swap dealer risk

    management positions or speculative positions when that trader holds

    very large positions pursuant to a bona fide hedge exemption.

    Proposed regulation 20.01 sets forth reporting requirements for

    persons that would acquire positions pursuant to the bona fide hedge

    exemption of proposed regulation 151.3(a)(1). Specifically, this

    section would require such persons to file a completed CFTC Form 40 and

    Part B of new CFTC Form 404. Part B of CFTC Form 404 would collect

    information on: The quantity of stocks owned of the commodity that

    underlies the relevant referenced energy contract and its products and

    by-products; the ownership of shares of an investment vehicle that

    holds or owns the referenced energy contract or the commodity that

    underlies the referenced energy contract and its products and by-

    products; the quantity of fixed price purchase and sale commitments on

    the relevant referenced energy contract's commodity; and, for

    anticipatory hedging transactions, annual sales or requirements for the

    preceding three complete fiscal years and anticipated sales or

    requirements of such commodity for the period hedged. For cross-hedge

    positions, traders would be required to report the relevant commercial

    activity in terms of the actual or anticipated quantity of the cross-

    hedged commodity, and on a converted basis, equivalent positions in the

    relevant referenced energy contract. The Commission notes that this

    proposed data collection is consistent with data currently collected in

    grain and cotton markets using CFTC Forms 204 and 304, respectively,

    pursuant to part 19 of the Commission's regulations.

    2. Swap Dealers

    Swap dealers can perform an important economic function by taking

    on risks to accommodate the specific hedging and risk management needs

    of various customers. Swap dealers often are able to aggregate and

    standardize these otherwise particularized risks, and in turn, enter

    into commodity futures and option contracts to manage them.

    Accordingly, under the regulations as proposed, swap dealers may apply

    to the Commission for an exemption from the proposed speculative

    position limits for positions held outside of the spot month to manage

    the risks associated with swap agreements entered into to accommodate

    swap customers. Proposed regulation 151.1 would define ``swap

    agreement'' to have the same meaning as in current Commission

    regulation 35.1(b)(1).\79\ Proposed regulation 151.1 would also define

    ``swap dealer'' to mean ``any person who, as a significant part of its

    business, holds itself out as a dealer in swaps, makes a market in

    swaps, regularly engages in the purchase of swaps and their resale to

    customers in the ordinary course of a business, or engages in any

    activity causing the person to be commonly known in the trade as a

    dealer or market maker in swaps.''

    ---------------------------------------------------------------------------

    \79\ 17 CFR 35.1(b)(1).

    ---------------------------------------------------------------------------

    The proposed swap dealer exemption would be limited to twice an

    applicable all-months-combined or single non-spot month speculative

    position limit. Further, traders would be required to aggregate

    positions held as swap dealer risk management transactions with net

    speculative positions for the purpose of determining compliance with

    the proposed Federal speculative position limits. As with bona fide

    hedgers that hold positions in excess of the proposed limits, swap

    dealers holding large positions pursuant to the proposed swap dealer

    exemption would be unable to also take on positions as speculators. In

    effect, this proposed ``crowding out'' provision would restrict a

    trader controlling a large position used for swap risk management from

    also entering into large speculative positions.

    Proposed regulation 1.45 sets forth the application procedure for

    swap dealers that would seek an exemption from the proposed Commission-

    set speculative position limits. Specifically, this regulation would

    require a person to file a completed CFTC Form 40, an initial

    application and an annual update to certify that the person remains a

    swap dealer, as defined in proposed regulation 151.1. The exemption

    would require the applicant to consent to the publication of the fact

    that such person received a swap dealer exemption from the Commission.

    Such publication would be made only once a year and would not include

    the identity of a swap dealer that first received an exemption within

    the six calendar months preceding a publication. Furthermore, the

    publication would not include any information that would disclose the

    specific commodities for which the swap dealer has sought an exemption.

    In this regard, the Commission reiterates that it will protect all

    proprietary information in accordance with the Freedom of Information

    Act and part 145 of the Commission's regulations, 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 otherwise 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.'' \80\

    ---------------------------------------------------------------------------

    \80\ See 7 U.S.C. 12(a)(1).

    ---------------------------------------------------------------------------

    Proposed regulation 20.02 sets forth reporting requirements for

    persons who would receive a swap dealer limited risk management

    exemption pursuant to proposed regulation 151.3(a)(2). Specifically,

    the proposed regulation would require swap dealers to file monthly a

    completed Form 404 Part C with the Commission and with any registered

    entity on which the swap dealer's referenced energy contract positions

    are listed. The monthly report would include, for each day, swap

    positions based upon the commodity underlying the referenced energy

    contracts that are held in proprietary and customer accounts and a

    summary of dealing and trading activity in swaps based upon the

    commodity underlying the referenced energy contracts. Furthermore,

    proposed regulation 20.02 would require the swap dealer to file a

    supplemental report whenever it establishes a larger position in

    referenced energy contracts than previously reported. In addition to

    the above reporting requirements, traders that receive a swap dealer

    limited risk management exemption must also maintain complete books and

    records relating to their swap dealing activities (including

    transaction data) and make such books and records, along with a list of

    counterparties to customer swap agreements that support and

    substantiate the need to offset swap agreement risks on reporting

    markets, available to the Commission upon request.

    3. Exemptions for Delta-Adjusted Positions

    The Commission understands that option risk factors continuously

    change with movements in the price of an underlying futures contract.

    As the price of the underlying futures contract changes, a trader

    offsetting the risk of an options position through a delta-neutral

    position in the underlying futures contract may need to adjust the

    futures position substantially on an intra-day basis to maintain a risk

    neutral position. As currently defined in regulation 150.1, delta-

    neutrality is recognized by reference to the previous day's risk

    factor. Proposed regulations 151.3 and 20.03 would set forth the

    exemption and reporting requirements for persons whose positions would

    have exceeded the Federal speculative position limit

    [[Page 4161]]

    for a referenced energy contract when adjusted by the previous day's

    risk factors (deltas), but that would not exceed such a limit when

    positions are calculated using an appropriate contemporaneous risk

    factor. The reporting requirements, as proposed, would include the

    submission of complete position data to demonstrate that such positions

    remained within an otherwise applicable speculative position limit when

    adjusted by an appropriate and contemporaneous risk factor.

    H. Account Aggregation

    Proposed regulation 151.4 would establish account aggregation

    standards specifically for positions in referenced energy contracts.

    Under the proposed standards, the Federal position limits in referenced

    energy contracts would apply to all positions in accounts in which any

    person, directly or indirectly, has an ownership or equity interest of

    10% or greater or, by power of attorney or otherwise, controls trading.

    Proposed regulation 151.4 includes a limited exemption for positions in

    pools in which a trader that is a limited partner, shareholder or

    similar person has an ownership or equity interest of less than 25%

    unless the trader in fact controls trading that is done by the pool.

    Proposed regulation 151.4 would also treat positions held by two or

    more persons 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 person. Accordingly, the

    proposed regulations would aggregate positions in accounts at both the

    account owner and controller levels.

    In contrast to the disaggregation exemptions of current regulations

    150.3(a)(4) and 150.4, eligible entities (such as mutual funds,

    commodity pool operators and commodity trading advisors) and futures

    commission merchants will not be permitted to disaggregate positions

    pursuant to the independent account controller framework established in

    part 150 of the Commission's regulations. The current account

    disaggregation exceptions for the agricultural contracts enumerated in

    regulation 150.2, may be incompatible with the proposed Federal

    speculative position limit framework, however, and used to circumvent

    its requirements.

    The proposed framework sets high position levels that are at the

    outer bounds of the largest positions held by market participants,

    permits for the netting of positions across reporting markets and

    within contracts of the same class and in addition, includes a

    conditional-spot-month limit for cash-settled contracts and exemptions

    for bona fide hedgers, swap dealers and delta-adjusted positions.

    Accordingly, an exemption, such as the eligible entity exemption, that

    would allow traders to establish a series of positions each near a

    proposed outer bound position limit, without aggregation, may not be

    appropriate. Instead, proposed regulation 151.4 would establish a clear

    general account aggregation standard and a clear exception thereto for

    passive pool participants and similar investors.

    VII. The CME Group's Proposal

    In a concept paper published in September of 2009, the CME Group

    suggested an alternative position limit framework that would require

    each reporting market to set position limits separately without inter-

    exchange aggregation.\81\ The single-month and all-months-combined

    limits, under the CME's proposal, would apply collectively to

    physically-delivered contracts and cash-settled contracts on a

    referenced energy commodity, including spread positions within the same

    contract. The level of the limits would be based on the collective open

    interest of the lead month (i.e., the month with the highest level of

    open interest) in such contracts at that reporting market.

    ---------------------------------------------------------------------------

    \81\ See, ``Excessive Speculation and Position Limits in Energy

    Derivatives Markets,'' CME Group, at page 10, http://

    www.cmegroup.com/company/files/PositionLimitsWhitePaper.pdf.

    ---------------------------------------------------------------------------

    The CME Group also suggested that each reporting market set a

    single-month limit at 10% of the first 25,000 contracts of that

    reporting market's open interest with a 5% marginal increase for open

    interest in excess of 25,000 contracts at that reporting market. The

    CME Group suggested that the all-months-combined limit be set at 150%

    of the single-month limit and suggested establishing a flexible

    concentration limit in deferred-month contracts. Under the CME's

    proposed approach, a suggested concentration limit of 25% of open

    interest would be applicable in a single month that has developed

    liquidity.\82\

    ---------------------------------------------------------------------------

    \82\ The concept paper did not specify a method to determine

    when a contract month had developed liquidity.

