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2011-28809

  • Federal Register, Volume 76 Issue 223 (Friday, November 18, 2011)[Federal Register Volume 76, Number 223 (Friday, November 18, 2011)]

    [Rules and Regulations]

    [Pages 71626-71706]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2011-28809]

    [[Page 71625]]

    Vol. 76

    Friday,

    No. 223

    November 18, 2011

    Part II

    Commodity Futures Trading Commission

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    17 CFR Parts 1, 150 and 151

    Position Limits for Futures and Swaps; Final Rule and Interim Final

    Rule

    Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 /

    Rules and Regulations

    [[Page 71626]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1, 150 and 151

    RIN 3038-AD17

    Position Limits for Futures and Swaps

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule and interim final rule.

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    SUMMARY: On January 26, 2011, the Commodity Futures Trading Commission

    (``Commission'' or ``CFTC'') published in the Federal Register a notice

    of proposed rulemaking (``proposal'' or ``Proposed Rules''), which

    establishes a position limits regime for 28 exempt and agricultural

    commodity futures and options contracts and the physical commodity

    swaps that are economically equivalent to such contracts. The

    Commission is adopting the Proposed Rules, with modifications.

    DATES: Effective date: The effective date for this final rule and the

    interim rule at Sec. 151.4(a)(2) is January 17, 2012.

    Comment date: The comment period for the interim final rule will

    close January 17, 2012.

    Compliance dates: For compliance dates for these final rules, see

    SUPPLEMENTARY INFORMATION.

    FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist,

    Division of Market Oversight, at (202) 418-5452, ssherrod@cftc.gov; B.

    Salman Banaei, Attorney, Division of Market Oversight, at (202) 418-

    5198, bbanaei@cftc.gov, Neal Kumar, Attorney, Office of General

    Counsel, at (202) 418-5353, nkumar@cftc.gov, Commodity Futures Trading

    Commission, Three Lafayette Centre, 1155 21st Street NW., Washington,

    DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. Introduction

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII

    of the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'')

    \3\ to establish a comprehensive new regulatory framework for swaps and

    security-based swaps. The legislation was enacted to reduce risk,

    increase transparency, and promote market integrity within the

    financial system by, among other things: (1) Providing for the

    registration and comprehensive regulation of swap dealers and major

    swap participants; (2) imposing clearing and trade execution

    requirements on standardized derivative products; (3) creating robust

    recordkeeping and real-time reporting regimes; and (4) enhancing the

    Commission's rulemaking and enforcement authorities with respect to,

    among others, all registered entities and intermediaries subject to the

    Commission's oversight.

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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

    \2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \3\ 7 U.S.C. 1 et seq.

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    As amended by the Dodd-Frank Act, section 4a(a)(2) of the CEA

    mandates that the Commission establish position limits for futures and

    options contracts traded on a designated contract market (``DCM'')

    within 180 days from the date of enactment for exempt commodities and

    270 days from the date of enactment for agricultural commodities.\4\

    Under section 4a(a)(5), Congress required the Commission to

    concurrently establish limits for swaps that are economically

    equivalent to such futures or options contracts traded on a DCM. In

    addition, the Commission must establish aggregate position limits for

    contracts based on the same underlying commodity that include, in

    addition to the futures and options contracts: (1) Contracts listed by

    DCMs; (2) swaps that are not traded on a registered entity but which

    are determined to perform or affect a ``significant price discovery

    function''; and (3) foreign board of trade (``FBOT'') contracts that

    are price-linked to a DCM or swap execution facility (``SEF'') contract

    and made available for trading on the FBOT by direct access from within

    the United States.

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    \4\ Section 1a(20) of the CEA defines the term ``exempt

    commodity'' to mean a commodity that is not an excluded or an

    agricultural commodity. 7 U.S.C. 1a(20). Section 1a(19) defines the

    term ``excluded commodity'' to mean, among other things, an interest

    rate, exchange rate, currency, credit risk or measure, debt or

    equity instrument, measure of inflation, or other macroeconomic

    index or measure. 7 U.S.C. 1a(19). Although the CEA does not

    specifically define the term ``agricultural commodity,'' section

    1a(9) of the CEA, 7 U.S.C. 1a(9), enumerates a non-exclusive list of

    agricultural commodities, and the Commission recently added section

    1.3(zz) to the Commission's regulations defining the term

    ``agricultural commodity.'' See 76 FR 41048, Jul. 13, 2011.

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    To implement the expanded mandate under the Dodd-Frank Act, the

    Commission issued Proposed Rules that would establish federal position

    limits and limit formulas for 28 physical commodity futures and option

    contracts (``Core Referenced Futures Contracts'') and physical

    commodity swaps that are economically equivalent to such contracts

    (collectively, ``Referenced Contracts'').\5\ The Commission also

    proposed aggregate position limits that would apply across different

    trading venues to contracts based on the same underlying commodity. In

    addition to developing position limits for the Referenced Contracts,

    the Proposed Rules would implement a new statutory definition of bona

    fide hedging transactions, revise the standards for aggregation of

    positions, and establish position visibility reporting requirements.

    The Proposed Rules would require DCMs and SEFs that are trading

    facilities to set position limits for exempt and agricultural commodity

    contracts and establish acceptable practices for position limits and

    position accountability rules in other commodities.

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    \5\ See Position Limits for Derivatives, 76 FR 4752, 4753 Jan.

    26, 2011. Specifically, the Commission proposed to withdraw its part

    150 regulations, which set out the current position limit and

    aggregation policies, and replace them with new part 151

    regulations.

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    B. Overview of Public Comments

    The Commission received 15,116 comments from a broad range of the

    industry and other interested persons, including DCMs, trade

    organizations, banks, investment companies, commercial end-users,

    academics, and the general public. Of the total comments received,

    approximately 100 comment letters provided detailed comments and

    recommendations concerning whether, and how, the Commission should

    exercise its authority to set position limits pursuant to amended

    section 4a, as well as other specific aspects of the proposal. The

    majority of the over 15,000 comment letters received were generally

    supportive of the proposal. Many urged the Commission promptly to

    ``restore balance to commodities markets.'' \6\ On the other hand,

    approximately 55 commenters requested that the Commission either

    significantly alter or withdraw the proposal. The Commission considered

    all of the comments received in formulating the final regulations.

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    \6\ See e.g., Letter from Professor Greenberger, University of

    Maryland School of Law on March 28, 2011 (``CL-Prof. Greenberger'')

    at 6-7; and Petroleum Marketers Association of America (``PMAA'')

    and New England Fuel Institute (``NEFI'') on March 28, 2011 (``CL-

    PMAA/NEFI'') at 5. Also, over 6,000 comment letters urged the

    Commission to ``act quickly'' to adopt position limits.

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    [[Page 71627]]

    II. The Final Rules

    A. Statutory Framework

    In the proposal, the Commission provided general background on the

    scope of its statutory authority under section 4a (as amended by the

    Dodd-Frank Act), together with the related legislative history, in

    support of the Proposed Rules.\7\ Many commenters responded with their

    views and interpretations of the Commission's mandate under the CEA,

    and in particular whether the Commission must first make findings that

    position limits are ``necessary'' to diminish, eliminate, or prevent

    undue burdens on interstate commerce resulting from excessive

    speculation before imposing them.\8\

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    \7\ A more detailed background on the statutory and legislative

    history is provided in the proposal. See 76 FR at 4753-4755.

    \8\ See e.g., CME Group, Inc. (``CME I'') on March 28, 2011

    (``CL-CME I'') at 4, 7.

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    As discussed in the proposal, CEA section 4a states that

    ``excessive speculation'' in any commodity traded on a futures exchange

    ``causing sudden or unreasonable fluctuations or unwarranted changes in

    the price of such commodity is an undue and unnecessary burden on

    interstate commerce'' and directs the Commission to establish such

    limits on trading ``as the Commission finds necessary to diminish,

    eliminate, or prevent such burden.'' \9\ This basic statutory mandate

    has remained unchanged since its original enactment in 1936 and through

    subsequent amendments to section 4a, including the Dodd-Frank Act.\10\

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    \9\ See section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1).

    \10\ As further detailed in the Proposed Rules, this long-

    standing statutory mandate is based on Congressional findings that

    market disruptions can result from excessive speculative trading. In

    the 1920s and into the 1930s, a series of studies and reports found

    that large speculative positions in the futures markets for grain,

    even without manipulative intent, can cause ``disturbances'' and

    ``wild and erratic'' price fluctuations. To address such market

    disturbances, Congress was urged to adopt position limits to

    restrict speculative trading notwithstanding the absence of

    manipulation. In 1936, based upon such reports and testimony,

    Congress provided the Commodity Exchange Authority (the predecessor

    of the Commission) with the authority to impose Federal speculative

    position limits. In doing so, Congress expressly observed the

    potential for market disruptions resulting from excessive

    speculative trading alone and the need for measures to prevent or

    minimize such occurrences. This mandate and underlying Congressional

    determination of its need has been re-affirmed through successive

    amendments to the CEA. See 76 FR at 4754-55.

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    In section 737 of the Dodd-Frank Act, Congress made major changes

    to CEA section 4a; among other things, Congress extended the

    Commission's reach to the heretofore unregulated swaps market.\11\ In

    doing so, Congress reinforced and reaffirmed the Commission's broad

    authority to set position limits to prevent undue and unnecessary

    burdens associated with excessive speculation. Specifically, section

    4a, as amended by the Dodd-Frank Act, provides that the Commission

    ``shall'' set position limits ``as appropriate'' and ``to the maximum

    extent practicable, in its discretion'' in order to protect against

    excessive speculation and manipulation while ensuring that the markets

    retain sufficient liquidity for bona fide hedgers and that their price

    discovery functions are not disrupted.\12\ Further, the Dodd-Frank Act

    amended the CEA to direct the Commission to define the relevant factors

    to be considered in identifying swaps that serve a ``significant price

    discovery'' function and thus become subject to position limits.\13\

    Congress also authorized the Commission to exempt persons or

    transactions ``conditionally or unconditionally'' from position

    limits.\14\

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    \11\ In particular, Congress expanded the scope of transactions

    that could be subject to position limits to include swaps traded on

    a DCM or SEF, and swaps not traded on a DCM or SEF, but that perform

    or affect a significant price discovery function with respect to

    registered entities. See section 4a(a)(1) of the CEA, 7 U.S.C.

    6a(a)(1). Congress also directed the Commission to establish

    aggregate limits on the amount of positions held in the same

    underlying commodity across markets for DCM contracts, FBOTs (with

    respect to certain linked contracts) and swaps that perform a

    ``significant price discovery function.'' section 4a(a)(6) of the

    CEA, 7 U.S.C. 6a(a)(6).

    \12\ See sections 4a(a)(3) to 4a(a)(5) of the CEA, 7 U.S.C.

    6a(a)(3) to 6a(a)(5). Additionally, new section 4a(a)(2)(c) states

    that, in establishing limits, the Commission ``shall strive to

    ensure'' that FBOTs trading in the same commodity will be subject to

    ``comparable'' limits and that any limits imposed by the Commission

    will not cause the price discovery in the commodity to shift to

    FBOTs.

    \13\ See section 4a(a)(4) of the CEA, 7 U.S.C. 6a(a)(4).

    \14\ See section 4a(a)(7) of the CEA, 7 U.S.C. 6a(a)(7).

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    In reaffirming the Commission's broad authority to set position

    limits, Congress also made clear that the Commission must impose them

    expeditiously. Under amended section 4a(a)(2), Congress directed that

    the Commission ``shall'' establish limits on the amount of positions,

    as appropriate, that may be held by any person in physical commodity

    futures and options contracts traded on a DCM. In section 4a(a)(5),

    Congress directed the Commission to establish, concurrently with the

    limits established under section 4a(a)(2), limits on the amount of

    positions, as appropriate, that may be held by any person with respect

    to swaps that are economically equivalent to the DCM contracts subject

    to the required limits under section 4a(a)(2). The Commission was

    directed to establish the limits within 180 days after enactment for

    exempt commodities and 270 days after enactment for agricultural

    commodities.

    As discussed in the proposal, the Commission construes the amended

    CEA to mandate the Commission to impose position limits at the level it

    determines to be appropriate to diminish, eliminate, or prevent

    excessive speculation and market manipulation.\15\ In setting such

    limits, the Commission is not required to find that an undue burden on

    interstate commerce resulting from excessive speculation exists or is

    likely to occur. Nor is the Commission required to make an affirmative

    finding that position limits are necessary to prevent sudden or

    unreasonable fluctuations in prices. Instead, the Commission must set

    position limits prophylactically, according to Congress' mandate in

    section 4a(a)(2), and, in establishing the limits Congress has

    required, exercise its discretion to set a limit that, to the maximum

    extent practicable, will, among other things, ``diminish, eliminate, or

    prevent excessive speculation.'' \16\

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    \15\ See 76 FR at 4754.

    \16\ Section 4a(a)(3)(B)(i) of the CEA, 7 U.S.C. 6a(a)(3)(B)(i).