    ---------------------------------------------------------------------------

    With respect to applying aggregate limits, the CME Group suggested

    that the CFTC establish and enforce an aggregate limit across all

    reporting markets, conditioned on the CFTC gaining authority to impose

    limits on OTC trading and on the CFTC developing a means to minimize

    the impact of potential transfers of trading to foreign jurisdictions

    or the physical markets. With respect to the aggregation of positions,

    the CME Group proposed that the aggregation standards of Commission

    regulation 150.4 apply to the aggregate limits.

    By way of comparison, the Commission's proposed limits would apply

    aggregately across all exchanges that list a referenced energy contract

    and separately to physically-delivered contracts and cash-settled

    contracts that are listed by a particular reporting market. The

    Commission's proposed class-based limits would prevent the

    establishment of excessively large positions in a single class and,

    thereby, would reduce the potential for price distortions.

    Also, by way of contrast to the CME Group's approach, the level of

    limits proposed by the Commission would be based on the sum of the open

    interest in all months, rather than only the lead month's open interest

    as proposed by the CME. By using the entire open interest, the

    Commission's proposal would avoid creating an incentive for traders to

    shift open interest into the lead month in an attempt to increase the

    level of the limits. Furthermore, rather than considering only a

    reporting market's open interest, the Commission's proposal would

    establish limit levels that reflect both aggregated open interest on

    all reporting markets and open interest on an individual reporting

    market. This tiered approach would provide an opportunity for small

    markets to grow, while establishing a prudential all-months limit for a

    class of contracts of no more than 30% of a reporting market's open

    interest in a class of contracts as defined in proposed regulation

    151.1. The class limit, as proposed by the Commission, would be capped

    at a formula-determined level based on the open interest in all

    reporting markets in a referenced energy contract. The 30% level was

    selected in light of the expected opportunity for arbitrage across

    classes and the cap was set using the traditional all-months position

    limit formula in regulation 150.5(c)(2).

    As discussed previously, the Commission's proposal first

    establishes an all-months-combined limit, then sets a single-month

    limit at two-thirds of the level of that all-months-combined limit.

    This is the same ratio between limits if first established in a single-

    month limit, as proposed by the CME, and then multiplied by 150% to

    arrive at an all-months-combined position limit. This two-thirds ratio,

    as proposed by the Commission, is therefore the same ratio that is

    proposed by the CME Group and consistent with the ratio between the

    single-month limits and the all-month-combined limits in the existing

    Federal agricultural positions limits which

    [[Page 4162]]

    range from a low of 61% to a high of 77%. The table below provides a

    comparison of position limits as they would be set under the proposed

    Commission and CME Group approaches to establishing speculative

    position limits:

    Proposed Federal Speculative Position Limits For Referenced Energy Contracts

    ----------------------------------------------------------------------------------------------------------------

    All-months-

    combined (AMC)

    average open

    Referenced energy contract Class of contract interest AMC limit Single-month

    (January 2008- limit

    December 2008)

    ----------------------------------------------------------------------------------------------------------------

    NYMEX Light Sweet Crude Oil........ NYMEX Physical 2,881,901 98,100 65,400

    Delivery.

    NYMEX Cash-Settled... 963,871 98,100 65,400

    Aggregate Limit...... 3,845,772 98,100 65,400

    NYMEX New York Harbor Gasoline NYMEX Physical 252,564 9,000 6,000

    Blendstock (RBOB). Delivery.

    NYMEX Cash-Settled... 29,306 8,800 5,900

    Aggregate Limit...... 281,870 9,000 6,000

    NYMEX New York Harbor No. 2 Heating NYMEX Physical 254,442 10,100 6,800

    Oil. Delivery.

    NYMEX Cash-Settled... 73,996 10,100 6,800

    Aggregate Limit...... 328,438 10,100 6,800

    NYMEX Henry Hub Natural Gas........ NYMEX Physical 1,236,257 132,700 88,500

    Delivery.

    NYMEX Cash-Settled... 3,088,239 132,700 88,500

    ICE Cash-Settled..... 904,754 132,700 88,500

    Aggregate Limit...... 5,229,250 132,700 88,500

    ----------------------------------------------------------------------------------------------------------------

    Proposed Energy Speculative Limits by CME Group

    ----------------------------------------------------------------------------------------------------------------

    Average lead

    month open

    interest All-months- Single-month

    Reference energy contract Exchange (January 2008- combined limit limit

    December 2008)

    ----------------------------------------------------------------------------------------------------------------

    NYMEX Light Sweet Crude Oil........ NYMEX................ 841,607 65,000 43,400

    NYMEX New York Harbor Gasoline NYMEX................ 107,439 10,000 6,700

    Blendstock (RBOB).

    NYMEX New York Harbor No. 2 Heating NYMEX................ 98,977 9,300 6,200

    Oil.

    NYMEX Henry Hub Natural Gas........ NYMEX................ 505,220 39,800 26,600

    ICE.................. 124,860 11,300 7,500

    ----------------------------------------------------------------------------------------------------------------

    VIII. Request for Comment

    The Commission requests comment on all aspects of this proposal,

    and particularly requests comments on the following issues and

    responses to the following questions:

    1. Are Federal speculative position limits for energy contracts

    traded on reporting markets necessary to ``diminish, eliminate, or

    prevent'' the burdens on interstate commerce that may result from

    position concentrations in such contracts?

    2. Are there methods other than Federal speculative position limits

    that should be utilized to diminish, eliminate, or prevent such

    burdens?

    3. How should the Commission evaluate the potential effect of

    Federal speculative position limits on the liquidity, market efficiency

    and price discovery capabilities of referenced energy contracts in

    determining whether to establish position limits for such contracts?

    4. Under the class approach to grouping contracts as discussed

    herein, how should contracts that do not cash settle to the price of a

    single contract, but settle to the average price of a sub-group of

    contracts within a class be treated during the spot month for the

    purposes of enforcing the proposed speculative position limits?

    5. Under proposed regulation 151.2(b)(1)(i), the Commission would

    establish an all-months-combined aggregate position limit equal to 10%

    of the average combined futures and option contract open interest

    aggregated across all reporting markets for the most recent calendar

    year up to 25,000 contracts, with a marginal increase of 2.5% of open

    interest thereafter. As an alternative to this approach to an all-

    months-combined aggregate position limit, the Commission requests

    comment on whether an additional increment with a marginal increase

    larger than 2.5% would be adequate to prevent excessive speculation in

    the referenced energy contracts. An additional increment would permit

    traders to hold larger positions relative to total open positions in

    the referenced energy contracts, in comparison to the proposed formula.

    For example, the Commission could fix the all-months-combined aggregate

    position limit at 10% of the prior year's average open interest up to

    25,000 contracts, with a marginal increase of 5% up to 300,000

    contracts and a marginal increase of 2.5% thereafter. Assuming the

    prior year's average open interest equaled 300,000 contracts, an all-

    months-combined aggregate position limit would be fixed at 9,400

    contracts under the proposed rule and 16,300 contracts under the

    alternative.

    6. Should customary position sizes held by speculative traders be a

    factor in moderating the limit levels proposed by the Commission? In

    this connection, the Commission notes that current regulation 150.5(c)

    states contract markets may adjust their speculative

    [[Page 4163]]

    limit levels ``based on position sizes customarily held by speculative

    traders on the contract market, which shall not be extraordinarily

    large relative to total open positions in the contract * * *''

    7. Reporting markets that list referenced energy contracts, as

    defined by the proposed regulations, would continue to be responsible

    for maintaining their own position limits (so long as they are not

    higher than the limits fixed by the Commission) or position

    accountability rules. The Commission seeks comment on whether it should

    issue acceptable practices that adopt formal guidelines and procedures

    for implementing position accountability rules.

    8. Proposed regulation 151.3(a)(2) would establish a swap dealer

    risk management exemption whereby swap dealers would be granted a

    position limit exemption for positions that are held to offset risks

    associated with customer initiated swap agreements that are linked to a

    referenced energy contract but that do not qualify as bona fide hedge

    positions. The swap dealer risk management exemption would be capped at

    twice the size of any otherwise applicable all-months-combined or

    single non-spot-month position limit. The Commission seeks comment on

    any alternatives to this proposed approach. The Commission seeks

    particular comment on the feasibility of a ``look-through'' exemption

    for swap dealers such that dealers would receive exemptions for

    positions offsetting risks resulting from swap agreements opposite

    counterparties who would have been entitled to a hedge exemption if

    they had hedged their exposure directly in the futures markets. How

    viable is such an approach given the Commission's lack of regulatory

    authority over the OTC swap markets?

    9. Proposed regulation 20.02 would require swap dealers to file

    with the Commission certain information in connection with their risk

    management exemptions to ensure that the Commission can adequately

    assess their need for an exemption. The Commission invites comment on

    whether these requirements are sufficient. In the alternative, should

    the Commission limit these filing requirements, and instead rely upon

    its regulation 18.05 special call authority to assess the merit of swap

    dealer risk management exemption requests?

    10. The Commission's proposed part 151 regulations for referenced

    energy contracts would set forth a comprehensive regime of position

    limit, exemption and aggregation requirements that would operate

    separately from the current position limit, exemption and aggregation

    requirements for agricultural contracts set forth in part 150 of the

    Commission's regulations. While proposed part 151 borrows many features

    of part 150, there are notable distinctions between the two, including

    their methods of position limit calculation and treatment of positions

    held by swap dealers. The Commission seeks comment on what, if any, of

    the distinctive features of the position limit framework proposed

    herein, such as aggregate position limits and the swap dealer limited

    risk management exemption, should be applied to the agricultural

    commodities listed in part 150 of the Commission's regulations.