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    Commenters were divided on the scope of the Commission's authority

    under CEA section 4a. A number of commenters supported the view that

    the Dodd-Frank Act, in extending the Commission's authority to swaps,

    imposed on the Commission a mandatory obligation to impose position

    limits.\17\ For example, Professor Michael Greenberger stated that

    ``[s]ection 737 emphatically provides that the Commission `shall by

    rule, regulation, or order establish limits on the amount of positions,

    as appropriate, other than bona fide hedge positions that may be held

    by any person[.]' The language could not be clearer. The Commission is

    required to establish position limits as Congress intentionally used

    the word, `shall,' to impose the mandatory obligation.'' \18\ Professor

    Greenberger further noted, ``the plain reading of the phrase `as

    appropriate' modifies only those position limits mandated to be

    imposed, i.e., the mandatory position limits must be promulgated `as

    appropriate.' The term `as appropriate' does not modify the heavily

    emphasized

    [[Page 71628]]

    mandate that there `shall' be position limits.'' \19\

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    \17\ See e.g., American Public Gas Association (``APGA'') on

    March 28, 2011 (``CL-APGA'') at 2-3; Americans for Financial Reform

    (``AFR'') on March 28, 2011 (``CL-AFR'') at 5; U.S. Senator Harkin

    on December 15, 2010 (``CL-Sen. Harkin''). See also CL-PMAA/NEFI

    supra note 6 at 4-5.

    \18\ CL-Prof. Greenberger supra note 6 at 4 (emphasis added).

    \19\ Id. at 5. In addition, Professor Greenberger noted that

    Section 719 of the Dodd-Frank Act specifically requires the

    Commission `to conduct a study of the effects of the position limits

    imposed pursuant to the other provisions of this title on excessive

    speculation and on the movement of transactions.' The Commission is

    required to submit the report `within 12 months after the imposition

    of position limits pursuant to the other provisions of this title.'

    Why would Congress specifically require the Commission to submit a

    report after imposing position limits if it had provided by statute

    (as opponents of position limits mistakenly argue) that the data

    must be available before the position limit rule is finally

    promulgated? The short answer is that Congress clearly understood

    the imminent danger excessive speculation and passive betting on

    price direction had caused by uncontrollable increases in the prices

    of energy and agricultural commodities. Therefore, the Commission is

    statutorily obligated to impose the `appropriate' position limits.

    Id. at 6-7.

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    Other commenters expressed similar views, asserting that the

    Commission is not required to demonstrate price fluctuations caused by

    excessive speculation or the efficacy of position limits in reducing

    excessive speculation or market manipulation. The Petroleum Marketers

    Association of America and the New England Fuel Institute (``PMAA/

    NEFI'') in a joint comment letter argued, for example, that

    the purpose of position limits is not to punish past wrongdoing, but

    rather to deter and prevent potential future dysfunctions in the

    commodity staples derivatives markets and to prevent harm to market

    participants and burdens on interstate commerce. Because the purpose

    of position limits is to prevent future violations, the Commission

    should not be required to appreciate the complete and precise level

    of excessive speculation prior to taking action.''\20\

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    \20\ CL-PMAA/NEFI supra note 6 at 5. See also Delta Airlines,

    Inc. (``Delta'') on March 28, 2011 (``CL-Delta'') at 11. Delta

    believes that the Commission should instead strive to establish

    meaningful speculative position limits using sampling and other

    statistical techniques to make reasonable, working assumptions about

    positions in various market segments and refining the speculative

    limits based upon market experience and better data as it is

    developed. See also CL-Sen. Harkin supra note 17 at 1 (opposing any

    delay in the implementation of position limits); and 56 National

    coalitions and organizations and 28 International coalitions and

    organizations from 16 countries (``ICPO'') on March 28, 2011 (``CL-

    ICPO'') at 1 (stating that the proposal regarding position limits

    should be implemented fully).

    On the other hand, numerous commenters posited that the Commission

    did not adequately demonstrate, or perform sufficient analysis

    establishing, the need for or appropriateness of the proposed limits

    and related requirements.\21\ For example, according to the CME Group,

    Inc. (``CME''),

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    \21\ See e.g., CL-CME I supra note 8; Commodity Markets Council

    (``CMC'') on March 28, 2011 (``CL-CMC''); PIMCO on March 28, 2011

    (``CL-PIMCO''); Edison Electric Institute (``EEI'') and Electric

    Power Supply Association (``EPSA'') on March 28, 2011 (``CL-EEI/

    EPSA''); BlackRock, Inc. (``BlackRock'') on March 28, 2011 (``CL-

    BlackRock''); International Working Group on Trade-Finance Linkages

    (``IWGTFL'') on March 28, 2011(``CL-IWGTFL''); Coalition of Physical

    Energy Companies (``COPE'') on March 28, 2011 (``CL-COPE''); Utility

    Group on March 28, 2011 (``CL-Utility Group'');ISDA/SIFMA on March

    28, 2011 (``CL-ISDA/SIFMA''); Futures Industry Association (``FIA

    I'') on March 25, 2011 (``CL-FIA I''); Katten Muchin Rosenman LLP

    (``Katten'') on March 31, 2011 (``CL-Katten''); Colorado Public

    Employees' Retirement (``PERA'') on March28, 2011 (``CL-PERA'');

    American Petroleum Institute (``API'') on March 28, 2011 (``CL-

    API''); Sullivan & Cromwell LLP (``Centaurus Energy'') on March 28,

    2011 (``CL-Centaurus Energy''); ICI on March 28, 2011 (``CL-ICI'');

    Morgan Stanley on March 28, 2011 (``CL-Morgan Stanley''); Asset

    Management Group (``AMG''), Securities Industry and Financial

    Markets Association (``SIFMA'') on April 5, 2011(``CL-SIFMA AMG

    I''); World Gold Council (``WGC'') on March 28, 2011 (``CL-WGC'');

    and Managed Funds Association (``MFA'') on March 28, 2011 (``CL-

    MFA'').

    the CEA sets up a two-pronged approach for imposing limits on

    speculative positions. First, [under CEA section 4a(a)(1)] the

    Commission must `find' that any position limits are `necessary'--a

    directive that Congress reaffirmed in [the Dodd-Frank Act]. Second,

    once the Commission makes the `necessary' finding, [CEA sections

    4a(a)(2)(A) and 4a(a)(3) provide that the Commission] must establish

    a particular position limit regime only `as appropriate'--a

    statutory requirement added by Dodd-Frank.''\22\

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    \22\ CME argued the Commission's interpretation of section

    4a(a)(1) of the CEA would render the ``as the Commission finds are

    necessary'' language a nullity, effectively replacing it with

    statutory language imposing a lower threshold than is found

    elsewhere in the CEA. See CL-CME I supra note 8 at 3, citing Keene

    Corp. v. United States, 508 U.S. 200, 208 (1993) (``where Congress

    includes particular language in one section of a statute but omits

    it in another * * *, it is generally presumed that Congress acts

    intentionally and purposely in the disparate inclusion or

    exclusion'' quoting Russello v. United States, 464 U.S. 16, 23

    (1983).

    In this connection, CME and many other commenters asserted that because

    the Commission did not make a finding that position limits are

    necessary to prevent undue burdens on interstate commerce resulting

    from excessive speculation, it did not satisfy the pre-condition to

    establishing position limits.

    Some of these commenters, such as the International Swaps and

    Derivatives Association and the Securities Industry and Financial

    Markets Association (``ISDA/SIFMA'') (in a joint comment letter) and

    the Futures Industry Association (``FIA''), argued that the Commission

    is directed to set position limits ``as appropriate,'' and ``as

    appropriate'' requires empirical evidence demonstrating that such

    limits would diminish, eliminate, or prevent excessive speculation. FIA

    claimed that in the absence of evidence concerning the impact of

    excessive speculation, it would be impossible to set position limits

    that comply with the statutory objectives of section 4a(a)(3).

    Similarly, Centaurus Energy Master Fund, LP (``Centaurus'') and ISDA/

    SIFMA commented that the ``as appropriate'' language in section

    4a(a)(2)(A) requires factual support before imposing position limits,

    and that ``the imposition of position limits `prophylactically' is not

    mandated by Dodd-Frank and is not supported by the facts.'' \23\

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    \23\ CL-ISDA/SIFMA, supra note 21 at 3; and CL-Centaurus Energy,

    supra note 21 at 2. See also CL-COPE supra note 21 at 2-3; and CL-

    Utility Group supra note 21 at 3. Along similar lines, COPE and the

    Utility Group opined that ``the deadline of 180 days after the date

    of enactment in clause (B)(i) is only triggered upon a determination

    that such limits are appropriate. Congress unambiguously modified

    the word `shall' with the requirement that limits only be

    established `as appropriate.'' Id.

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    CME also contended that imposing position limits on ``economically

    equivalent swaps'' would be counter to Dodd-Frank because it will

    encourage market participants to enter into bespoke, uncleared, non-DCM

    or SEF-traded swaps.\24\ Finally, CME and other commenters, suggested

    that position limits and position accountability levels should be set

    and administered by futures exchanges.

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    \24\ CL-CME I, supra note 8 at 11.

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

    Upon careful consideration of the commenters' views, the Commission

    reaffirms its interpretation of amended section 4a. The Commission

    disagrees that it must first determine that position limits are

    necessary before imposing them or that it may set limits only after it

    has conducted a complete study of the swaps market. Congress did not

    give the Commission a choice. Congress directed the Commission to

    impose position limits and to do so expeditiously.\25\ Section

    4a(a)(2)(B) states that the limits for physical commodity futures and

    options contracts ``shall'' be established within the specified

    timeframes, and section 4a(a)(2)(5) states that the limits for

    economically equivalent swaps ``shall'' be established concurrently

    with the limits required by section 4a(a)(2). The congressional

    directive that the Commission set position limits is further reflected

    in the repeated references to the limits ``required'' under section

    4a(a)(2)(A).\26\ Section 4a(a)(6) similarly states, without

    qualification, that the Commission ``shall'' establish aggregate

    position

    [[Page 71629]]

    limits.\27\ While some commenters seize on the phrase ``as

    appropriate,'' which appears in sections 4a(a)(2)(A), 4a(a)(3), and

    4a(a)(5), that phrase, when considered in the context of the position

    limits provisions as a whole, is most sensibly read as directing the

    Commission to exercise its discretion in determining the extent of the

    limits that Congress required the Commission to impose.\28\

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    \25\ See also CL-Sen. Harkin, supra note 17 at 1 (opposing any

    delay in the implementation of position limits); and CL-ICPO, supra

    note 20 at 1 (stating that the Proposed Rules regarding position

    limits should be implemented fully).

    \26\ See sections 4a(a)(2)(B)(i)-(ii), 4a(a)(2)(C), and 4a(a)(3)

    of the CEA, 7 U.S.C. 6a(a)(2)(B)(i)-(ii), 6a(a)(2)(C), 6a(a)(3).

    \27\ Section 4a(a)(6) of the CEA directs the Commission to

    impose aggregate limits for contracts based on the same underlying

    commodity across: (a) DCM contracts, (b) FBOT contracts offered via

    direct access from inside the United States that are linked to

    contracts listed on a registered entity; and (c) swap contracts that

    perform or affect a significant price discovery function (``SPDF'')

    with respect to registered entities. 7 U.S.C. 6a(a)(6). Although the

    scope of SPDF swaps is currently limited to economically equivalent

    swaps discussed herein, the Commission intends to address in a

    subsequent rulemaking, as was discussed in the proposal, a process

    by which SPDF swaps can be identified. See Position Limits for

    Derivatives, 76 FR 4752, 4753, Jan. 26, 2011.

    \28\ Section 719 of the Dodd-Frank Act requires the Commission

    to submit a report on the effects of the position limits imposed

    pursuant to the other provisions of this title. Such a provision

    gives further support to the Commission's view that Congress

    mandated that the Commission impose position limits, setting levels

    as appropriate, because the reporting requirement presupposes that

    limits will be imposed. Congress did not intend the Commission to

    have to demonstrate that such limits are ``necessary'' or that

    position limits in general are ``appropriate'' before imposing them

    and reporting on their operation. See also CL-Prof. Greenberger

    supra note 6 at 6-7.

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    In accordance with the statutory mandate, the Commission has

    established position limits and has exercised its discretion to set

    position limit levels to further the congressional objectives set out

    in section 4a(a)(3)(B) based upon the Commission's experience with

    existing position limits.\29\ In adding section 4a(a)(3)(B), Congress

    reaffirmed the Commission's broad discretion to fix position limit

    levels (and to adopt related requirements) aimed at combating excessive

    speculation and market manipulation, while also protecting market

    liquidity (for bona fide hedgers) and price discovery. The provision

    reflects the Commission's historical approach to setting position

    limits, and it is consistent with the longstanding congressional

    directive in section 4a(a)(1) that the Commission set position limits

    in its discretion to prevent or minimize burdens that could result from

    excessive speculative trading.\30\

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    \29\ The Commission has applied those limits to specified

    Referenced Contracts based on their high levels of open interest and

    significant notional value or their capacity to serve as a reference

    price for a significant number of cash market transactions.