    11. The Commission is considering establishing speculative position

    limits for contracts based on other physical commodities with finite

    supply such as precious metal and soft agricultural commodity

    contracts. The Commission invites comment on which aspects of the

    current speculative position limit framework for the agricultural

    commodity contracts and the framework proposed herein for the major

    energy commodity contracts (such as proposed position limits based on a

    percentage of open interest and the proposed exemptions from the

    speculative position limits) are most relevant to contracts based on

    other physical commodities with finite supply such as precious metal

    and soft agricultural commodity contracts.

    12. As discussed previously, the Commission has followed a policy

    since 2008 of conditioning FBOT no-action relief on the requirement

    that FBOTs with contracts that link to CFTC-regulated contracts have

    position limits that are comparable to the position limits applicable

    to CFTC-regulated contracts. If the Commission adopts the proposed

    rulemaking, should it continue, or modify in any way, this policy to

    address FBOT contracts that would be linked to any referenced energy

    contract as defined by the proposed regulations?

    13. The Commission notes that Congress is currently considering

    legislation that would revise the Commission's section 4a(a) position

    limit authority to extend beyond positions in reporting market

    contracts to reach positions in OTC derivative instruments and FBOT

    contracts. Under some of these revisions, the Commission would be

    authorized to set limits for positions held in OTC derivative

    instruments and FBOT contracts.\83\ The Commission seeks comment on how

    it should take this pending legislation into account in proposing

    Federal speculative position limits.

    ---------------------------------------------------------------------------

    \83\ See, e.g., the Over-the-Counter Derivatives Markets Act of

    2009 (OCDMA), H.R. 3795, 111th Congress, 1st Session (2009). OCDMA

    would also abolish the DTEF, ECM and ECM-SPDC market categories.

    ---------------------------------------------------------------------------

    14. Under proposed regulation 151.2, the Commission would set spot-

    month and all-months-combined position limits annually.

    a. Should spot-month position limits be set on a more frequent

    basis given the potential for disruptions in deliverable supplies for

    referenced energy contracts?

    b. Should the Commission establish, by using a rolling-average of

    open interest instead of a simple average for example, all-months-

    combined position limits on a more frequent basis? If so, what reasons

    would support such action?

    15. Concerns have been raised about the impact of large, passive,

    and unleveraged long-only positions on the futures markets. Instead of

    using the futures markets for risk transference, traders that own such

    positions treat commodity futures contracts as distinct assets that can

    be held for an appreciable duration. This notice of rulemaking does not

    propose regulations that would categorize such positions for the

    purpose of applying different regulatory standards. Rather, the owners

    of such positions are treated as other investors that would be subject

    to the proposed speculative position limits.

    a. Should the Commission propose regulations to limit the positions

    of passive long traders?

    b. If so, what criteria should the Commission employ to identify

    and define such traders and positions?

    c. Assuming that passive long traders can properly be identified

    and defined, how and to what extent should the Commission limit their

    participation in the futures markets?

    d. If passive long positions should be limited in the aggregate,

    would it be feasible for the Commission to apportion market space

    amongst various traders that wish to establish passive long positions?

    e. What unintended consequences are likely to result from the

    Commission's implementation of passive long position limits?

    16. The proposed definition of referenced energy contract,

    diversified commodity index, and contracts of the same class are

    intended to be simple definitions that readily identify the affected

    contracts through an objective and administerial process without

    [[Page 4164]]

    relying on the Commission's exercise of discretion.

    a. Is the proposed definition of contracts of the same class for

    spot and non-spot months sufficiently inclusive?

    b. Is it appropriate to define contracts of the same class during

    spot months to only include contracts that expire on the same day?

    c. Should diversified commodity indexes be defined with greater

    particularity?

    17. Under the proposed regulations, a swap dealer seeking a risk

    management exemption would apply directly to the Commission for the

    exemption. Should such exemptions be processed by the reporting markets

    as would be the case with bona fide hedge exemptions under the proposed

    regulations?

    18. In implementing initial spot-month speculative position limits,

    if the notice of proposed rulemaking is finalized, should the

    Commission:

    a. Issue special calls for information to the reporting markets to

    assess the size of a contract's deliverable supply;

    b. Use the levels that are currently used by the exchanges; or

    c. Undertake an independent calculation of deliverable supply

    without substantial reliance on exchange estimates?

    IX. Related Matters

    A. Cost Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the

    costs and benefits of its actions before issuing new regulations under

    the Act. Section 15(a) does not require the Commission to quantify the

    costs and benefits of new regulations or to determine whether the

    benefits of adopted regulations outweigh their costs. Rather, section

    15(a) requires the Commission to consider the cost and benefits of the

    subject regulations. Section 15(a) further specifies that the costs and

    benefits of new regulations shall be evaluated in light of five broad

    areas of market and public concern: (1) Protection of market

    participants and the public; (2) efficiency, competitiveness, and

    financial integrity of the market for listed derivatives; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission may, in its discretion, give

    greater weight to any one of the five enumerated areas of concern and

    may, in its discretion, determine that, notwithstanding its costs, a

    particular regulation is 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 regulatory framework for positions in the referenced

    energy contracts, as defined by the proposed regulations, would impose

    certain compliance costs on Commission-regulated exchanges and traders

    that hold large positions in the referenced energy contracts. In

    addition to the compliance costs that are directly related to the

    proposed regulations, the proposed position limits and their

    concomitant limitation on trading activity could impose certain general

    but significant costs. The proposed position limits could cause

    unintended consequences by decreasing liquidity in the markets for the

    referenced energy contracts, impairing the price discovery process in

    these markets, and pushing large positions to trading venues over which

    the Commission has no direct regulatory authority.

    Based on data received by the Commission's large trader reporting

    system, the Commission believes the proposed position limits would

    accommodate the normal course of speculative positions in markets for

    the referenced energy contracts. Commission data indicates that

    possibly ten traders, including traders that hold positions pursuant to

    exchange-approved bona fide hedge exemptions, could be affected by the

    proposed limits. For the reasons discussed below, the Commission

    anticipates that the compliance costs associated with the proposed

    limits and their impact on the efficiency of the markets for the

    referenced energy contracts would be minimal.

    The proposed spot-month position limits, although applicable to a

    class of contracts and across reporting markets, are consistent with

    current exchange-set spot-month position limits that have been

    implemented and enforced by NYMEX and ICE pursuant to DCM and ECM-SPDC

    core principles and Commission guidance. In addition, both NYMEX and

    ICE implement position accountability rules for positions outside the

    spot month and routinely monitor and solicit reports from large

    traders. The affected exchanges and large traders therefore are

    accustomed to an existing compliance system for large positions and the

    processing of hedge and spread exemptions from exchange-set spot-month

    position limits. In addition, a significant portion of the affected

    traders are currently subject to the Commission's large trader

    reporting system and should have compliance systems in place to

    accommodate any new potential regulatory requirements. For these

    reasons, the compliance costs associated with the proposed limits

    should be minimal.

    Section 4a(a) has identified excessive speculation that causes

    unwarranted fluctuations in the price of a commodity as an undue burden

    on commerce. Accordingly section 4a(a) of the Act gives the Commission

    the ability to establish a position limit framework as a prophylactic

    measure against sudden or unreasonable price fluctuations or

    unwarranted price changes in accordance with the purposes and findings

    of the Act. The Congressional endorsement of the Commission's

    prophylactic use of speculative position limits extends to any

    commodity and does not require a specific finding of an extant undue

    burden on interstate commerce.

    A primary intent of the proposed position limit framework is to

    prevent a single trader or several traders from acquiring large or

    concentrated positions that may cause unwarranted, sudden or

    unreasonable fluctuations in the price of energy commodities. The

    Commission is concerned that concentrated positions at or near the

    proposed limits may directly lead to market disruptions causing

    unwarranted, sudden or unreasonable fluctuations in the price of energy

    commodities.

    Another concern regarding the existence of large speculative

    positions is the possibility for disruption across markets or trading

    platforms listing similar or linked products. Because individual

    markets have knowledge of positions only on their own trading

    platforms, it is difficult for them to assess the full impact of a

    trader's activities. In recognition of this, the proposed framework

    also would apply to trading done in linked and economically similar

    contracts across markets. The Commission notes that it has the unique

    capacity for monitoring trading and implementing remedial measures

    across interconnected futures and option markets in the referenced

    energy contracts. The position limits, as proposed, are purposefully

    set at the outer bounds of the levels that speculators are likely to

    acquire in order to avoid disrupting or interfering with beneficial

    trading activity. Still, the proposed regulations are intended to fully

    achieve the prophylactic purpose of section 4a(a) of the Act.

    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, clearing members, foreign

    [[Page 4165]]

    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.\84\ Similarly, 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.

    ---------------------------------------------------------------------------

    \84\ 47 FR 18618 (April 30, 1982).

    ---------------------------------------------------------------------------

    C. Paperwork Reduction Act

    Certain provisions of the proposed regulations would result in new

    collection of information requirements within the meaning of the

    Paperwork Reduction Act of 1995 (``PRA''). The Commission therefore is

    submitting this proposal to the Office of Management and Budget

    (``OMB''), along with proposed new CFTC Form 404, 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

    ``Regulation 1.45 and Parts 20 and 151--Position Limit Framework For

    Referenced Energy Contracts'' (OMB control number 3038-NEW).

    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.'' \85\

    ---------------------------------------------------------------------------

    \85\ 7 U.S.C. 12(a)(1).