    \30\ Consistent with the congressional findings and objectives,

    the Commission has previously set position limits without finding

    excessive speculation or an undue burden on interstate commerce, and

    in so doing has expressly stated that such additional determinations

    by the Commission were not necessary in light of the congressional

    findings in section 4a of the Act. In its 1981 rulemaking to require

    all exchanges to adopt position limits for commodities for which the

    Commission itself had not established limits, the Commission stated,

    in response to similar comments that it had not made any factual

    determinations that excessive speculation had occurred or

    analytically demonstrated that the proposed limits were necessary to

    prevent excessive speculation in the future:

    [T]he prevention of large or abrupt price movements which are

    attributable to the extraordinarily large speculative positions is a

    congressionally endorsed regulatory objective of the Commission.

    Further, it is the Commission's view that this objective is enhanced

    by the speculative position limits since it appears that the

    capacity of any contract to absorb the establishment and liquidation

    of large speculative positions in an orderly manner is related to

    the relative size of such positions, i.e., the capacity of the

    market is not unlimited.

    Establishment of Speculative Position Limits, 46 FR 50938, Oct.

    16, 1981 (adopting then Sec. 1.61 (now part of Sec. 150.5)). The

    Commission reiterated this point in the proposed rulemaking in early

    2010, before enactment of the Dodd-Frank Act. Federal Speculative

    Position Limits for Referenced Energy Contracts and Associated

    Regulations,75 FR 4144, at 4146, 4148-49, Jan. 26, 2010 (``[t] he

    Congressional endorsement [in section 4a] of the Commission's

    prophylactic use of position limits rendered unnecessary a specific

    finding that an undue burden on interstate commerce had actually

    occurred'' because 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''); withdrawn, 75 FR 50950, Aug. 18, 2010. During the

    consideration of the Dodd-Frank Act--as well as in the nearly three

    decades since the Commission issued its interpretation of section 4a

    in 1981--Congress was aware of the Commission's longstanding

    approach to position limits, including its interpretation that the

    Commission is not required to make a predicate finding prior to

    establishing limits. Congress did not disturb the language under

    which the Commission previously acted to impose position limits, and

    added new language that makes clear that the types of limits

    described in sections 4a(a)(2), (a)(5), and (a)(6) are required.

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

    In sum, the contention that the Commission is required to

    demonstrate that position limits (or position limit levels) are

    necessary is contrary not only to the language of, and congressional

    objectives underlying, amended section 4a, but also to the regulatory

    history of position limits and to the choices Congress made in the

    Dodd-Frank Act in light of that history.\31\

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

    \31\ The Commission also notes that Congress has reauthorized

    the Commission several times, both before and after the Commission

    established a position limit regime, without making a finding that

    position limits were ``necessary'' to combat excessive speculation.

    In this regard, Congress was aware of the Commission's historical

    interpretation of section 4a and has not elected to amend the

    relevant text, including in the Dodd-Frank Act, of that section. If

    Congress intended a different interpretation, Congress would have

    amended the language of section 4a. See Commodity Futures Trading

    Commission v. Schor, 478 U.S. 833, 846 (1986) (``It is well

    established that when Congress revisits a statute giving rise to a

    longstanding administrative interpretation without pertinent change,

    the `congressional failure to revise or repeal the agency's

    interpretation is persuasive evidence that the interpretation is the

    one intended by Congress''') citing NLRB v. Bell Aerospace Co., 416

    U.S. 267, 274-275 (1974).

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

    For the reasons stated above, and for the reasons provided in the

    proposal, the Commission finds that it has authority under CEA section

    4a, as amended by the Dodd-Frank Act, to impose the position limits

    herein.\32\

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

    \32\ Some commenters submitted a number of studies and reports

    addressing the issue of whether position limits are effective or

    necessary to address excessive speculation. For the reasons

    explained above, the Commission is not required to make a finding as

    to whether position limits are effective or necessary to address

    excessive speculation. Accordingly, these studies and reports do not

    present facts or analyses that are material to the Commission's

    determinations in finalizing the Proposed Rules. A discussion of

    these studies is provided in section III A infra.

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

    B. Referenced Contracts

    The Commission identified 28 Core Referenced Futures Contracts and

    proposed to apply aggregate limits on a futures equivalent basis across

    all derivatives that are (i) Directly or indirectly linked to the price

    of a Core Referenced Futures Contract; or (ii) based on the price of

    the same underlying commodity for delivery at the same delivery

    location as that of a Core Referenced Futures Contract, or another

    delivery location having substantially the same supply and demand

    fundamentals (such derivative products are collectively defined as

    ``Referenced Contracts'').\33\ These Core Referenced Futures Contracts

    were selected on the basis that such contracts: (1) Have high levels of

    open interest and significant notional value; or (2) serve as a

    reference price for a significant number of cash market transactions.

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

    \33\ 76 FR at 4752, 4753. These Core Referenced Futures

    Contracts are: Chicago Board of Trade (``CBOT'') Corn, Oats, Rough

    Rice, Soybeans, Soybean Meal, Soybean Oil and Wheat; Chicago

    Mercantile Exchange Feeder Cattle, Lean Hogs, Live Cattle and Class

    III Milk; Commodity Exchange, Inc. Gold, Silver and Copper; ICE

    Futures U.S. Cocoa, Coffee C, FCOJ-A, Cotton No.2, Sugar No. 11 and

    Sugar No. 16; Kansas City Board of Trade (``KCBT'') Hard Winter

    Wheat; Minneapolis Grain Exchange Hard Red Spring Wheat; and New

    York Mercantile Exchange Palladium, Platinum, Light Sweet Crude Oil,

    New York Harbor No. 2 Heating Oil, New York Harbor Gasoline

    Blendstock and Henry Hub Natural Gas.

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

    Edison Electric Institute and the Electric Power Supply Association

    argued that the Commission did not provide a reasoned explanation for

    selecting the 28 Referenced Contracts.\34\ Other commenters requested

    that the Commission clarify the definition of Referenced Contracts or

    restrict it to

    [[Page 71630]]

    those contracts sharing a common delivery point.\35\

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

    \34\ CL-EEI/EPSA, supra note 21 at 5.

    \35\ Alternative Investment Management Association (``AIMA'') on

    March 28, 2011 (``CL-AIMA'') at 2; CL-API supra note 21 at 5; BG

    Americas & Global LNG (``BGA'') on March 28, 2011 (``CL-BGA'') at

    18; Chris Barnard on March 28, 2011 at 1; CL-COPE supra note 21 at

    6; CL-ISDA/SIFMA supra note 21 at 20; Shell Trading (``Shell'') on

    March 28, 2011 (``CL-Shell'') at 7-8; CL-Utility Group supra note 21

    at 7; and Working Group of Commercial Energy Firms (``WGCEF'') on

    March 28, 2011 (``CL-WGCEF'') at 22.

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

    Some commenters argued that the Commission should narrow the

    definition of economically equivalent swaps to cleared swaps.\36\

    Conversely, other commenters asked the Commission to broaden its

    definition of Referenced Contracts. For example, Better Markets asked

    the Commission to consider a ``market-based approach'' to determine

    whether to include a contract within a Referenced Contract category,

    including hedging relationships used by market participants, cross-

    contract netting practices of clearing organizations, enduring price

    relationships, and physical characteristics.\37\

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

    \36\ CL-API, supra note 21 at 13; and CL-BGA, supra note 35 at

    18. American Petroleum Institute explained that extending the

    definition of ``Referenced Contract'' beyond standardized cleared

    contracts would not be cost-effective. Similarly, BGA argued that

    because the Commission cannot identify uncleared contracts until

    they are executed, the scope of economically equivalent swaps should

    be limited to only those that are cleared.

    \37\ Better Markets, Inc. (``Better Markets'') on March 28, 2011

    (``CL-Better Markets'') at 68-69.

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

    The Edison Electric Institute and Electrical Power Suppliers

    Association opined that the Commission should allow market participants

    to define what constitutes an economically equivalent contract

    consistent with commercial practices and to allow for a good-faith

    exemption for market participants relying on their own determination

    consistent with Commission guidance.\38\ ISDA/SIFMA argued that the

    Commission should ensure that the concept of an economically equivalent

    derivative contract covers contracts whose correlation with futures can

    be established through accepted models that address features such as

    maturity, payout structure, locations basis, product basis, etc.\39\

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

    \38\ CL-EEI/EPSA, supra note 21 at 12.

    \39\ CL-ISDA/SIFMA supra note 21 at 23.

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

    The proposed Sec. 151.1 definition of Referenced Contract excluded

    basis contracts and commodity index contracts.\40\ Proposed Sec. 151.1

    defined basis contract as those contracts that are ``cash settled based

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

    same commodity) at different delivery points.'' Commodity index

    contracts were defined in the proposal as contracts that are ``based on

    an index comprised of prices of commodities that are not the same nor

    [sic] substantially the same.'' The proposal further excluded

    intercommodity spread contracts,\41\ calendar spread contracts, and

    basis contracts from the definition of ``commodity index contract.''

    Many commenters appeared to interpret the proposal as subjecting

    positions in basis contracts or commodity index contracts to the

    position limits set forth in proposed Sec. 151.4.\42\ The Coalition of

    Physical Energy Companies and the Utility Group found that the

    definition of Referenced Contract was ``vague'' and ``clearly

    extraordinarily broad'' because, inter alia, it appeared to include

    some over-the-counter (``OTC'') swaps that utilized a Core Referenced

    Futures Contract price as a component of a floating price

    calculation.\43\ The Coalition of Physical Energy Companies and the

    Utility Group opined that even if the proposed class of Referenced

    Contracts that are priced based on ``locations with substantially the

    same supply and demand fundamentals, as that of any Core Referenced

    Futures Contract'' it is unclear whether the definition of Referenced

    Contract extends to ``those [swaps] that are actually economically

    equivalent, e.g., look alikes.'' \44\

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

    \40\ The proposed definition of a Referenced Contract included

    contracts (i) Directly or indirectly linked, including being

    partially or fully settled on, or priced at a differential to, the

    price of any Core Referenced Futures Contract; or (ii) directly or

    indirectly linked, including being partially or fully settled on, or

    priced at a differential to, the price of the same commodity for

    delivery at the same location, or at locations with substantially

    the same supply and demand fundamentals, as that of any Core

    Referenced Futures Contract.

    \41\ Proposed Sec. 151.1 defined ``intercommodity spread''

    contracts as those contracts that ``represent[] the difference

    between the settlement price of a Referenced Contract and the

    settlement price of another contract, agreement, or transaction that

    is based on a different commodity.''

    \42\ See e.g., CL-Utility Group supra note 21 at 7-8; CL-COPE

    supra note 21 at 6; Commercial Alliance (``Commercial Alliance I'')

    on June 5, 2011 (``CL-Commercial Alliance I'') at 5-10 (arguing for

    the extension of the bona fide hedge exemption for physical market

    transactions and anticipated physical market transactions that could

    be hedged with a basis contract position).

    \43\ CL-Utility Group supra note 21 at 7-8 (arguing that

    ``virtual tolling swaps'' that utilize a Referenced Contract-derived

    price series as a component of a floating price appear to be covered

    by the definition of ``Referenced Contract''); and CL-COPE supra

    note 21 at 6.

    \44\ Id.

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

    The Commission is adopting the proposal regarding Referenced

    Contracts with modifications and clarifications responsive to the

    comments. The Commission clarifies that the term ``Referenced

    Contract'' includes: (1) The Core Referenced Futures Contract; (2)

    ``look-alike'' contracts (i.e., those that settle off of the Core

    Referenced Futures Contract and contracts that are based on the same

    commodity for the same delivery location as the Core Referenced Futures

    Contract); (3) contracts with a reference price based only on the

    combination of at least one Referenced Contract price and one or more

    prices in the same or substantially the same commodity as that

    underlying the relevant Core Referenced Futures Contract;\45\ and (4)

    intercommodity spreads with two components, one or both of which are

    Referenced Contracts. These criteria capture contracts with prices that

    are or should be closely correlated to the prices of the Core

    Referenced Futures Contract.\46\

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

    \45\ E.g., a swap with a floating price based on the average of

    the settlement price of the New York Mercantile Exchange (``NYMEX'')

    Light, Sweet Crude Oil futures contract and the settlement price of

    the IntercontinentalExchange (``ICE'') Brent Crude futures contract.

    \46\ Under amended section 4a(a)(1), the Commission is required

    to establish aggregate position limits on contracts based on the

    same underlying commodity, including those swaps that are not traded

    on a DCM or SEF but which are determined to perform or affect a

    significant price discovery function (``SPDF''). 7 U.S.C. 6a(a)(1).

    The Commission currently lacks the data necessary to evaluate the

    pricing relationships between potential SPDF swaps and Referenced

    Contracts and therefore has determined not to set forth, at this

    time, standards for determining significant price discovery function

    swaps. As the Commission gathers additional data on the effect of

    position limits on the 28 Referenced Contracts and these contracts'

    relationship with other contracts, it could, in its discretion,

    extend position limits to additional contracts beyond the current

    set of Referenced Contracts. The Commission could determine, for

    example, that a contract, due to certain shared qualitative or

    quantitative characteristics with Referenced Contracts, performs a

    SPDF with respect to Referenced Contracts.

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

    In response to commenters, the Commission is eliminating a proposed

    category of Referenced Contracts, namely, those based on

    ``substantially the same supply and demand fundamentals.'' The

    Commission notes that the ``substantially the same supply and demand

    fundamentals'' criterion would require individualized evaluation of

    certain trading data to determine whether the price of a commodity may

    or may not be substantially related to a Core Referenced Futures

    Contract. Such analysis may require access to, among other things, data

    concerning bids and offers and transaction information regarding the

    cash market, which are not readily available to the Commission at this

    time.

    The remaining categories of Referenced Contract, i.e., derivatives

    that are directly or indirectly linked to or based on the same

    commodity for delivery at the same delivery location as

    [[Page 71631]]

    a Core Referenced Futures Contract, are based on objective criteria and

    readily available data, which should provide market participants with

    clarity as to the scope of economically equivalent contracts.\47\ The

    Commission clarifies that if a swap contract that utilizes as its sole

    floating reference price the prices generated directly or indirectly

    \48\ from the price of a single Core Referenced Futures Contract, then

    it is a look-alike Referenced Contract and subject to the limits set

    forth in Sec. 151.4.\49\ If such a swap is priced based on a fixed

    differential to a Core Referenced Futures Contract, it is similarly a

    Referenced Contract.\50\

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

    \47\ In finalizing the Commission's Large Trader Reporting for

    Physical Commodity Swaps rulemaking, and also in response to

    comments, the Commission modified the proposed definition of

    ``paired swap'' to exclude contracts based on the same commodity at

    different locations with substantially the same supply and demand

    fundamentals as that of any Core Referenced Futures Contract. See 76

    FR 43855, Jul. 22, 2011.

    \48\ An ``indirect'' price link to a Core Referenced Futures

    Contract includes situations where the swap reference price is

    linked to prices of a cash-settled Referenced Contract that itself

    is cash-settled based on a physical-delivery Referenced Contract

    settlement price.

    \49\ The Commission clarifies, by way of example, that a swap

    based on the difference in price of a commodity (or substantially

    the same commodity) at different delivery locations is a ``basis

    contract'' and therefore not subject to the limits set forth in

    Sec. 151.4. In addition, if a swap is based on prices of multiple

    different commodities comprising an index, it is a ``commodity index

    contract'' and therefore is not subject to the limits set forth in

    Sec. 151.4. In contrast, if a swap is based on the difference

    between two prices of two different commodities, with one linked to

    a Core Referenced Futures Contract price (and the other either not

    linked to the price of a Core Referenced Futures Contract or linked

    to the price of a different Core Referenced Futures Contract), then

    the swap is an ``intercommodity spread contract,'' is not a

    commodity index contract, and is a Referenced Contract subject to

    the position limits specified in Sec. 151.4. The Commission further

    clarifies that a contract based on the prices of a Referenced

    Contract and the same or substantially the same commodity (and not

    based on the difference between such prices) is not a commodity

    index contract and is a Referenced Contract subject to position

    limits specified in Sec. 151.4.

    \50\ The Commission has clarified in its definition of

    ``Referenced Contract'' that position limits extend to contracts

    traded at a fixed differential to a Core Referenced Futures Contract

    (e.g., a swap with the commodity reference price NYMEX Light, Sweet

    Crude Oil +$3 per barrel is a Referenced Contract) or based on the

    same commodity at the same delivery location as that covered by the

    Core Referenced Futures Contract, and not to unfixed differential

    contracts (e.g., a swap with the commodity reference price Argus

    Sour Crude Index is not a Referenced Contract because that index is

    computed using a variable differential to a Referenced Contract).

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

    With respect to comments that the Commission should broaden the

    scope of Referenced Contracts, the Commission notes that expanding the

    scope of position limits based, for example, on cross-hedging

    relationships or other historical price analysis would be problematic.

    Historical relationships may change over time and, additionally, would

    require individualized determinations. For example, if the standard for

    determining economic equivalence was some level of historical

    correlation, then a commodity derivative might have met the correlation

    metric yesterday, fail it today, and again meet the metric

    tomorrow.\51\ Under these circumstances, the Commission does not

    believe that it is necessary to expand the scope of position limits

    beyond those proposed. In this regard, the Commission notes that the

    commenters did not provide specific criteria or thresholds for making

    determinations as to which price-correlated commodity contracts should

    be subject to limits.\52\ The Commission further notes that it would

    consider amending the scope of economically equivalent contracts (and

    the relevant identifying criteria) as it gains experience in this area.

    For clarity, the Commission has deleted the definition of the proposed

    term ``Referenced paired futures contract, option contract, swap, or

    swaption'' since that term was only used in the definitions section and

    incorporated the relevant provisions of that proposed term into the

    definition of Referenced Contracts. Lastly, the Commission has made

    amendments in Sec. 151.2 that clarify that ``Core Referenced Futures

    Contracts'' include options that expire into outright positions in such

    contracts.

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

    \51\ Nevertheless, a trader may decide to assume the risk that

    the historical price relationship might not hold and enter into a

    cross-hedging transaction in a derivative that has been and is

    expected to be price-fluctuation-related to that trader's cash

    market commodity and seek (and obtain) a bona fide hedge exemption.

    \52\ For example, the commenters did not address whether a

    derivatives contract on a commodity should be included if there were

    observed historical associated price correlations but no identified

    causation relationship.

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

    C. Phased Implementation

    The Commission proposed to implement the position limit rule in two

    phases. In the first phase, the spot-month limits for Referenced

    Contracts would be set at a level based on existing limits determined

    by the appropriate DCM. In the second phase, the spot-month limits

    would be adjusted on a regular schedule, set to 25 percent of the

    Commission's determination of estimated deliverable supply, which would

    be based on DCM-provided estimates or the Commission's own estimates.

    The Commission believes that spot-month position limits can be

    implemented on an advanced schedule, because such limits will initially

    be based on existing DCM limits or on estimates of deliverable supply

    for which data is available.

    In the proposal, non-spot-month energy, metal, and ``non-

    enumerated'' \53\ agricultural Referenced Contract limits would be

    based on open interest and would be set in the second phase pending the

    availability of certain positional data on physical commodity

    swaps.\54\

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

    \53\ In the final rulemaking, the term ``legacy'' replaced the

    term ``enumerated'' used in the proposal. The Commission has made

    this change in order to avoid unnecessary confusion.

    \54\ As discussed in the proposal, the Commission retained the

    position limits for the enumerated agricultural Referenced Contracts

    ``as an exception to the general open interest based formula.'' 76

    FR at 4752, 4760.

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

    In general, commenters were divided on whether the Commission

    should, in whole or in part, delay the imposition of position limits.

    Some commenters stated that the Commission should stay or withdraw its

    proposal until such time that the Commission has gathered and analyzed

    data to determine if position limits are necessary or appropriate.\55\

    CME asserted that the Commission cannot impose spot-month limits until

    it has received and analyzed data on economically equivalent swaps

    since the limits cover such swaps.\56\ Conversely, some commenters

    rejected the phased implementation of non-spot-month position limits

    and urged the Commission to implement such limits on a more expedited

    timeframe. One such commenter, Delta, argued ``that the Commission

    should instead strive to establish meaningful speculative position

    limits using sampling and other statistical techniques to make

    reasonable, working assumptions about positions in various market

    segments and refining the speculative limits based upon market

    experience and better data as it is developed.'' \57\ The Commission

    also received many letters requesting that the Commission impose

    position limits generally on an expedited basis.\58\

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

    \55\ CL-FIA I, supra note 21 at 8; CL-COPE, supra note 21 at 4;

    CL-Utility Group, supra note 21 at 5; CL-EEI/EPSA supra note 21 at

    2; CL-Centaurus Energy, supra note 21 at 3; CL-PIMCO supra note 21

    at 6; CL-SIFMA AMG I, supra note 21 at 15-16; CL-PERA, supra note 21

    at 2; CL-Morgan Stanley, supra note 21 at 1; and CL-CMC, supra note

    21 at 2.

    \56\ CL-CME I, supra note 8 at 7-8.

    \57\ CL-Delta, supra note 20 at 11.

    \58\ See e.g., Gary Krasilovsky on February 6, 2011 (``CL-

    Krasilovsky''); and Alan Murphy (``Murphy'') on January 6, 2011

    (``CL-Murphy'').

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

    The Commission is finalizing the phased implementation schedule

    generally as proposed and in furtherance of the congressional directive

    that the Commission establishes position limits on an

    [[Page 71632]]

    expedited timeframe. As stated above, spot-month limits, which are

    based on existing DCM limits and data that is available, can be

    implemented on an expedited timeframe. In addition, non-spot-month

    legacy limits do not require swap positional data to set the limits,

    and, thus, can be set on an expedited timeframe.\59\ With respect to

    non-spot-month limits for non-legacy Referenced Contracts, which are

    dependent on open interest levels and thus dependent on swaps

    positional data, the Commission will initially set such limits

    following the collection of approximately 12 months of swaps positional

    data.\60\

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

    \59\ Non-spot-month limits for agricultural contracts currently

    subject to Federal position limits under part 150 are referred to

    herein as ``legacy limits.'' As noted earlier, such Referenced

    Contracts are generally referred to as ``enumerated'' agricultural

    contracts. 17 CFR 150.2.

    \60\ The Commission recently adopted reporting regulations that

    require routine position reports from clearing organizations,

    clearing members, and swap dealers. See 76 FR 43851, Jul. 22, 2011.

    The swaps positional data obtained through these reports are

    expected to serve as a primary source for determining open

    interests.

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

    1. Compliance Dates

    In light of the above referenced timeframe for implementation, the

    compliance date for all spot-month limits and non-spot-month legacy

    limits shall be 60 days after the term ``swap'' is further defined

    pursuant to section 721 of the Dodd-Frank Act (i.e., 60 days after the

    further definition of ``swap'' as adopted by the Commission and the

    Securities and Exchange Commission is published by the Federal

    Register). Prior to the Commission further defining the term swap,

    market participants shall continue to comply with the existing position

    limits regime contained in part 150 and any applicable DCM position

    limits or accountability levels. After the compliance date, the

    Commission will revoke part 150, and persons will be required to comply

    with all the provisions of this part 151, including Sec. 151.5 for

    bona fide hedging and Sec. 151.7 related to the aggregation of

    accounts. For non-spot-month non-legacy Referenced Contracts, the

    compliance date shall be set forth by Commission order establishing

    such limits approximately 12 months after the collection of swap

    positional data.\61\

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

    \61\ Prior to the compliance date, persons shall continue to

    comply with applicable exchange-set position limits and

    accountability levels.

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

    Although the Commission proposed to revoke part 150 in the Proposed

    Rules, the Commission is retaining this provision until the compliance

    dates set forth above.

    2. Transitional Compliance

    As discussed below in detail in section II.B. of this release,

    Sec. 151.1 excludes ``basis contracts'' and ``commodity index

    contracts'' from the definition of Referenced Contract. However, part

    20 of the Commission's regulations requires reporting entities to

    report commodity reference price data sufficient to distinguish between

    basis and non-basis swaps and between commodity index contract and non-

    commodity index contract positions in covered contracts.\62\ Therefore,

    the Commission intends to rely on the data elements in Sec. 20.4(b) to

    distinguish data records subject to Sec. 151.4 position limits from

    those contracts that are excluded from Sec. 151.4. This will enable

    the Commission to set position limits using the narrower data set

    (i.e., Referenced Contracts subject to Sec. 151.4 position limits) as

    well as conduct surveillance using the broader data set.

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

    \62\ See Sec. 20.2, 17 CFR 20.11 for a list of covered

    contracts.

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

    In addition, Sec. 151.9 provides that traders may determine to

    either exclude (i.e., not aggregate) or net their pre-existing swap

    positions (as discussed below), while part 20 does not require a

    distinction to be made for reporting pre-existing swap positions. The

    Commission believes it is appropriate to include pre-existing swap

    positions in the basis for setting position limits and, thus, the part

    20 data collection will provide this broader data set. This is because

    limits based on a narrower data set (that is, excluding pre-existing

    swaps) may be overly restrictive and, thus, may not provide adequate

    liquidity for bona fide hedgers, in light of the biennial reset of most

    non-spot-month position limits under Sec. 151.4(d)(3). Nonetheless,

    and consistent with the statutory exclusion of swaps pre-existing the

    Dodd-Frank Act, position limits will not apply to such pre-existing

    swap positions.\63\

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

    \63\ While requiring reporting entities to submit data

    sufficient to allow the Commission to distinguish pre-existing

    positions from other positions would be helpful to the Commission,

    the Commission does not currently believe it would be cost-effective

    to impose this requirement broadly as it would require reporting

    entities to revisit transaction trade confirmation records that may

    or may not be readily linked to position-tracking databases.

    Moreover, the Commission could develop a reasonable estimate of the

    extent of a trader's pre-existing positions by comparing their

    positions as of the effective date with the positions held on a date

    in interest (e.g., when a trader appears to establish a position

    exceeding a position limit).