    ---------------------------------------------------------------------------

    Under the proposed regulations, reporting markets listing, and

    market participants trading, the referenced energy contracts would be

    subject to the position limit framework established by proposed part

    151 and the application and reporting requirements of proposed

    regulation 1.45 and part 20. Proposed regulation 1.45 sets forth the

    application procedure for swap dealers that would seek an exemption

    from the proposed Commission-set Federal speculative position limits

    for referenced energy contracts. Proposed part 20 would require similar

    reports from persons holding large positions under the proposed

    conditional-spot-month position limit, as bona fide hedgers, as swap

    dealers, and as traders with certain delta-adjusted positions. The

    Commission estimates that affected traders, as a result of their

    diversified business structure, would be subject to most or all of the

    requirements and exemptions of proposed regulation 1.45 and parts 20

    and 151.

    Should the proposed regulations be adopted, the total number of

    traders that would be subject to the regulations is estimated at 10,

    with each providing an estimated 20 reports to the Commission at an

    estimated compliance time of four hours per response. Accordingly, the

    Commission estimates the aggregate annual burden that would be imposed

    by the regulations, as proposed, to be 800 hours. The Commission

    specifically notes that the estimated annual burden provided on the

    affected exchanges and traders is in addition to, and does not include,

    costs incurred from compliance with other regulatory and operational

    requirements. 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: (i) 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; (ii) evaluate the accuracy of the Commission's

    estimate of the burden of the proposed collections of information;

    (iii) determine whether there are ways to enhance the quality, utility,

    and clarity of the information to be collected; and (iv) 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.

    You may submit your comments directly to the Office of Information

    and Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at OIRA-

    submissions@omb.eop.gov. Please provide the Commission with a copy of

    your comments so that we can summarize all written comments and address

    them in any subsequent notice of rulemaking. Refer to the Addresses

    section of this notice for comment submission instructions to the

    Commission. You may obtain a copy of the supporting statements for the

    collection of information discussed above by visiting RegInfo.gov. OMB

    is required to make a decision concerning the collection of information

    between 30 to 60 days after publication of this notice. 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 20

    Commodity futures, Reporting and recordkeeping requirements.

    17 CFR Part 151

    Position limits, Bona fide hedge positions, Spread exemptions,

    Energy commodities.

    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 XIII of

    the Food, Conservation and Energy Act of 2008, Pub. L. No. 110-246,

    122 Stat. 1624 (June 18, 2008).

    2. Add Sec. 1.45 in part 1 to read as follows:

    Sec. 1.45. Application for a swap dealer exemption.

    (a) Persons seeking an exemption from the speculative position

    limits established by the Commission for referenced energy contracts

    under Sec. 151.2 of this chapter, pursuant to an exemption for swap

    dealers under Sec. 151.3(a)(2) of this chapter, shall:

    (1) File an initial application for an exemption and, thereafter,

    update such application annually, as the Commission shall require;

    (2) Provide as part of the application, all information required by

    the Commission, including but not limited to:

    (i) A completed Form 40 along with the information required under

    Sec. 18.04 of this chapter;

    (ii) A certification that the person is a swap dealer as defined in

    Sec. 151.1 of this chapter; and

    [[Page 4166]]

    (iii) Specific consent to having their name published on the

    Commission's Web site (http://www.cftc.gov) as having received a swap

    dealer exemption from the speculative position limits; provided

    however, that such list shall be published no more than once annually,

    that no publication of the name of a swap dealer shall be made earlier

    than six calendar months following the date on which the exemption was

    granted, and that such publication shall not disclose the related

    commodities in which the person is swap dealer or any other information

    provided by the swap dealer to the Commission that would be

    inconsistent with section 8(a)(1) of the Act; and

    (3) Comply with the reporting requirements of Sec. 20.02 of this

    chapter.

    (b) Form, manner and time of filing.

    (1) An application under paragraph (a) of this section shall be

    submitted in the format and in the manner and within the time specified

    by the Commission.

    (2) The Commission hereby delegates, until such time as the

    Commission orders otherwise, to the Director of the Division of Market

    Oversight and to such members of the Commission's staff acting under

    the Director's direction as the Director may designate, the authority

    to specify the format, manner and time period for applications to be

    submitted under paragraph (a) of this section. The Director may submit

    to the Commission for its consideration any matter that has been

    delegated in this paragraph. Nothing in this paragraph prohibits the

    Commission, at its election, from exercising the authority delegated in

    this paragraph.

    3. Add part 20 to read as follows:

    PART 20--REPORTS IN CONNECTION WITH POSITIONS IN REFERENCED ENERGY

    CONTRACTS

    Sec.

    20.00 Conditional-spot-month position limit.

    20.01 Bona fide hedging.

    20.02 Reports from swap dealers.

    20.03 Delta-adjusted positions.

    20.04 Form, manner and time of filing.

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m,

    6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food,

    Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat.

    1624 (June 18, 2008).

    Sec. 20.00 Conditional-spot-month position limit.

    (a) Information required. All persons that acquire positions in a

    referenced energy contract pursuant to the conditional-spot-month

    position limit of Sec. 151.2(a)(2) of this chapter shall submit to the

    Commission a Form 40 and provide the information required under Sec.

    18.04 of this chapter.

    (b) Additional cash and derivatives position data. All persons

    subject to paragraph (a) of this section shall also submit the

    following position data, net long or short, on Part A of Form 404:

    (1) The trader's cash positions in contracts priced at a fixed

    price differential (including a zero differential) to the referenced

    energy contract or the contract's underlying commodity;

    (2) The trader's cash positions in contracts priced to a cash

    market index that includes quotations or prices for spot or forward

    contracts in the referenced energy contract's underlying commodity;

    (3) The trader's positions in cleared or bilateral swap agreements

    with a fixed price differential (including zero) to the referenced

    energy contract or the contract's underlying commodity; and

    (4) Positions in any other physically or financially settled

    contracts that are economically related to the trader's positions that

    are acquired pursuant to the conditional-spot-month position limit.

    Sec. 20.01 Bona fide hedging.

    (a) Information required. All persons that acquire positions in a

    referenced energy contract pursuant to the bona fide hedge exemption of

    Sec. 151.3(a)(1) of this chapter shall submit to the Commission a Form

    40 and provide the information required under Sec. 18.04 of this

    chapter.

    (b) Additional information on cash market activities. All persons

    subject to paragraph (a) of this section shall also submit the

    following information on Part B of Form 404:

    (1) The quantity of stocks owned of the commodity that underlies a

    referenced energy contract and its products and by-products;

    (2) The quantity of fixed price purchase commitments open in such

    commodity and its products and by-products;

    (3) The quantity of fixed price sale commitments open in such

    commodity and its products and by-products;

    (4) For unsold anticipated commercial services or output directly

    connected to producing, transporting, refining, merchandising,

    marketing, or processing a commodity underlying a referenced energy

    contract:

    (i) Annual sales of such services or output for the three complete

    fiscal years preceding the current fiscal year; and

    (ii) Anticipated sales of such services or output for the period

    hedged; and

    (5) For unfilled anticipated requirements:

    (i) Annual requirements of such commodity for the three complete

    fiscal years preceding the current fiscal year; and

    (ii) Anticipated requirements of such commodity for the period

    hedged.

    (6) The shares of an investment vehicle, including, but not limited

    to, exchange-traded funds, registered investment companies, commodity

    pools and private investment companies, that holds or owns a referenced

    energy contract or the commodity that underlies a referenced energy

    contract and its products and by-products.

    (c) Conversion methodology. Persons engaged in the hedging of

    commercial activity that does not involve the same quantity or

    commodity as the quantity or commodity associated with positions in

    referenced energy contracts shall furnish this 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 energy contracts that

    are sold or purchased. In addition, such persons shall explain the

    methodology used for determining the ratio of conversion between the

    actual or anticipated cash positions and the trader's positions in

    referenced energy contracts.

    Sec. 20.02 Reports from swap dealers.

    (a) Initial reports. Persons who have received a swap dealer

    exemption pursuant to Sec. 151.3(a)(2) of this chapter from the

    speculative position limits established by the Commission for

    referenced energy contracts under Sec. 151.2 of this chapter shall

    provide on Part C of Form 404 to the Commission, and to any registered

    entity on which the swap dealer's referenced energy contract positions

    are listed, a monthly report including:

    (1) Swap positions based upon the commodity underlying the

    referenced energy contracts separately for proprietary and customer

    accounts on a daily basis; and

    (2) A daily summary of dealing and trading activity in swaps based

    upon the commodity underlying the referenced energy contracts.

    (b) Supplemental reports. Whenever the risk management requirements

    of a swap dealer require it to increase its positions in referenced

    energy contracts from levels justified by information provided in its

    initial application under Sec. 1.45 of this chapter or the swap

    dealer's most recent report submitted under this section, the swap

    dealer shall file, on the business day following the date on which such

    positions were acquired, a supplemental report in compliance with the

    requirements of

    [[Page 4167]]

    paragraph (a) of this section that supports the increase in position

    levels.

    (c) Recordkeeping. Traders that receive a swap dealer exemption

    under Sec. 151.3(a)(2) of this chapter shall maintain complete books

    and records relating to their swap dealing activities (including

    transactional data) and make such books and records, along with a list

    of counterparties to customer swap agreements that support and

    substantiate the need to offset swap agreement risks on reporting

    markets, available to the Commission upon request.

    Sec. 20.03 Delta-adjusted positions.

    (a) Information required. All persons with referenced energy

    contract positions in excess of the position limits of Sec. 151.2 of

    this chapter that acquire such positions in reliance on Sec.

    151.3(a)(3) of this chapter shall submit to the Commission a Form 40

    and provide the information required under Sec. 18.04 of this chapter.