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

    The Commission understands that most uncleared swaps are executed

    opposite a clearing member or swap dealer and would therefore result in

    positions reportable to the Commission under part 20. Part 20 reports

    will not provide data on positions where neither party to a swap is a

    clearing member or swap dealer, but these positions represent a small

    fraction of all uncleared swaps. Since most uncleared swaps will be

    reportable under part 20, the Commission believes the swaps' data set

    will be adequate to set position limits.\64\

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

    \64\ Proposed Sec. 151.4(e)(3) based the uncleared swap

    component of the open interest figure used to set non-spot-month

    position limits on open interest attributed to swap dealers. Section

    20.4 requires position reporting from swap dealers as well as

    clearing organizations and clearing members. Final rule Sec.

    151.4(b)(2)(ii) permits estimation of the uncleared swap component

    using clearing organization or clearing member data obtained under

    Sec. 20.4 reports.

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

    In order to determine a trader's compliance with position limits in

    light of the pre-existing position exemption and the sampling inherent

    in requiring swap position data reporting from clearing members and

    swap dealers, the Commission will utilize one existing and one new

    means to conduct the necessary market surveillance. First, the

    Commission may issue special calls under Sec. 20.6(b) in instances

    where traders appear to have positions exceeding part 151 position

    limits. Traders subject to these special calls would then be afforded

    an opportunity to provide information on their positions demonstrating

    compliance with a part 151 position limit. Second, the Commission notes

    that traders are required to provide position visibility on their

    uncleared swaps positions under Sec. 151.6(c) in 401 filings that

    would reflect all of their uncleared swap positions in Referenced

    Contracts as well as their total positions in Referenced Contracts,

    irrespective of whether these swaps were executed opposite a clearing

    member or swap dealer. These filings would allow the Commission to

    determine whether the trader is in compliance with part 151 position

    limits. The Commission clarifies that such 401 filings require the

    reporting of gross long and gross short positions in Referenced

    Contracts, excluding those positions that are not included in the

    definition of Referenced Contracts (e.g., excluding those positions

    arising from basis contract positions, pre-existing swap positions, and

    diversified commodity index positions).\65\

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

    \65\ See supra under II.B. discussing the definition of

    Referenced Contract.

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

    D. Spot-Month Limits

    Proposed Sec. 151.4 would apply spot-month position limits

    separately for physically-delivered contracts and cash-settled

    contracts (i.e., cash-settled

    [[Page 71633]]

    futures and swaps).\66\ A trader could therefore hold positions up to

    the spot-month position limit in both the physical-delivery and cash-

    settled contracts but a trader could not net cash-settled contracts

    with the physical-delivery contracts.\67\ The proposed spot-month

    position limits for physical-delivery Core Referenced Futures Contracts

    initially would be set at existing DCM levels; cash-settled Referenced

    Contracts would be subject to limits set at the same level. As

    discussed above, during the second phase of implementation, the spot-

    month limits would be based on 25 percent of estimated deliverable

    supply, as determined by the Commission in consultation with DCMs. The

    Commission has determined to adopt the spot-month limits substantially

    as proposed but with certain changes to address commenters' concerns.

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

    \66\ For the ICE Futures U.S. Sugar No. 16 (SF) and CME Class

    III Milk (DA), the Commission proposed to adopt the DCM single-month

    limits for the nearby month or first-to-expire Referenced Contract

    as spot-month limits. These contracts currently have single-month

    limits that are enforced in the spot month.

    \67\ Thus, for example, if the spot-month limit for a Referenced

    Contract is 1,000 contracts, then a trader could hold up to 1,000

    contracts long in the physical-delivery contract and 1,000 contracts

    long in the cash-settled contract. However, the same trader could

    not hold 1,001 contracts long in the physical-delivery contract and

    hold 1 contract short in the cash-settled and remain under the limit

    for the physical-delivery contract. A trader's cash-settled contract

    position would be a function of the trader's position in Referenced

    Contracts based on the same commodity that are cash-settled futures

    and swaps. For purposes of applying the limits, a trader shall

    convert and aggregate positions in swaps on a futures equivalent

    basis consistent with the guidance in the Commission's Appendix A to

    Part 20, Large Trader Reporting for Physical Commodity Swaps. See 76

    FR 43851, 43865 Jul. 22, 2011.

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

    1. Definition of ``Deliverable Supply''

    In the proposal, the Commission defined ``deliverable supply''

    generally as ``the quantity of the commodity meeting a derivative

    contract's delivery specifications that can reasonably be expected to

    be readily available to short traders and saleable by long traders at

    its market value in normal cash marketing channels at the derivative

    contract's delivery points during the specified delivery period,

    barring abnormal movement in interstate commerce.'' \68\ Several

    commenters supported ``deliverable supply'' as an appropriate basis for

    spot-month limits for physical-delivery contracts.\69\ Other commenters

    disagreed, stating that ``deliverable supply'' was inappropriate, even

    for physical-delivery contracts, because it would result in overly

    stringent limits.\70\ ISDA/SIFMA suggested that the Commission instead

    base spot-month limits on ``available deliverable supply,'' a broader

    measure of physical supply.\71\

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

    \68\ 76 FR at 4752, 4757.

    \69\ See CL-AFR supra note 17 at 7-8; CL-AIMA supra note 35 at

    2; CL-Prof. Greenberger supra note 6 at 17; InterContinental

    Exchange, Inc. (``ICE I'') on March 28, 2011 (``CL-ICE I'') at 5;

    and Natural Gas Exchange (``NGX'') on March 28, 2011 (``CL-NGX'') at

    3.

    \70\ CL-ISDA/SIFMA supra note 21 at 21; and CL-FIA I supra note

    21 at 9.

    \71\ ``Available deliverable supply'' includes: (1) All

    available local supply (including supply committed to long-term

    commitments); (2) all deliverable non-local supply; and (3) all

    comparable supply (based on factors such as product and location).

    See CL-ISDA/SIFMA supra note 21 at 21. Another commenter, the

    Alternative Investment Management Association, similarly advocated a

    more expansive definition of ``deliverable supply.'' CL-AIMA supra

    note 35 at 3 (``This may include all supplies available in the

    market at all prices and at all locations, as if a party were

    seeking to buy a commodity in the market these factors would be

    relevant to the price.'')

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

    Similarly, two commenters suggested that the Commission include

    supply committed to long-term supply contracts in its definition of

    ``deliverable supply'' to avoid artificially reduced spot-month

    position limits.\72\ In the Commission's experience overseeing the

    position limits established at the exchanges as well as federally-set

    position limits, ``spot-month speculative position limits levels are

    `based most appropriately on an analysis of current deliverable

    supplies and the history of various spot-month expirations.' '' \73\

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

    \72\ National Grain and Feed Association (``NGFA'') on March 28,

    2011 (``CL-NGFA'') at 5; and CL-CME I supra note 8 at 9 (suggesting

    that if the Commission decides to retain this exclusion, it should

    define what it understands a ``long-term'' agreement to be and

    ensure consistency with the deliverable supply definition in the

    Core Principles and Other Requirements for Designated Contract

    Markets proposed rulemaking). Id. citing Appendix C of Part 38, 75

    FR 80572, 80631, Dec. 22, 2010. (In Appendix C, the Commission

    states that commodity supplies that are ``committed to some

    commercial use'' should be excluded from deliverable supply, and

    requires DCMs to consult with market participants to estimate these

    supplies on a monthly basis).

    \73\ 64 FR 24038, 24039, May 5, 1999.

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

    Other commenters argued that ``deliverable supply'' should not be

    the basis for position limits on cash-settled Referenced Contracts.\74\

    Niska, for example, asked the Commission to explain why spot-month

    limits for cash-settled contracts should be linked to deliverable

    supply.\75\ Another commenter, BGA, opined that the Commission should

    set position limits for cash-settled swap Referenced Contracts based on

    the size of the swap market because swap contracts do not contemplate

    delivery of the underlying contract and therefore are not ``tied to the

    physical limits of the market.'' \76\

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

    \74\ Minneapolis Grain Exchange, Inc. (``MGEX'') on March 28,

    2011 (``CL-MGEX'') at 4; CL-MFA supra note 21 at 16; Niska Gas

    Storage LLC (``Niska'') on March 28, 2011 (``CL-Niska'') at 2. See

    also CL-AIMA supra note 35 at 2 (asking the Commission to reconsider

    position limits on cash-settled contracts).

    \75\ CL-Niska supra note 75 at 2.

    \76\ CL-BGA supra note 35 at 19. See also Cargill, Incorporated

    (``Cargill'') on March 28, 2011 (``CL-Cargill'') at 13 (urging the

    Commission to study the impact of applying any position limit based

    on ``deliverable supply'' to the swaps market).

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

    The Commission finds that the use of deliverable supply to set

    spot-month limits is wholly consistent with its historical approach to

    setting spot-month limits and overseeing DCMs' compliance with Core

    Principles 3 and 5.\77\ Currently, in determining whether a physical-

    delivery contract complies with Core Principle 3, the Commission staff

    considers whether the specified contract terms and conditions may

    result in a deliverable supply that is sufficient to ensure that the

    contract is not conducive to price manipulation or distortion. In this

    context, the term ``deliverable supply'' generally means the quantity

    of the commodity meeting a derivative contract's delivery

    specifications that can reasonably be expected to be readily available

    to short traders and saleable by long traders at its market value in

    normal cash marketing channels at the derivative contract's delivery

    points during the specified delivery period, barring abnormal movement

    in interstate commerce.\78\ The spot-month limit pursuant to Core

    Principle 5 is similarly established based on the analysis of

    deliverable supplies. The Acceptable Practices for Core Principle 5

    state that, with respect to physical-delivery contracts, the spot-month

    limit should not exceed 25 percent of the estimated deliverable

    supply.\79\ Lastly, with

    [[Page 71634]]

    respect to cash-settled contracts on agricultural and exempt

    commodities, the spot-month limit is set at some percentage of

    calculated deliverable supply. Accordingly, the Commission is adopting

    deliverable supply as the basis of setting spot-month limits. In

    response to commenters, the Commission added Sec. 151.4(d)(2)(iv) to

    clarify that, for purposes of estimating deliverable supply, DCMs may

    use any guidance issued by the Commission set forth in the Acceptable

    Practices for Core Principle 3.

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

    \77\ Core Principle 3 specifies that a board of trade shall list

    only contracts that are not readily susceptible to manipulation,

    while Core Principle 5 obligates a DCM to establish position limits

    or position accountability provisions where necessary and

    appropriate ``to reduce the threat of market manipulation or

    congestion, especially during the delivery month.''

    \78\ See e.g., the discussion of deliverable supply in Guideline

    No. 1. 17 CFR part 40, app. A. See also the discussion of

    deliverable supply in the first publication of Guideline No. 1. 47

    FR 49832, 49838, Nov. 3, 1982.

    \79\ Indeed, with three exceptions, the Sec. 151.2-listed

    contracts with DCM-defined spot months are currently subject to

    exchange-set spot-month position limits, which would have been

    established in this manner. The only contracts based on a physical

    commodity that currently do not have spot-month limits are the COMEX

    mini-sized gold, silver, and copper contracts that are cash settled

    based on the futures settlement prices of the physical-delivery

    contracts. The cash-settled contracts have position accountability

    provisions in the spot month, rather than outright spot-month

    limits. These cash-settled contracts have relatively small levels of

    open interest.

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

    2. Twenty-Five Percent as the Deliverable Supply Formula

    ICE commented that spot-month limits for physical-delivery

    contracts (but not cash-settled contracts) set at 25 percent of

    deliverable supply are necessary to prevent corners and squeezes.\80\

    Other commenters, however, opined that spot-month position limits based

    on 25 percent of deliverable supply are insufficient to prevent

    excessive speculation.\81\ Americans for Financial Reform (``AFR''),

    for example, argued that while ``deliverable supply'' is an appropriate

    basis for setting spot-month limits,\82\ the proposed spot-month limit

    addresses manipulation by a single actor and would not be set low

    enough to combat excessive speculation in the market as a whole and the

    volatility and delinking of commodities prices from economic

    fundamentals caused by excessive speculation.\83\ Some commenters

    recommended that the Commission set the spot-month limits based on the

    ``individual characteristics'' of each Core Referenced Futures

    Contract, and not necessarily an exchange's deliverable supply

    estimate.\84\

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

    \80\ CL-ICE I supra note 69 at 5.

    \81\ CL-AFR supra note 17 at 5; American Trucking Association

    (``ATA'') on March 28, 2011 (``CL-ATA'') at 3; Food & Water Watch

    (``FWW'') on March 28, 2011 (``CL-FWW'') at 10; National Farmers

    Union (``NFU'') on March 28, 2011 (``CL-NFU'') at 2; and CL-PMAA/

    NEFI supra note 6 at 7.

    \82\ CL-AFR supra note 17 at 7-8.

    \83\ See CL-AFR supra note 17 at 5, 7.

    \84\ CL-FIA I supra note 21 at 9; CL-ISDA/SIFMA supra note 21 at

    21; and CL-MFA supra note 21 at 18.