    (b) Additional information. In addition, such persons shall provide

    the following on Part D of Form 404:

    (1) A certification that their positions, in whole or in part, are

    in excess of the applicable limits as a result of the application of a

    futures-equivalent calculation that adjusts option positions by the

    previous day's risk factor, or delta coefficient; and

    (2) Complete position data that demonstrates that the application

    of a contemporaneous risk factor, or delta coefficient, renders the

    trader compliant with the position limits of Sec. 151.2 of this

    chapter on an adjusted basis.

    Sec. 20.04 Form, manner and time of filing.

    Unless otherwise instructed in this part or by the Commission or

    its designee, the Forms and information required to be filed under this

    part shall be submitted at such time and in a form and manner specified

    by the Commission. The Commission hereby delegates, until such time as

    the Commission orders otherwise, to the Director of the Division of

    Market Oversight and to such members of the Commission's staff acting

    under the Director's direction as the Director may designate, the

    authority to specify the format, manner and time period within which

    the Forms and information required to be filed under this part shall be

    submitted to the Commission. The Director may submit to the Commission

    for its consideration any matter that has been delegated in this

    paragraph. Nothing in this paragraph prohibits the Commission, at its

    election, from exercising the authority delegated in this paragraph.

    4. Add part 151 to read as follows:

    PART 151--FEDERAL SPECULATIVE POSITION LIMITS FOR REFERENCED ENERGY

    CONTRACTS

    Sec.

    151.1 Definitions.

    151.2 Position limits for referenced energy contracts.

    151.3 Exemptions for referenced energy contracts.

    151.4 Aggregation of positions.

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m,

    6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food,

    Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat.

    1624 (June 18, 2008).

    Sec. 151.1 Definitions.

    As used in this part--

    Basis contract means a futures or option contract 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 futures or option contract that

    represents the difference between the settlement prices in one month of

    a referenced energy contract and another month's settlement price for

    the same referenced energy contract;

    Contracts of the same class mean referenced energy contracts

    (including option contracts on a futures-equivalent basis) on a single

    reporting market that are based on the same commodity and delivered in

    the same manner (cash-settled or physically-delivered), provided

    however, that during their spot month, contracts shall be considered

    contracts of the same class if, in addition, such contracts expire on

    the same trading day;

    Diversified commodity index means a commodity index with price

    components that include energy as well as non-energy commodities,

    provided however, that futures and option contracts based on a

    diversified commodity index that incorporates the price of a commodity

    underlying a referenced energy contract's commodity which are used to

    circumvent the speculative position limits, shall be considered to be

    referenced energy contracts for the purpose of applying the position

    limits of Sec. 151.2 of this chapter;

    Inter-commodity spread contract means a futures or option contract

    that is based on the price difference between a referenced energy

    contract and another commodity contract;

    Referenced energy contract means a physically-delivered or cash-

    settled futures or option contract, other than a basis contract or

    contract on a diversified commodity index, that is a:

    (1) New York Mercantile Exchange Henry Hub natural gas contract

    (NG), or any other natural gas contract that is exclusively or

    partially based on a trading unit of 10,000 million British thermal

    units (mmBtu) of natural gas delivered at the Henry Hub pipeline

    interchange in Erath, Louisiana;

    (2) New York Mercantile Exchange Light Sweet crude oil contract

    (CL), or any other crude oil contract that is exclusively or partially

    based on a trading unit of 1,000 U.S. barrels of light sweet crude oil

    delivered at the Cushing crude oil storage complex in Cushing,

    Oklahoma;

    (3) New York Mercantile Exchange New York Harbor No. 2 heating oil

    contract (HO), or any other heating oil contract that is exclusively or

    partially based on a trading unit of 1,000 U.S. barrels of No. 2 fuel

    oil delivered at an ex-shore facility in New York Harbor;

    (4) New York Mercantile Exchange New York Harbor gasoline

    blendstock (RBOB) contract, or any other gasoline contract that is

    exclusively or partially based on a trading unit of 1,000 U.S. barrels

    of reformulated gasoline blendstock for oxygen blend delivered at an

    ex-shore facility in New York Harbor; or

    (5) Fraction or multiple of the contracts described in paragraphs

    (1) through (4) of this section, so that when viewed on a fractional

    basis or as a multiple, such contract is based on the same commodity in

    equivalent trading units;

    Reporting market means a reporting market as defined in Sec. 15.00

    of this chapter;

    Spot month means:

    (1) For a contract that allows trading concurrently with the

    issuance of delivery notices, the futures contract next to expire

    during that period of time beginning at the close of trading on the

    trading day preceding the first day on which delivery notices can be

    issued to the clearing organization of a registered entity;

    (2) For a contract that does not allow trading concurrently with

    the issuance of delivery notices, the futures contract next to expire

    during that period of time beginning at the close of trading on the

    third trading day preceding the last trading day; or

    (3) For a contract that cash-settles based on the price of one or

    more physically-delivered contracts, the period of time that is the

    spot-month for such physically-delivered contracts;

    Spread contract means either a calendar spread contract or an

    inter-commodity spread contract;

    Swap agreement means a swap agreement as defined in Sec.

    35.1(b)(1) of this chapter;

    [[Page 4168]]

    Swap dealer means, solely for the purposes of this part and Sec.

    1.45 and part 20 of this chapter, any person who, as a significant part

    of its business, holds itself out as a dealer in swaps, makes a market

    in swaps, regularly engages in the purchase of swaps and their resale

    to customers in the ordinary course of a business, or engages in any

    activity causing the person to be commonly known in the trade as a

    dealer or market maker in swaps;

    Unless specifically defined otherwise, the terms defined in Sec.

    150.1 of this chapter shall have the same meaning as they do in that

    section.

    Sec. 151.2 Position limits for referenced energy contracts.

    (a) Spot-month position limits. Except as otherwise authorized in

    Sec. 151.3, no person may hold or control positions in contracts of

    the same class when such positions, net long or net short, are in

    excess of:

    (1) For physically-delivered contracts, a spot-month position

    limit, fixed by the Commission at one-quarter of the estimated spot-

    month deliverable supply; or

    (2) For contracts that cash settle based on prices of physically-

    delivered contracts, a conditional-spot-month position limit, fixed by

    the Commission at one-quarter of the estimated spot-month deliverable

    supply, provided that, a trader may, if permitted by reporting market

    rules adopted to implement this paragraph, acquire or hold spot-month

    positions equal to the product of the above specified level and the

    spot-month multiplier of five if the trader does not hold positions in

    spot-month physically-delivered referenced energy contracts and the

    trader complies with the reporting requirements of part 20 of this

    chapter.

    (b) All-months-combined and single-month limits. Except as

    otherwise authorized in Sec. 151.3, no person may hold or control

    positions in a referenced energy contract when such positions, net long

    or net short, are in excess of:

    (1) Aggregate position limits:

    (i) An all-months-combined aggregate position limit, across

    reporting markets, fixed by the Commission at 10% of the open interest

    of that referenced energy contract aggregated across all reporting

    markets up to an open interest level of 25,000 contracts with a

    marginal increase of 2.5% of aggregated open interest thereafter; or

    (ii) A single-month aggregate position limit that is two-thirds of

    the position limit fixed pursuant to paragraph (b)(1)(i) of this

    section.

    (2) Reporting market position limits:

    (i) For a reporting market, an all-months-combined position limit

    for contracts of the same class that is the lower of the aggregate

    position limit for a referenced energy contract under paragraph

    (b)(1)(i) of this section or, for contracts of the same class, 30% of a

    class's average combined futures and delta-adjusted option month-end

    open interest for the most recent calendar year on that reporting

    market; or

    (ii) For a reporting market, a single-month position limit for

    contracts of the same class that is two-thirds of the position limit

    fixed pursuant to paragraph (b)(2)(i) of this section, provided

    however, that such positions shall not be greater than two times the

    level of the position limit fixed pursuant to paragraph (b)(2)(i) of

    this section on a gross basis.

    (c) Minimum position limit. The position limits of Sec.

    151.2(b)(2)(i) shall be replaced by an all-months-combined position

    limit, fixed by the Commission at the greater of 5,000 contracts or 1%

    of the open interest aggregated across all reporting markets, if the

    resulting position limit calculated under this paragraph is higher than

    an otherwise applicable position limit.

    (d) Deliverable supply.

    (1) Reporting markets listing physically-delivered referenced

    energy contracts are required to submit to the Commission an estimate

    of deliverable supply by the 31st of December of each calendar year.

    (2) The estimate submitted under paragraph (d)(1) of this section

    shall be accompanied by a description of the methodology used to derive

    the estimate along with any statistical data supporting the reporting

    market's estimate of deliverable supply.

    (3) The Commission shall base its fixing of spot-month position

    limits on the estimate provided under paragraph (d)(1) of this section

    unless the Commission determines to rely on its own estimate of

    deliverable supply.

    (4) The Commission may base its initial fixing of spot-month

    position limits solely on its own estimates of deliverable supply.

    (e) Calculation of limits for the purposes of this section.

    (1) For the purpose of calculating positions under this section,

    referenced energy option contracts that do not settle into futures

    contracts shall be included in any calculation on a futures-equivalent

    basis and treated as futures contracts under the provisions of this

    section.

    (2) Open interest shall be calculated by combining the month-end

    futures open interest and the open interest in its related option

    contract, on a delta-adjusted basis, for all months listed on a

    reporting market during the most recent calendar year.

    (3) In determining or calculating all levels and limits under this

    section, a resulting number shall be rounded up to the nearest hundred.

    (4) For the purpose of calculating position limits under this

    section, referenced energy contracts that are spread contracts, as

    defined by Sec. 151.1, shall be excluded from any calculation of open

    interest.

    (f) Administrative process for fixing and publishing position

    limits.

    (1) The Commission shall fix the spot-month position limits (and

    estimates of deliverable supply) and the all-months-combined position

    limits under Sec. 151.2, aggregately across all reporting markets and

    separately for each reporting market, by January 31st of each calendar

    year, provided that, the initial fixing of position limits may occur on

    a different date.

    (2) The Commission hereby delegates, until such time as the

    Commission orders otherwise, to the Director of the Division of Market

    Oversight and to such members of the Commission's staff acting under

    the Director's direction as the Director may designate, the authority

    to fix the position limits to be established pursuant to paragraph

    (f)(1) of this section. The Director may submit to the Commission for

    its consideration any matter that has been delegated in this paragraph.

    Nothing in this paragraph prohibits the Commission, at its election,

    from exercising the authority delegated in this paragraph.

    (3) The fixed position limits shall be published on the

    Commission's Web site (http://www.cftc.gov) and shall become effective

    on the 1st day of March immediately following the fixing date (or 30

    complete calendar days following an initial fixing of position limits

    under this part if such fixing is on a date other than the 31st of

    January) and shall remain effective until the last day of the

    immediately following February.

    Sec. 151.3 Exemptions for referenced energy contracts.

    (a) Positions that may exceed limits. The position limits set forth

    in Sec. 151.2 may be exceeded to the extent that such positions are:

    (1) Upon application to a reporting market for an exemption,

    positions (other than positions that are held to offset risks

    associated with swap agreements under paragraph (a)(2) of this section)

    held in a proprietary account (as defined in Sec. 1.3(y) of this

    chapter) shown to be bona fide hedging transactions, as defined and

    approved

    [[Page 4169]]

    by a reporting market in a manner consistent with, but that may differ

    from (to the extent that such differences are consistent with

    commercial activity in the physical energy markets), Sec. Sec.

    1.3(z)(1) and (2) of this chapter, provided that:

    (i) Traders holding positions outside the spot month, and traders

    holding spot-month positions with respect to spot-month positions only,

    that are greater than or equal to a position limit set under Sec.

    151.2 pursuant to a bona fide hedge exemption shall not also hold or

    control positions speculatively; and

    (ii) Traders holding positions that are greater than or equal to

    twice a position limit set under to Sec. 151.2 pursuant to a bona fide

    hedge exemption shall not also hold or control positions pursuant to an

    exemption under paragraph (a)(2) of this section;

    (2) Upon application under Sec. 1.45 of this chapter, swap dealer

    risk management transactions outside of the spot month that are held to

    offset risks associated with swap agreements, which are entered into to

    accommodate swap customers and are either directly linked to the

    referenced energy contracts or the fluctuations in value of the swap

    agreements are substantially related to the fluctuations in the value

    of the referenced energy contracts, and which do not exceed twice the

    applicable speculative position limits in all-months-combined or in any

    single non-spot-month, provided that traders holding positions under

    this paragraph shall not also hold or control positions speculatively

    when such the trader's total positions are greater than or equal to a

    position limit set under to Sec. 151.2; or

    (3) Subsequently demonstrated, in a report to be filed on the

    calendar day following the acquisition of such positions pursuant to

    part 20 of this chapter, to be below an applicable position limit once

    option contracts that are a part of a trader's overall position are

    adjusted by a contemporaneous risk factor or delta coefficient for such

    options.

    (b) Other exemptions. 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 limit.

    (c) Call for information. Upon call by the Commission, the Director

    of the Division of Market Oversight or the Director's designee, any

    reporting market issuing, or any person claiming, an exemption from

    speculative position limits under this section must provide to the

    Commission such information as specified in the call relating to the

    positions owned or controlled by that person, trading done pursuant to

    the claimed exemption, the futures, options, over-the-counter, or cash

    market positions that support the claim of exemption, and the relevant

    business relationships supporting a claim of exemption.

    Sec. 151.4 Aggregation of positions.

    (a) Positions to be aggregated. The position limits set forth in

    Sec. 151.2 of this chapter shall apply to:

    (1) All positions in accounts in which any person, directly or

    indirectly, has an ownership or equity interest of 10% or greater or,

    by power of attorney or otherwise, controls trading; or

    (2) Positions held by two or more persons acting pursuant to an

    expressed 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 person.

    (b) Positions in pools. Positions in pools in which a trader that

    is a limited partner, shareholder or similar person has an ownership or

    equity interest of less than 25% need not be aggregated with other

    positions of the trader unless such person, by power of attorney or

    otherwise, controls trading that is done by the pool.

    Issued by the Commission this 14th day of January 2010, in

    Washington, DC.

    David Stawick,

    Secretary of the Commission.

    Note: The following appendix will not appear in the Code of

    Federal Regulations.

    Appendix Statements

    Statement of Gary Gensler Chairman, Commodity Futures Trading

    Commission Meeting of the Commodity Futures Trading Commission

    The CFTC is charged with a significant responsibility to ensure

    the fair, open and efficient functioning of futures markets. Our

    duty is to protect both market participants and the American public

    from fraud, manipulation and other abuses. Central to these

    responsibilities is our duty to protect the public from the undue

    burdens of excessive speculation that may arise, including those

    from concentration in the marketplace.

    The CFTC does not set or regulate prices. Rather, the Commission

    is directed to ensure that commodity markets are fair and orderly.

    It is for that reason that I support the staff's recommended

    rulemaking regarding position limits in the energy markets and

    exemptions for swap dealer risk management transactions.

    The CFTC is directed in its original 1936 statute to set

    position limits to protect against the burdens of excessive

    speculation, including those caused by large concentrated positions.

    In that law--the Commodity Exchange Act (CEA)--Congress said that

    the CFTC ``shall'' impose limits on trading and positions as

    necessary to eliminate, diminish or prevent the undue burdens that

    may come as a result of excessive speculation. We are directed by

    statute to act in this regard to protect the American public.

    A transparent and consistent playing field for all physical

    commodity futures should be the foundation of our regulations. Thus,

    position limits should be applied consistently to all markets and

    trading platforms and exemptions to them also should be consistent

    and well-defined.

    While we currently set and enforce position limits on certain

    agriculture products, we do not for energy markets. Though there are

    some differences between energy markets and agricultural markets,

    those distinctions do not suggest to me that the federal government

    should set position limits on one and not the other.

    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.'' I believe this

    is still true today.

    The futures exchanges also have obligations with regard to the

    setting of position limits. As was explored in our summer hearings,

    though, the Commodity Futures Modernization Act (CFMA) changed the

    exchanges' obligations. They have to comply with a core principal

    that speaks to protecting against manipulation or congestion,

    ``especially during trading in the delivery month.'' These core

    principles do not explicitly require the exchanges to set position

    limits to guard against the burdens of excessive speculation. The

    CEA, in section 4a, though, left the obligations of the CFTC

    unchanged with regard to setting position limits to protect against

    the possible burdens of excessive speculation. Our governing statute

    importantly distinguishes between these two distinct, but sometimes

    related, public policy goals--protecting against manipulation and

    protecting against possible burdens of excessive speculation. The

    CFMA clearly established that the exchanges had to address the first

    while the CFTC had a broader mandate to address both. Though the

    CFTC had in 1992 first allowed exchanges to establish accountability

    regimes, it was only in 2001 that they did so in lieu of position

    limits in the energy markets.

    The past eight years have provided further evidence as to the

    difference. Accountability levels are regularly and repeatedly

    exceeded. In fact, they are neither stop signs nor even yield signs

    for market participants. As reviewed at our summer hearings, in the

    12 months between July 2008 and June 2009,

    [[Page 4170]]

    accountability levels for individual months were exceeded in the

    four main energy contracts by 69 different traders, some exceeding

    the levels during every trading day in the period.

    The staff recommendation builds upon the Commission's experience

    and previous guidance in setting position limits, particularly for

    agricultural commodities.

    Limits are set across the same contract month

    groupings: All-months-combined (AMC); single-month; and spot-month.

    Limits apply to aggregate positions in futures and

    options combined.

    There are exemptions for bona fide hedging transactions

    involving commodity inventory hedges and anticipatory purchases or

    sales of the commodity.

    In addition, the proposed energy limits incorporate CFTC

    guidance to exchanges in setting speculative position limits:

    The basic formula for the level of the all-months-

    combined limit is the same--10% of the first 25,000 contracts of

    open interest plus 2.5% of open interest over 25,000 contracts.

    The approach to setting the level of the spot-month

    limit in the physical delivery contracts is the same--25% of the

    estimated deliverable supply.

    The proposed energy Federal limits builds upon the Commission's

    experience in several ways:

    The proposed energy limits would be responsive to the

    size of the market and administratively reset on an annual basis,

    rather than remaining unchanged until a new rule is issued.

    The proposal extends contract aggregation by applying

    all-months-combined and single-month energy speculative position

    limits both to classes of contracts (all physical delivery or cash

    settled contracts in a commodity at a reporting market) and to

    positions held across all reporting markets.

    The proposed energy limits aggregate positions at the

    owner level rather than permitting disaggregation for independent

    account controllers.

    I believe that the staff recommendation is a measured and

    balanced approach to setting position limits in the energy markets.

    In addition to resetting position limits in the energy futures

    and options markets, the proposed rulemaking both addresses

    exemptions for bona fide hedgers and establishes a consistent

    framework for certain swap dealer risk management exemptions. The

    Commission and the exchanges currently grant relief from agriculture

    and energy position limits to swap dealers on a case-by-case basis

    via staff no-action letters or similar methods at the exchanges. The

    proposed rule would, for the first time, bring uniformity to swap

    dealer exemptions. Swap dealers would be required to file an

    exemption application and update the application annually. Exempted

    swap dealers also would be required to provide monthly reports of

    their actual risk management needs and maintain records that

    demonstrate their net risk management needs. The CFTC would publicly

    disclose the names of swap dealers that have filed for an exemption

    after a six-month delay.