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

    The Commission has determined to adopt the 25 percent level of

    deliverable supply for setting spot-month limits. This formula is

    consistent with the long-standing Acceptable Practices for Core

    Principle 5,\85\ which provides that, for physical-delivery contracts,

    the spot-month limit should not exceed 25 percent of the estimated

    deliverable supply. The use of the existing industry standard would

    provide clarity concerning the underlying methodology. Further, the

    Commission believes that, based on its experience, the formula has

    appeared to work effectively as a prophylactic tool to reduce the

    threat of corners and squeezes and promote convergence without

    compromising market liquidity.\86\ In making an estimate of deliverable

    supply, the Commission reminds DCMs to take into consideration the

    individual characteristics of the underlying commodity's supply and the

    specific delivery features of the futures contract.\87\

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

    \85\ Core Principle 5 obligates a DCM to establish position

    limits and position accountability provisions where necessary and

    appropriate ``to reduce the threat of market manipulation or

    congestion, especially during the delivery month.''

    \86\ In this respect, the proposed limits formula is not

    intended to address speculation by a class or group of traders.

    \87\ As under current practice, DCM estimates of deliverable

    supplies (and the supporting data and analysis) will be subject to

    Commission staff review.

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

    3. Cash-Settled Contracts

    With respect to cash-settled contracts, proposed Sec. 151.4

    incorporated a conditional spot-month limit permitting traders without

    a hedge exemption to acquire position levels that are five times the

    spot-month limit if such positions are exclusively in cash-settled

    contracts (i.e., the trader does not hold positions in the physical-

    delivery Referenced Contract) and the trader holds physical commodity

    positions that are less than or equal to 25 percent of the estimated

    deliverable supply. The proposed conditional-spot-month position limits

    generally tracked exchange-set position limits currently implemented

    for certain cash-settled energy futures and swaps.\88\

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

    \88\ For example, the NYMEX Henry Hub Natural Gas Last Day

    Financial Swap, the NYMEX Henry Hub Natural Gas Look-Alike Last Day

    Financial Futures, and the ICE Henry LD1 swap are all cash-settled

    contracts subject to a conditional-spot-month limit that, with the

    exception of the requirement that a trader not hold large cash

    commodity positions, is identical in structure to the proposed

    limit.

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

    Currently, with the exception of significant price discovery

    contracts, traders' swaps positions are not subject to position limit

    restrictions. The Commission is aware that counterparties to uncleared

    swaps may impose prudential credit restrictions that may directly (for

    example, by one party setting a maximum notional amount restriction

    that it will execute with a particular counterparty) or indirectly (for

    example, by one party setting a credit annex requirement such as

    posting of initial collateral by a counterparty) restrict the amount of

    bilateral transactions between the parties. However, the proposed spot

    month limits would be the first broad position limit r[eacute]gime

    imposed on swaps.

    Several commenters questioned the application of proposed spot-

    month position limits to cash-settled contracts.\89\ Some of these

    commenters suggested that cash-settled contracts, if subject to any

    spot-month position limits at all, should be subject to relatively less

    restrictive limits that are not based on estimated deliverable

    supply.\90\ BGA, for example, argued that position limits on swaps

    should be set based on the size of the open interest in the swaps

    market because swap contracts do not provide for physical delivery.\91\

    Further, certain commenters argued that imposing a single speculative

    limit on all cash-settled contracts would substantially reduce the

    cash-settled positions that a trader can hold because currently, each

    cash-settled contract is subject to a separate limit.\92\ Other

    commenters urged the Commission to eliminate class limits and allow for

    netting across futures and swaps contracts so as not to impact

    liquidity.\93\

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

    \89\ CL-ISDA/SIFMA supra note 21 at 6-7, 19; Goldman, Sachs &

    Co. (``Goldman'') on March 28, 2011 (``CL-Goldman'') at 5; CL-ICI

    supra note 21 at 10; CL-MGEX supra note 74 at 4 (particularly

    current MGEX Index Contracts that do not settle to a Referenced

    Contract should be considered exempt from position limits because

    cash-settled index contracts are not subject to potential market

    manipulation or creation of market disruption in the way that

    physical-delivery contracts might be); CL-WGCEF supra note 35 at 20

    (``the Commission should reconsider setting a limit on cash-settled

    contracts as a function of deliverable supply and establish a much

    higher, more appropriate spot-month limit, if any, on cash-settled

    contracts''); CL-MFA supra note 21 at 16-17; and CL-SIFMA AMG I

    supra note 21 at 7.

    \90\ CL-BGA supra note 35 at 19; CL-ICI supra note 21 at 10; CL-

    MFA supra note 21 at 16-17; CL-WGCEF supra note 35 at 20; CL-Cargill

    supra note 76 at 13; CL-EEI/EPSA supra note 21 at 9; and CL-AIMA

    supra note 35 at 2.

    \91\ CL-BGA supra note 35 at 10.

    \92\ See e.g., CL-FIA I supra note 21 at 10; and CL-ICE I supra

    note 69 at 6

    \93\ See e.g., CL-ISDA/SIFMA supra note 21 at 8.

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

    A number of commenters objected to limiting the availability of a

    higher limit in the cash-settled contract to traders not holding any

    physical-delivery contract.\94\ For example, CME argued that the

    proposed conditional limits would encourage price discovery to migrate

    to the cash-settled contracts, rendering the physical-delivery contract

    ``more susceptible to sudden price

    [[Page 71635]]

    movements during the critical expiration period.'' \95\ AIMA commented

    that the prohibition against holding positions in the physical-delivery

    Referenced Contract will cause investors to trade in the physical

    commodity markets themselves, resulting in greater price pressure in

    the physical commodity.\96\

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

    \94\ American Feed Industry Association (``AFIA'') on March 28,

    2011 (``CL-AFIA'') at 3; CL-AFR supra note 17 at 6; Air Transport

    Association of America (``ATAA'') on March 28, 2011 (``CL-ATAA'') at

    7; CL-BGA supra note 35 at 11-12; CL-Centaurus Energy supra note 21

    at 3; CL-CME I supra note 8 at 10; CL-WGCEF supra note 35 at 21-22;

    and CL-PMAA/NEFI supra note 6 at 14.

    \95\ CL-CME I supra note 8 at 10. Similarly, BGA argued that

    conditional limits incentivize the migration of price discovery from

    the physical contracts to the financial contracts and have the

    unintended effect of driving participants from the market and

    thereby increasing the potential for market manipulation with a very

    small volume of trades. CL-BGA supra note 35 at 12.

    \96\ CL-AIMA supra note 35 at 2.

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

    Some of these commenters, including the CME and the KCBT, argued

    against the proposed restriction with respect to cash-settled contracts

    and recommended that cash-settled Referenced Contracts and physical-

    delivery contracts should be subject to the same position limits.\97\

    Two commenters opined that if the conditional limits are adopted, they

    should be increased from five times 25 percent of deliverable

    supply.\98\ ICE recommended that they be increased to at least ten

    times 25 percent of deliverable supply.\99\

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

    \97\ CL-CME I supra note 8 at 10; Kansas City Board of Trade

    (``KCBT I'') on March 28, 2011 (``CL-KCBT I'') at 4; and CL-APGA

    supra note 17 at 6, 8. Specifically, KCBT argued that parity should

    exist in all position limits (including spot-month limits) between

    physical-delivery and cash-settled Referenced Contracts; otherwise,

    these limits would unfairly advantage the look-alike cash-settled

    contracts and result in the cash-settled contract unduly influencing

    price discovery. Moreover, the higher spot-month limit for the

    financial contract unduly restricts the physical market's ability to

    compete for spot-month trading, which provides additional liquidity

    to commercial market participants that roll their positions forward.

    CL-KCBT I at 4.

    \98\ CL-AIMA supra note 35 at 2; and CL-ICE I supra note 70 at

    8.

    \99\ CL-ICE I supra note 69 at 8. ICE also recommended that the

    Commission remove the prohibition on holding a position in the

    physical-delivery contract or shorten the duration to a narrower

    window of trading than the final three days of trading.

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

    In support of their view, the CME submitted data concerning its

    natural gas physical-delivery contract.\100\ The data, however,

    generally indicates that the trading volume in the contract in the spot

    month has increased since the implementation of a conditional-spot-

    month limit, suggesting little (if any) adverse impact on market

    liquidity for the contract. Moreover, according to the same data set,

    both the outright volume and the average price range in the settlement

    period on the last trade day in the closing range have declined.\101\

    Other measures of average price range in the spot period also have

    declined.

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

    \100\ CME Group, Inc. (``CME III'') on August 15, 2011 (``CL-CME

    III'').

    \101\ ``Outright volume'' means the volume of electronic

    outright transactions that the DCM used for purposes of calculating

    settlement prices and excludes, for example, spread exemptions

    executed at a differential.

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

    The CME also submitted, for the same physical-delivery contract, a

    measure of the relative closing range as a ratio to volatility

    (``RCR'')--that is, the ratio of the closing range to the 20-day

    standard deviation of settlement prices. The RCR measure has declined

    on average after implementation of the conditional limits across 17

    expirations, while the RCR on two individual expirations was higher

    after implementation of the conditional limits, indicating a higher

    relative price volatility on those two days. However, during one of

    those two days, certain traders were active in the physical-delivery

    futures contracts and concurrently held cash-settled contracts, in

    excess of one times the limit on the physical-delivery contract; in the

    other day, this was not the case. In summary, the Commission does not

    believe that the data submitted by CME supports the assertion that

    setting the existing conditional limits on cash-settled contracts in

    the natural gas market has materially diminished the price discovery

    function of physical-delivery contracts.

    Considering the comments that were received, the Commission is

    adopting, on an interim final rule basis, the proposed spot-month

    position limit provisions with modifications. Under the interim final

    rule, the Commission will apply spot-month position limits for cash-

    settled contracts using the same methodology as applied to the

    physical-delivery Core Referenced Future Contracts, with the exception

    of natural gas contracts, which will have a class limit and aggregate

    limit of five times the level of the limit for the physical-delivery

    Core Referenced Futures Contract. As further described below, the

    Commission is adopting these spot-month limit methodologies as interim

    final rules in order to solicit additional comments on the appropriate

    level of spot-month position limits for cash-settled contracts.

    Specifically, the Commission is adopting, on an interim final rule

    basis, a spot-month position limit for cash-settled contracts (other

    than natural gas) that will be set at 25 percent of estimated

    deliverable supply, in parity with the methodology for setting spot-

    month limit levels for the physical-delivery Core Referenced Futures

    Contracts. The Commission believes, consistent with the comments, that

    parity should exist in all position limits (including spot-month

    limits) between physical-delivery and cash-settled Referenced Contracts

    (other than in natural gas); otherwise, these limits would permit

    larger position in look-alike cash-settled contracts that may provide

    an incentive to manipulate and undermine price discovery in the

    underlying physical-delivery futures contract. However, the Commission

    has a reasonable basis to believe that the cash-settled market in

    natural gas is sufficiently different from the cash-settled markets in

    other physical commodities to warrant a different spot-month limit

    methodology.

    With respect to NYMEX Light, Sweet Crude Oil (``WTI crude oil''),

    NYMEX New York Harbor Gasoline Blendstock (``RBOB''), and NYMEX New

    York Harbor Heating Oil (``heating oil'') contracts, administrative

    experience, available data, and trade interviews indicate that the

    sizes of the markets in cash-settled Referenced Contracts (as measured

    in notional value) are likely to be no greater in size than the related

    physical-delivery Core Referenced Futures Contracts. This is because

    there are alternative markets which may satisfy much of the demand by

    commercial participants to engage in cash-settled contracts for crude

    oil. These include a market for generally short-dated WTI crude oil

    forward contracts, as well as a well-developed forward market for Brent

    oil and an active cash-settled WTI futures contract (the cash-settled

    ICE Futures (Europe) West Texas Intermediate Light Sweet Crude Oil

    futures contract). That futures contract had, as of October 4, 2011, an

    open interest of less than one-third that of the physical-delivery

    NYMEX Light Sweet Crude Oil futures contract, as reported in the

    Commission's Commitment of Traders Report. That contract is subject to

    a spot-month limit equal to the spot-month limit imposed by NYMEX on

    the relevant physical-delivery futures contract, as a condition of a

    Division of Market Oversight no-action letter issued on June 17, 2008,

    CFTC Letter No. 08-09. A review of the Commission's large trader

    reporting system data indicated fewer than five traders recently held a

    position in that cash-settled ICE contract in excess of 3,000 contracts

    in the spot month, pursuant to exemptions granted by the exchange.

    Accordingly, given that the size of the cash-settled swaps market

    involving WTI does not appear to be materially larger than that of the

    physical-delivery Core Referenced Futures Contract, parity in spot

    month limits in WTI crude oil between physical-delivery and cash-

    settled contracts should ensure sufficient

    [[Page 71636]]

    liquidity for bona fide hedgers in the cash-settled contracts.

    With respect to the other energy commodities, based on

    administrative experience, available data, and trade interviews, the

    Commission understands the swaps markets in RBOB and heating oil are

    small relative to the relevant Core Referenced Futures Contracts. In

    this regard, unlike natural gas, there has been a small amount of

    trading in exempt commercial markets in RBOB and heating oil. Thus,

    parity in spot month limits in RBOB and heating oil between physical-

    delivery and cash-settled contracts should ensure sufficient liquidity

    for bona fide hedgers in the cash-settled contracts.

    With respect to agricultural commodities, administrative

    experience, available data, and trade interviews indicate that the

    sizes of the markets in cash-settled Referenced Contracts (as measured

    in notional value) are small and not as large as the related Core

    Referenced Futures Contracts. This is likely due to the fact that,

    currently, off-exchange agricultural commodity swaps (that are not

    options) may only be transacted pursuant to part 35 of the Commission's

    regulations. Under current rules, exempt commercial markets and exempt

    boards of trade have not been permitted to, and have not, listed

    agricultural swaps (although the Commission has repealed and replaced

    part 35, effective December 31, 2011, at which point the Commission

    regulations would permit agricultural commodity swaps to be transacted

    under the same requirements governing other commodity swaps). Regarding

    off-exchange agricultural trade options, part 35 is not available; such

    transactions must be pursuant to the Commission's agricultural trade

    option rules found in Commission regulation 32.13. Under regulation

    32.13, parties to the agricultural trade option must have a net worth

    of at least $10 million and the offeree must be a producer, processor,

    commercial user of, or merchant handling the agricultural commodity

    which is the subject of the trade option. Based on interviews with

    offerors of agricultural trade options believed to be the largest

    participants, administrative experience is that the off-exchange

    markets are smaller than the relevant Core Referenced Futures

    Contracts. Accordingly, parity in spot month limits in agricultural

    commodities between physical-delivery and cash-settled contracts should

    ensure sufficient liquidity for bona fide hedgers in the cash-settled

    contracts.

    With respect to the metal commodities, based on administrative

    experience, available data, and trade interviews, the Commission

    understands the cash-settled swaps markets also are small. Based on

    interviews with market participants, the Commission understands there

    is an active cash forward market and lending market in metals,

    particularly in gold and silver, which may satisfy some of the demand

    by commercial participants to engage in cash-settled contracts. The

    cash-settled metals contracts listed on DCMs generally are

    characterized by a low level of open interest relative to the physical-

    delivery metals contracts. Moreover, as is the case for RBOB and

    heating oil, there has not been appreciable trading in exempt

    commercial markets in metals. Accordingly, parity in spot month limits

    in metals commodities between physical-delivery and cash-settled

    contracts should ensure sufficient liquidity for bona fide hedgers in

    the cash-settled contracts.

    In contrast, regarding natural gas, there are very active cash-

    settled markets both at DCMs and exempt commercial markets. NYMEX lists

    a cash-settled natural gas futures contract linked to its physical-

    delivery futures contract that has significant open interest.

    Similarly, ICE, an exempt commercial market, lists natural gas swaps

    contracts linked to the NYMEX physical-delivery futures contract.

    Moreover, both NYMEX and ICE have gained experience with conditional

    spot-month limits in natural gas where the cash-settled limit is five

    times the limit for the physical-delivery futures contract. In this

    regard, NYMEX imposed the same limit on its cash-settled natural

    contract as ICE imposed on its cash-settled natural gas contract when

    ICE complied with the requirements of part 36 of the Commission's

    regulations regarding SPDCs. As discussed above, the Commission

    believes the existing conditional limits on cash-settled natural gas

    contracts have not materially diminished the price discovery function

    of physical-delivery contracts. The final rules relax the conditional

    limits by removing the condition, but impose a tighter limit on cash-

    settled contracts by aggregating all economically similar cash-settled

    natural gas contracts.\102\

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

    \102\ The Commission is removing the proposed restrictions for

    claiming the higher limit in cash-settled Referenced Contracts in

    the spot month. Unlike the proposed conditional limit, under the

    aggregate limit, a trader in natural gas can utilize the five times

    limit for the cash-settled Referenced Contract and still hold

    positions in the physical-delivery Referenced Contract. In addition,

    there is no requirement that the trader not hold cash or forward

    positions in the spot month in excess of 25 percent of deliverable

    supply of natural gas. Although the Commission's experience with

    DCMs using the more restrictive conditional limit in natural gas has

    been generally positive, the Commission, in agreeing with

    commenters, will wait to impose similar conditions until the

    Commission gains additional experience with the limits in the

    interim final rule. In this regard, the Commission will monitor

    closely the spot-month limits in these final rules and may revert to

    a conditional limit in the future in response to market

    developments.

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

    Thus, the Commission has determined that the one-to-one ratio

    (between the level of spot-month limits on physical-delivery contracts

    and the level of the spot-month limits on cash-settled contracts in the

    agricultural, metals, and energy commodities other than natural gas)

    maximizes the objectives enumerated in section 4a(a)(3). Specifically,

    such limits ensure market liquidity for bona fide hedgers and protect

    price discovery, while deterring excessive speculation and the

    potential for market manipulation, squeezes, and corners. The

    Commission further notes that the formula is consistent with the level

    the Commission staff has historically deemed acceptable for cash-

    settled contracts, as well as the formula for physical-delivery

    contracts under Acceptable Practices for Core Principle 5 in part 38.

    Nevertheless, the Commission recognizes that after experience with the

    one-to-one ratio and additional reporting of swap transactions, it may

    be possible to maximize further these objectives with a different ratio

    and therefore will revisit the issue after it evaluates the effects of

    the interim final rule.

    In addition to the spot-month limit for cash-settled natural gas

    contracts, the interim final rule also provides for an aggregate spot-

    month limit set at five times the level of the spot-month limit in the

    relevant physical-delivery natural gas Core Referenced Futures

    Contract. A trader therefore must at all times fall within the class

    limit for the physical-delivery natural gas Core Referenced Futures

    Contract, the five-times limit for cash-settled Referenced Contracts in

    natural gas, and the five-times aggregate limit.

    To illustrate the application of the spot-month limits in natural

    gas contracts, assume a physical-delivery Core Referenced Futures

    Contract limit on a particular commodity is set to a level of 100.

    Thus, a trader may hold a net position (long or short) of 100 contracts

    in that Core Referenced Futures Contract and a net position (long or

    short) of 500 contracts in the cash-settled Referenced Contracts on

    that same commodity, provided that the total directional position of

    both contracts is below the aggregate limit. Therefore, to comply with

    the aggregate

    [[Page 71637]]

    limit, if a trader wanted to hold the maximum directional position of

    100 contracts in the physical-delivery contract, the trader could hold

    only 400 contracts on the same side of the market in cash-settled

    contracts.\103\ Thus, while the aggregate limit in isolation may appear

    to allow a trader to establish a position of 600 contracts in cash-

    settled contracts and 100 contracts on the opposite side of the market

    in the physical-delivery contract (that is, an aggregate net position

    of 500 contracts), the class limits restrict that trader to no more

    than 500 contracts net in cash-settled contracts. The aggregate limit

    is less restrictive than the proposed conditional limit in that a

    trader may elect to hold positions in both physical-delivery and cash-

    settled contracts, subject to the aggregate limit.

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

    \103\ Further to this example, if a trader wanted to hold 100

    contracts in the physical-delivery contract in one direction, the

    trader could hold 500 cash-settled contracts in the opposite

    direction as the physical-delivery contract.

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

    The Commission believes that, based on current experience with

    existing DCM and exempt commercial market (``ECM'') conditional limits,

    the one-to-five ratio for natural gas contracts maximizes the statutory

    objectives, as set forth in section 4a(a)(3)(B) of the CEA, of

    preventing excessive speculation and market manipulation, ensuring

    market liquidity for bona fide hedgers, and promoting efficient price

    discovery. Nevertheless, the Commission recognizes that after

    experience with the one-to-five ratio and additional reporting of swap

    transactions, it may be possible to maximize further these objectives

    with a different ratio and therefore will revisit the issue after it

    evaluates the effects of the interim final rule. Accordingly, the

    Commission is implementing the one-to-five ratio in natural gas

    contracts on an interim final rule basis and is seeking comments on

    whether a different ratio can further maximize the statutory objectives

    in section 4a(a)(3)(B) of the CEA.

    The Commission notes that, as would have been the case with the

    proposed conditional limits, the spot-month limits on cash-settled

    natural gas contracts will be more restrictive than the current natural

    gas conditional spot-month limits. The NYMEX Henry Hub Natural Gas

    (``NG'') physical-delivery futures contract has a spot-month limit of

    1,000 contracts. Both the NYMEX cash-settled natural gas futures

    contract (``NN'') and the ICE Henry Hub Physical Basis LD1 contract

    (``LD1'') have conditional-spot-month limits equivalent to 5,000

    contracts in the NG futures contract. In contrast to the LD1 contract,

    swap contracts that are not significant price discovery contracts

    (``SPDCs'') have not been subject to any position limits. However, the

    final rule aggregates the related cash-settled contracts, whether swaps

    or futures. For example, a trader under current rules may hold a

    position equivalent to 5,000 NG contracts in each of the NN and LD1

    contracts (10,000 in total), but under the final rule, a speculative

    trader may hold only 5,000 cash-settled contracts net under the

    aggregate spot month limit (since a trader must add its NN position to

    its LD1 position). Further, other economically-equivalent contracts

    would be aggregated with a trader's cash-settled contracts in NN and

    LD1.

    Proposed Sec. 151.11(a)(2) required that a DCM or SEF that is a

    trading facility adopt spot-month limits on cash-settled contracts for

    which no federal limits apply, based on the methodology in proposed

    Sec. 151.4 (i.e., 25 percent of deliverable supply). Proposed Sec.

    151.4(a) did not establish spot-month limits in the cash-settled Core

    Referenced Futures Contracts (i.e., Class III Milk, Feeder Cattle, and

    Lean Hog contracts). Thus, under the proposal, a DCM or SEF that is a

    trading facility would be required to set a spot-month limit on such

    contracts at a level no greater than 25 percent of deliverable supply.

    The final rules provide that the spot-month position limit for

    cash-settled Core Referenced Futures Contracts (i.e., Class III Milk,

    Feeder Cattle, and Lean Hog contracts) and related cash-settled

    Referenced Contracts will be set by the Commission at a level equal to

    25 percent of deliverable supply.\104\

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

    \104\ See Sec. 151.4(a).

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

    The Commission is also retaining class limits in the spot month for

    physical-delivery and cash-settled contracts. Under the class limit

    restriction, a trader may hold positions up to the spot-month limit in

    the physical-delivery contracts, as well as positions up to the

    applicable spot-month limit in cash-settled contracts (i.e., cash-

    settled futures and swaps), but a trader in the spot month may not net

    across physical-delivery and cash-settled contracts.\105\ Absent such a

    restriction in the spot month, a trader could stand for 100 percent of

    deliverable supply during the spot month by holding a large long

    position in the physical-delivery contract along with an offsetting

    short position in a cash-settled contract, which effectively would

    corner the market.\106\

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

    \105\ As discussed above, the Commission is eliminating the

    conditional spot-month limit.

    \106\ As will be discussed further below, the Commission is

    eliminating class limits outside of the spot month.

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

    In the Commission's view, the aggregate limit for natural gas will

    ensure that no trader amasses a speculative position greater than five

    times the level of the physical-delivery Referenced Contract position

    limit and thereby, the limit ``diminishes the incentive to exert market

    power to manipulate the cash-settlement price or index to advantage a

    trader's position in the cash-settlement contract.'' \107\

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

    \107\ 76 FR at 4752, 4758.

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

    As noted above, the Commission has developed the limits on

    economically equivalent swaps concurrently with limits established for

    physical commodity futures contracts and has established aggregate

    requirements for cash-settled futures and swaps. In establishing the

    spot-month limits for cash-settled futures, options, and swaps, the

    Commission seeks to ensure, to the maximum extent practicable, that

    there will be sufficient market liquidity for bona fide hedgers in

    swaps, especially those seeking to offset open positions in such

    contracts. Permitting traders to hold larger positions in natural gas

    cash-settled contracts near expiration should not materially affect the

    potential for market abuses, as the current Commission surveillance

    system serves to detect and prevent market manipulation, squeezes, and

    corners in the physical-delivery futures contracts as well as market

    abuses in cash-settled contracts on which position information is

    collected. In this regard, the Swaps Large Trader Reporting system will

    enhance the Commission's surveillance efforts by providing the

    Commission with transparency for the positions of traders holding large

    swap positions. The Commission will monitor closely the effects of its

    spot-month position limits to ensure that they do not disrupt the price

    discovery function of the underlying market and that they are effective

    in addressing the potential for market abuses in cash-settled

    contracts.

    4. Interim Final Rule

    The Commission believes that, based on administrative experience,

    available data, and trade interviews, the spot month limits formulas

    for energy, agricultural and metals contracts, as described above, at

    this time best maximizes the statutory objectives set forth in CEA

    section 4a(a)(3)(B) of preventing excessive speculation and market

    manipulation, ensuring market liquidity for bona fide hedgers, and

    promoting efficient price discovery. However, commenters presented a

    range of views as to the appropriate formula with respect to cash

    settled contracts. Some commenters believed that either a

    [[Page 71638]]

    larger ratio was appropriate or there should be no limit on cash-

    settled contracts at all.\108\ Other commenters believed there should

    be parity in the limits between physical-delivery contracts and cash-

    settled contracts.\109\ Accordingly, the Commission is implementing the

    spot month limits on an interim rule basis and is seeking comments on

    whether a different ratio (e.g., one-to-three or one-to-four) can

    maximize further the statutory objectives in section 4a(a)(3)(B).