    This rule proposal is one step in a very important process. Our

    vote on the proposed rulemaking begins a 90-day public comment

    period. Many important questions are listed in the proposal, and we

    are all very interested to hear from the public on these significant

    issues.

    I look forward to hearing from hedgers and speculators, dealers

    and exchanges and other market participants and economists regarding

    the proposal and how and if it would improve the functioning of the

    markets. I am also interested in hearing any changes that they may

    suggest.

    As we vote to on a proposed rulemaking to set position limits in

    the energy futures and options markets, we also are working with

    Congress to bring comprehensive regulatory reform to the over-the-

    counter derivatives markets. I was pleased that the House included

    in the recently passed financial reform legislation enhanced

    authority for the CFTC to set aggregate position limits for over-

    the-counter derivatives contracts when they perform or affect a

    significant price discovery function with respect to regulated

    entities. While Congress continues to work on regulatory reform, it

    is important that the Commission continue its work under current

    authority to consider setting energy position limits. The CFTC is

    working in parallel with the legislative process.

    I thank the staff and my fellow Commissioners for all of the

    preparation that went into the recommended rulemaking. I will now

    entertain a motion that the Commission issue a proposed rule to set

    position limits for futures and option contracts in the major energy

    markets and establish consistent, uniform exemptions for certain

    swap dealer risk management transactions.

    Statement of Commissioner Michael V. Dunn Regarding the Notice of

    Proposed Rulemaking for Speculative Position Limits for Referenced

    Energy Contracts

    Today I am voting to release the proposed notice of rulemaking

    entitled Federal Speculative Position Limits for Referenced Energy

    Contracts and Associated Regulations. My vote to release this

    proposed rule should in no way be construed as an agreement with the

    opinions expressed in the proposal or to the approach advocated in

    setting these proposed position limits. Despite my serious

    reservations, I have agreed to the release of this proposal so that

    the public at-large has ample opportunity to voice their opinions

    and concerns on this topic.

    At the close of the Commission's position limits hearings on

    August 5, 2009, I stated that:

    [T]he CFTC does not have the authority to set speculative

    position limits in all of the venues that may be affected by

    excessive speculation, specifically over-the-counter markets (OTC)

    and on foreign boards of trade (FBOT). Unilateral Commission action

    in only the markets we currently regulate may not have the desired

    effect of reigning in excessive speculation in the futures market.

    Without similar steps in the OTC markets and on FBOTs, those seeking

    to evade the limits we set could simply move to venues outside our

    authority.

    I believe this is still true today, and that forging ahead on a

    position limits regime for political expediency is not the course of

    action that this agency needs or one that promotes the health and

    integrity of the futures industry in the United States. The simple

    announcement of our hearings several months ago caused business to

    migrate to OTC markets and FBOTs currently outside our purview. This

    is an unacceptable consequence of regulation and is, I fear, a sign

    of things to come if this agency does not take a coordinated

    approach to bringing sensible regulation to the futures markets.

    I think it needs to be made clear that the Proposed Position

    Limits do not set trading limitations on any particular class of

    investor, including passively managed long-only index funds. The

    Proposed Position Limits' sole objective is to prevent excessive

    speculation by a single entity. I would be very interested to hear

    from the public on whether this incremental approach best addresses

    the market wide concerns raised by those who participated in our

    hearings last summer.

    I would like to reiterate that my vote to release this document

    should in no way be construed as an agreement of any kind to final

    rules setting federal speculative position limits on energy

    contracts. My commitment remains to accept comments and information

    during the next few months with an open mind, and to work with my

    fellow Commissioners to ensure that we have a functioning futures

    industry.

    Statement of Commissioner Jill Sommers Regarding the Notice of Proposed

    Rulemaking for Speculative Position Limits for Referenced Energy

    Contracts

    Dissenting

    The Commission and its predecessors have grappled with the

    complex issues surrounding federal speculative position limits for

    many years in connection with transactions based on agricultural

    commodities. As prices rose across the board in virtually all

    commodities throughout 2007 and 2008, the Commission focused its

    attention on possible causes, including the influx of new traders

    into the markets, in particular swap dealers hedging the risk

    resulting from over-the-counter (OTC) business and traders seeking

    exposure to commodities as an asset class through passive, long-term

    investment in exchange traded funds (ETFs) and commodity index

    funds. Concerns were raised in numerous Congressional hearings that

    excessive speculation in both exchange-traded and OTC markets was to

    blame for rising prices, particularly in the energy sector. The

    Commission held three days of hearings in July and August of 2009 to

    discuss a number of different approaches and has received continuous

    feedback from the industry for the past several months. We now have

    before us a proposal from staff which would implement federal

    speculative position limits for futures and options contracts in

    certain energy commodities.

    I dissent from issuing the proposal for the following reasons. I

    am concerned that hard positions limits may be imposed on exchange

    trading without similar limits in place for

    [[Page 4171]]

    OTC markets. Legislation giving us the authority to impose OTC

    limits may be enacted this year, but the timing and final form of

    such legislation is unknown. While I wholeheartedly support efforts

    to enhance our authority in this area, I am concerned that forging

    ahead with federal limits in a piecemeal fashion is unwise. I am

    especially concerned that doing so will have the perverse effect of

    driving portions of the market away from centralized trading and

    clearing at the very time we are urging all standardized OTC

    activity to be traded on-exchange or cleared. Likewise, I am

    concerned that, without global standards, trading will move to other

    financial centers around the world. A report issued by the United

    Kingdom's Financial Services Authority and HM Treasury last month

    urges caution in introducing a position limits regime. See Financial

    Services Authority & HM Treasury, Reforming OTC Derivative Markets,

    A UK Perspective at 31-35 (Dec. 2009). Clearly, more work is needed

    to achieve a uniform approach.

    A delay in promulgating position limits will not leave the

    markets unprotected. The proposal before us ``sets high position

    levels that are at the outer bounds of the largest positions held by

    market participants.'' Proposal at 59. Exchange position limits and

    accountability rules remain in place and will continue to trigger

    the first line of defense against potential market manipulations or

    other disruptions. Even if the proposed federal limits were enacted,

    exchanges would be obligated to begin monitoring positions on their

    markets well before traders reach the federal limits. Aggressive use

    of the Commission's surveillance authority in partnership with the

    exchanges should be sufficient to closely monitor and protect the

    integrity of the markets.

    Finally, the proposal makes no distinction between passive ETF

    and index traders and speculators. While the proposal does seek

    comment on the feasibility of categorizing such traders differently,

    I am discouraged that we are no closer to an answer than we were

    prior to our 2009 hearings, the numerous Congressional hearings that

    focused on index trading, and the Commission's extensive collection

    of index investment data since June 2008, which it now publishes on

    a quarterly basis. There is no doubt that passive long-only

    investors do not behave as typical speculative traders. They have a

    unique footprint in the markets. If the data demonstrates that

    passive long traders are disrupting the markets, through the rolling

    of their positions or otherwise, the Commission should make an

    affirmative finding and tailor a solution that addresses the

    problem.

    It is also my hope that if the Commission adopts the limits

    included in the proposal, that it also promulgate federal limits for

    all other commodities with a finite supply, such as metals and the

    agricultural commodities not currently subject to federal limits.

    The rationale given for the current proposal applies equally to

    contracts in those commodities. Another inconsistency that would

    result if the Commission adopts the proposed rulemaking is that swap

    dealers would continue to receive bona fide hedge exemptions for

    positions related to agricultural commodities subject to federal

    limits, but the new proposed risk management exemption regime would

    apply to positions related to the four energy commodities included

    in the proposal. A uniform policy would benefit not only the

    Commission and market participants from an operational efficiency

    standpoint, but would also enhance transparency by eliminating

    needless complexities in the process.

    Statement of Commissioner Bart Chilton Regarding the Notice of Proposed

    Rulemaking for Speculative Position Limits for Referenced Energy

    Contracts

    ``Moving Forward''

    During the last decade, while traditional hedgers and

    speculators increased their use of the futures markets, many new

    non-traditional participants entered the arena, bringing with them

    capital and a wealth of innovative approaches to trading. The trend

    helped fuel the economic engine of our democracy--a good and

    positive outcome. As markets and market participants evolve, the

    Commission has an inherent responsibility to examine the impact, as

    well as to proactively anticipate the potential impact, of changing

    dynamics on those markets we are entrusted to oversee.

    There is certainly no consensus about the potential and net

    impact of new non-traditional speculators on commodity markets. Did

    the massive passives--very large traders who have no interest in the

    underlying physical commodity and have, in general, a fairly

    inactive long trading strategy--contribute to $147 barrel oil in

    2008? Some say there is no impact on markets, others (like

    researchers at MIT, Rice and Princeton--and a new study out this

    week from Lincoln University of Missouri) absolutely disagree.

    Regardless, what is important to remember is that having an

    impact is not equivalent to manipulation (or other abuse) under

    current law, rule or regulation; it is not per se negative. However,

    any conduct that potentially can distress markets, that has the

    propensity to create artificiality in the markets, needs to be

    understood and curbed as necessary.

    The Commodity Exchange Act (CEA) has as its fundamental purpose

    the deterrence and prevention of fraud, market abuse and

    manipulation. To accomplish our mission requires vigilance and

    thoughtful consideration of the potential for market aberrations. It

    requires agile, balanced and prudent action in a timely manner--not

    usually the mark of government. Our role in striking the right

    balance with regard to the massive passives and other new dynamics

    in the futures industry requires that we not merely review and

    respond, but that we anticipate, deter and prevent.

    That is why I support moving forward on the energy proposal

    before the Commission. This proposal strikes a reasonable balance.

    Simply put, it seeks to impose mandatory hard cap position limits.

    Doing so is not the mark of wild-eyed overzealous regulators. In

    fact, the position limits called for in the proposal are similar to

    limits already in effect for agricultural commodities. This proposal

    simply seeks to expand such mandatory hard cap position limits to

    four heavily traded energy contracts.

    Specifically, the energy proposal would establish four different

    hard cap mandatory speculative position limits. They are: An

    exchange-specific spot-month limit; a single month limit; an all-

    months-combined limit; and an all-encompassing, cumulative U.S.

    exchange position limit for substantially similar-traded contracts.

    These limits would be dynamic in that they would be responsive to

    the size of the market and subject to annual recalculation by the

    Commission.

    While I have been a staunch advocate for strong position limits,

    the levels set for the limits, in my opinion, actually err on the

    high side. The proposed limits will certainly be seen by some as

    higher than appropriate. However, should the limits prove

    inadequate, the agency can, and I hope will, recalibrate to ratchet

    them down or even increase them as deemed appropriate. The most

    important thing is to establish a thoughtful position limit system.

    Furthermore, while the proposed limits err on the high side,

    such levels would still ensure that the very largest traders'

    positions, those with the greatest potential for causing market-

    contortions, would be limited. Moreover, if limits were set too low,

    there would be a possibility that trading migration could take

    place, transferring traders to over-the-counter markets or overseas

    exchanges. This is particularly noteworthy because Congress has yet

    to pass regulatory reform legislation that would grant the CFTC

    authority to properly regulate the over-the-counter markets--markets

    that are currently dark in that there is not government regulation

    or oversight. Hundreds of trillions of dollars are traded in these

    dark markets and they can influence the price that consumers pay for

    everything from gasoline, to a loaf of bread, to a home mortgage.

    Passage of such legislation to provide regulators with authority in

    this area is critically needed, and soon.

    In addition to position limits, the proposal contains a

    mechanism to consider certain exemptions to those limits. I have

    suggested that any exemptions should be approved by the CFTC,

    targeted for legitimate business purposes, verifiable and

    transparent. This proposal meets all four of those criteria.

    Traders hedging commercial risks, i.e. those who have inventory

    or have an interest in the underlying physical commodity, would

    qualify for a bona fide hedging exemption from the proposed

    speculative position limits upon application to the exchange. The

    CFTC would audit the use of this exemption to ensure its consistency

    with our rules and regulations. Importantly, no longer included in

    this class of traders would be swap dealers who establish positions

    to offset the financial risk of customer initiated swap positions.

    Instead, those traders could apply directly to the CFTC for a

    limited risk management exemption for positions held outside of the

    spot month. Swap dealers who receive this exemption from the CFTC

    would be subject to rigorous and regular reporting requirements to

    verify and qualify their need for the exemption. Currently, neither

    the names nor the numbers of such exemptions

    [[Page 4172]]

    are available to the public. Under the proposal, in order to

    increase transparency, the CFTC would make public the identities of

    those who receive exemptions.

    Finally, the proposal seeks comment from the public on the

    question of expanding position limits to the metals complex and to

    soft agricultural commodities. While I am pleased that this question

    is at least posited through the proposed rule, I am extremely

    disappointed that metals are not a part of this proposal as I have

    sought. In essence, failure to include a proposed rule relative to

    metals such as gold and silver prevents the inclusion of metals in

    the final rule covering position limits in energy. As a result of

    the omission, CFTC attorneys have opined that should the Commission

    wish to establish position limits in metals as a result of public

    comment, the agency would have to undertake an entirely separate

    rulemaking. I strongly support thoughtful position limits in the

    metals complex. I have advocated for their inclusion in this

    proposal with each of my colleagues and staff, and regret the lack

    of consensus that remains. It is my sincere hope and expectation

    that the upcoming hearing on position limits with regard to metals

    will enable us to move more expeditiously on a parallel regulatory

    process for metals.

    I thank everyone involved in conceiving and designing this

    thoughtful proposal with regard to energy. We seek comment, for an

    ample period of 90 days, on not only the overall proposal, but also

    specifically on the question of expanding the concept to the metals

    and soft agricultural commodities and on the question of imposing

    separate position limits for the massive passives as a class of

    investors. I look forward to the comments and ultimately to putting

    a sensible position limit system in place.

    Concurring Statement of Commissioner Scott D. O'Malia

    Regarding the Proposed Federal Speculative Position Limits for

    Referenced Energy Contracts and Associated Regulations

    I concur on the release of the Federal Register notice of

    proposed Federal speculative position limits for certain energy

    commodities because I think it is important that the Commission

    receive comments on the proposal. I encourage our market

    participants, the public, and anyone with an interest in the markets

    to inform the Commission about the impact of the proposed limits or

    other limits, meaning limits as currently proposed, or potentially

    lower limits as a result of this rulemaking or future rulemaking.

    Notwithstanding my concurrence on the release for comments, I

    have many concerns regarding the proposal's effectiveness and

    justification. Keeping in mind the importance of maintaining the

    market's fundamental purpose of allowing customers to hedge

    commercial risk, I question the utility of rules that either present

    any potential for circumventing CFTC authority or make energy

    markets less transparent or liquid.

    The Proposed Limits Could Result in Less U.S. Regulatory Oversight

    I question the effectiveness of these regulatory changes,

    especially as Congress is considering a much broader and

    comprehensive financial reform package. I remain particularly

    concerned with the impact of enacting the proposed position limits

    on the regulated exchanges, while the Commission lacks the

    regulatory authority to impose limits equitably upon all similar

    energy transactions, including over-the-counter transactions. As we

    work to increase transparency in these markets, the proposed

    position limits may undermine our efforts by allowing participants

    to turn to the less regulated and less transparent over-the-counter

    markets, which would be detrimental to the markets and to the

    public.

    Status Quo for Index and Speculative Investors

    Earlier this year, the Commission held hearings and heard

    testimony from witnesses who were frustrated with recent prices and

    volatility in commodity markets. Some advocated that the Commission

    immediately impose position limits as a solution. This created high

    expectations that any Commission proposal would impose limitations

    on passive index and speculative investors. The release states that

    no more than ten trading entities would be affected and most of

    those would likely be entitled to a bona fide hedge exemption. This

    means that few, if any, passive index and speculative investors will

    be significantly impacted by the proposed position limits. The

    proposed position limits will not change the investing behavior of

    passive index investors, so long as they remain under the limits or

    utilize the over-the-counter markets over which the Commission has

    limited authority. The Commission would benefit from receiving

    information on the impact, if any, the proposed position limits

    might have on the trading strategies of passive index investors

    going forward. In addition, the Commission should endeavor to

    improve its understanding of the impacts of passive index investors

    rolling over their position on a monthly basis to determine what, if

    any, action is required.

    Concerns About Effectiveness and Necessity

    This proposal makes a case for the statutory justification for

    the CFTC to impose position limits under Section 4a(a) of the Act.

    However, the proposal fails to make a compelling argument that the

    proposed position limits, which only target large concentrated

    positions, would dampen price distortions or curb excessive

    speculation. In large part, the lack of a compelling justification

    may be due to the CFTC's own research and the Interagency Task Force

    on Commodity Market's conclusion that the rise in oil prices was

    largely attributable to fundamental supply and demand factors, which

    is also supported by independent analysis. In addition, the fact

    that the proposed position limits are modeled on the agricultural

    commodities position limits forces us to examine whether those

    agriculture limits were effective in preventing the price spikes in

    2007 and 2008. Despite federal position limits, contracts such as

    wheat, corn, soybeans, and cotton contracts were not spared record

    setting price increases.

    Missed Opportunity for Transparency

    The proposed position limits provide swap dealers with twice the

    single and all-months combined levels. This is a divergence from the

    current practice of providing swap dealers with a hedge exemption

    for commercial risk taken on over-the-counter transactions. I

    question whether the Commission has missed an opportunity to

    consider an alternative approach to provide swap dealers with a

    ``look through'' exemption, meaning swap dealers would receive a

    bona fide hedge exemption for business related to counterparties who

    would have been entitled to a hedge exemption if the counterparties

    had used the futures markets. In exchange for this ``look through''

    exemption, swap dealers would provide the Commission with their

    customer's over-the-counter position data. That data would allow the

    Commission to determine whether customers are attempting to

    circumvent the position limits. I would be interested to receive

    comments on whether the Commission should impose this ``look

    through'' exemption, rather than the swap dealer exemption in the

    proposed rule. In addition, I am interested to know what types of

    data could be made available under a ``look through'' exemption.

    While I am aware that the proposed rule contains a provision for

    ``look through'' recordkeeping, meaning data would be provided only

    upon Commission request, this would not provide the same

    transparency as the above.

    Position Limits Must Not Hinder Commercial Risk Management

    If position limits are implemented, the Commission must ensure

    that such limits do not affect market liquidity and thus hinder the

    market's fundamental purpose of allowing commercial hedgers to

    manage risk. This is true for position limits on energy products or

    for any other commodity.

    In light of the many questions and concerns I have, I look

    forward to receiving comments from market participants, the public,

    and anyone with an interest in the markets that would be impacted by

    the proposed position limits.

    [FR Doc. 2010-1209 Filed 1-25-10; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: January 26, 2010



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