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

    \108\ See e.g., CL-ICE I, supra note 69 at 8, CL-Centaurus,

    supra note 21 at 3; CL-BGA, supra note 35 at 12.

    \109\ See e.g., CL-CME I, supra note 8 at 10; CL-KCBT, supra

    note 97 at 4; CL-APGA, supra note 17 at 6,8.

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

    Specifically, the Commission invites commenters to address whether

    the interim final rule best maximizes the four objectives in section

    4a(a)(3)(B). The Commission also seeks comments on whether it should

    set a different ratio for different commodities. Should the Commission

    consider setting the ratio higher than one-to-one and, if so, in which

    commodities? Commenters are encouraged, to the extent feasible, to be

    comprehensive and detailed in providing their approach and rationale.

    Commenters are requested to address how their suggested approach would

    better maximize the four objectives in section 4a(a)(3).

    Additionally, commenters are encouraged to address the following

    questions:

    Should the Commission consider the relationship between the open

    interest in cash-settled contracts in the spot month and open interest

    in the physical-delivery contract in the spot month in setting an

    appropriate ratio?

    Are there other metrics that are relevant to the setting of a spot-

    month limit on cash-settled contracts (e.g., volume of trading in the

    physical-delivery futures contract during the period of time the cash-

    settlement price is determined)?

    What criteria, if any, could the Commission use to distinguish

    among physical commodities for purposes of setting spot-month limits

    (e.g., agricultural contracts of relatively limited supplies

    constrained by crop years and limited storage life) and how would those

    criteria be related to the levels of limits?

    The Commission also invites comments on the costs and benefits

    considerations under CEA section 15a. The Commission further requests

    commenters to submit additional quantitative and qualitative data

    regarding the costs and benefits of the interim final rule and any

    suggested alternatives. Thus, the Commission is seeking comments on the

    impact of the interim final rule or any alternative ratio on: (1) The

    protection of market participants and the public; (2) the efficiency,

    competitiveness, and financial integrity of the futures markets; (3)

    the market's price discovery functions; (4) sound risk management

    practices; and (5) other public interest considerations.

    The comment period for the interim final rule will close January

    17, 2012.

    After the Commission gains some experience with the interim final

    rule and has reviewed swaps data obtained through the Swaps Large

    Trader Reports, the Commission may further reevaluate the appropriate

    ratio between physical-delivery and cash-settled spot-month position

    limits and, in that connection, seek additional comments from the

    public.

    5. Resetting Spot-Month Limits

    The Proposed Rules required that DCMs submit estimates of

    deliverable supply to the Commission by the 31st of December of each

    calendar year. The Proposed Rules also provided that the Commission

    would rely on either these DCM estimates or its own estimates to revise

    spot-month position limits on an annual basis.\110\ Two commenters

    commented that the Commission's proposed process for DCMs providing

    their deliverable supply estimates within the proposed timeframe was

    operationally infeasible.\111\

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

    \110\ See Sec. 151.4(c). Under the Proposed Rules, spot-month

    legacy limits would not be subject to periodic resets.

    \111\ CL-CME I supra note 8 at 9; and CL-MGEX supra note 75 at

    2. In addition, the MGEX stated that it is impractical to try to

    ascertain an accurate estimate of deliverable supply because there

    are too many variable and unknown factors that affect an

    agricultural commodity's production and the amount that is sent to

    delivery points. CL-MGEX supra note 74 at 2.

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

    Others criticized the setting of spot-month limits on an annual

    basis. MFA commented that the limits should reflect seasonal

    deliverable supply by using either data based on the prior year's

    deliverable supply estimates or more frequent re-setting.\112\ The

    Institute for Agriculture and Trade Policy (``IATP'') commented that

    the spot-month position limits for legacy agricultural commodities will

    likely require more than annual revision due to the effects of climate

    change on the estimated deliverable supply for each Referenced

    Contract.\113\ IATP also urged the Commission to amend the proposal to

    provide for emergency meetings to estimate deliverable supply if prices

    or supply become volatile.\114\

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

    \112\ CL-MFA supra note 21 at 18.

    \113\ IATP on March 28, 2011 (``CL-IATP'') at 5.

    \114\ Id. at 3.

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

    Two commenters expressed concern about the potential volatility in

    the limit levels introduced by the Commission's proposed annual process

    for setting spot-month limits. BGA commented that spot-month limits

    that are changed too frequently (annually would be too frequent in

    their view) could result in a ``flash crash'' as traders make large

    position changes in order to comply with a potentially new lower

    limit.\115\ BGA suggested that this concern could be addressed through,

    among other things, less frequent changes to the spot-month position

    limit levels and by providing the market a several-month ``cure

    period.'' \116\ ISDA/SIFMA suggested that year-to-year spot-month limit

    level volatility could be addressed by using a five-year rolling

    average of estimated deliverable supply.\117\

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

    \115\ CL-BGA supra note 35 at 20.

    \116\ Id.

    \117\ CL-ISDA/SIFMA supra note 21 at 22.

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

    The Commission recognizes the concerns regarding the necessity and

    desirability of an annual updating of the deliverable supply

    calculations on a single anniversary date, and that under normal market

    conditions, agricultural, energy, and metal commodities typically do

    not exhibit dramatic and sustained changes in their supply and demand

    fundamentals from year-to-year. Accordingly, the Commission has

    determined to update spot-month limits biennially (every two years) for

    energy and metal Referenced Contracts instead of annually, and to

    stagger the dates on which estimates of deliverable supply shall be

    submitted by DCMs. These changes should mitigate the costs of

    compliance for DCMs to prepare and submit estimates of deliverable

    supply to the Commission. Under the final rule, DCMs may petition the

    Commission to update the limits on a more frequent basis should supply

    and demand fundamentals warrant it.

    Finally, in response to comments, the Commission has made minor

    modifications to the definition of the ``spot month'' to provide for

    consistency with DCMs' current practices in the administration of spot-

    month limits for the Referenced Contracts.

    E. Non-Spot-Month Limits

    The Commission proposed to impose aggregate position limits outside

    of the spot month in order to prevent a speculative trader from

    acquiring excessively large positions and, thereby, to help prevent

    excessive speculation and deter and prevent market

    [[Page 71639]]

    manipulations, squeezes, and corners.\118\ Furthermore, the Commission

    provided that the ``resultant limits are purposely designed to be high

    in order to ensure sufficient liquidity for bona fide hedgers and avoid

    disrupting the price discovery process given the limited information

    the Commission has with respect to the size of the physical commodity

    swap markets.'' \119\

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

    \118\ 76 FR at 4752, 4759.

    \119\ Id.

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

    In the proposal, the formula for the non-spot-month position limits

    is based on total open interest for all Referenced Contracts in a

    commodity. The actual position limit is based on a formula: 10 percent

    of the open interest for the first 25,000 contracts and 2.5 percent of

    the open interest thereafter.\120\ The limits for each Referenced

    Contracts included class limits with one class comprised of all futures

    and option contracts and the second class comprised of all swap

    contracts. A trader could net positions within the same class, but

    could not net its position across classes. The limits also included an

    aggregate all-months-combined limit and a single month limit; however,

    the limit for the single month would be the same size as the limit for

    all months.

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

    \120\ By way of example, assuming a Referenced Contract has

    average all-months-combined aggregate open interest of 1 million

    contracts, the level of the non-spot-month position limits would

    equal 26,900 contracts. This level is calculated as the sum of 2,500

    (i.e., 10 percent times the first 25,000 contracts open interest)

    and 24,375 (i.e., 2.5 percent of the 975,000 contracts remaining

    open interest), which equals 26,875 (rounded up to the nearest 100

    under the rules (i.e., 26,900)).

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

    The Commission received many comments about the rationale for and

    design of the proposed non-spot-month limits. Many commenters opined

    that the proposed aggregate non-spot-month limits would not be

    sufficiently restrictive to prevent excessive speculation.\121\ Better

    Markets explained, for example, that the proposed non-spot-month limits

    address manipulation by limiting the position size of a single

    individual while position limits intended to reduce excessive

    speculation should aim to reduce total speculative participation in the

    market.\122\ These commenters recommended that, in order to address

    excessive speculation, the Commission should set limits designed to

    limit speculative activity to a target level.\123\

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

    \121\ CL-ATA supra note 81 at 3-4; CL-ATAA supra note 94 at 7;

    CL-Better Markets supra note 37 at 70-71; CL-Delta supra note 20 at

    2-6; CL-FWW supra note 81 at 11; and CL-PMAA/NEFI supra note 6 at 7,

    10. 3,178 form comment letters asked the Commission to impose a

    limit of 1,500 contracts on Referenced Contracts in silver.

    \122\ See e.g., CL-Better Markets supra note 37 at 61-64.

    \123\ CL-ATA supra note 81 at 4-5; CL-AFR supra note 17 at 5-6;

    CL-ATAA supra note 94 at 3, 6, 9-10, 12; CL-Better Markets supra

    note 37 at 70-71 (recommending the Commission to limit non-commodity

    index and commodity index speculative participation in the market to

    30 percent and 10 percent of open interest, respectively); CL-Delta

    supra note 20 at 5; and CL-PMAA/NEFI supra note 6 at 7. See also

    Daniel McKenzie on March 28, 2011 (``CL-McKenzie'') at 3. The

    Petroleum Marketers Association of America and the New England Fuel

    Institute, for example, suggested that the distribution of large

    speculative traders' positions in the market may be an appropriate

    factor to be considered in developing these speculative target

    limits.

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

    Other commenters questioned the utility of non-spot-month limits

    generally.\124\ AIMA, for example, opined that ``[a]lthough * * *

    limits within the spot-month may be effective to prevent `corners and

    squeezes' at settlement, the case for placing position limits in non-

    spot-months is less convincing and has not been made by the

    Commission.'' \125\ The FIA commented that non-spot-month position

    limits are not necessary to prevent excessive speculation.\126\

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

    \124\ American Gas Association (``AGA'') on March 28, 2011

    (``CL-AGA'') at 13; CL-AIMA supra note 35 at 3; CL-BlackRock supra

    note 21 at 18; CL-CME I supra note 8 at 21; CL-FIA I supra note 21

    at 11 (Commission's prior guidance does not provide a basis today

    for an exemption from hard speculative position limits for markets

    with large open-interest, high trading volumes and liquid cash

    markets); CL-Goldman supra note 89 at 6; CL-ISDA/SIFMA supra note 21

    at 18; CL-MGEX supra note 74 at 1 (Commission's proposed formulaic

    approach to non-spot-month position limits seems arbitrary); Natural

    Gas Supply Association (``NGSA'') and National Corn Growers

    Association (``NCGA'') on March 28, 2011, (``CL-NGSA/NCGA'') at 4-5

    (position limits outside the spot month should be eliminated or be

    increased substantially because threats of manipulation and

    excessive speculation are primarily of concern in the physical-

    delivery spot month contract); CL-PIMCO supra note 21 at 6; Global

    Energy Management Institute, Bauer College of Business, University

    of Houston (``Prof. Pirrong'') on January 27, 2011 (``CL-Prof.

    Pirrong'') at para. 21 (Commission has provided no evidence that the

    limits it has proposed are necessary to reduce the Hunt-like risk

    that the Commission uses as a justification for its limits); CL-

    SIFMA AMG I supra note 21 at 8; Teucrium Trading LLC (``Teucrium'')

    on March 28, 2011 (``CL-Teucrium'') at 2 (limiting the size of

    positions that a non-commercial market participant can hold in

    forward (non-spot) futures contracts or financially-settled swaps,

    the Commission will restrict the flow of capital into an area where

    it is needed most--the longer term price curve); and CL-WGCEF supra

    note 35 at 4.

    \125\ CL-AIMA supra note 35 at 3.

    \126\ CL-FIA I supra note 21 at 11.

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

    A number of commenters opined that the Commission should increase

    the open interest multipliers in the formula used in determining the

    non-spot-month position limits.\127\ Other commenters opined that the

    Commission should decrease the open interest multipliers to 5 percent

    of open interest for first 25,000 contracts and then 2.5 percent.\128\

    PMAA and the NEFI commented that the formula, which was developed in

    1992 in the context of agricultural commodities, is inappropriate for

    current markets with larger open interest relative to the agricultural

    markets.\129\

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

    \127\ See CL-AIMA supra note 35 at 3; CL-CME I supra note 8 at

    12 (for energy and metals); CL-FIA I supra note 21 at 12 (10 percent

    of open interest for first 25,000 contracts and then 5 percent); CL-

    ICI supra note 21 at 10 (10 percent of open interest until requisite

    market data is available); CL-ISDA/SIFMA supra note 21 at 20; CL-

    NGSA/NCGA supra note 125 at 5 (25 percent of open interest); and CL-

    PIMCO supra note 21 at 11.

    \128\ See CL-Prof. Greenberger supra note 6 at 13; and CL-FWW

    supra note 82 at 12.

    \129\ CL-PMAA/NEFI supra note 6 at 9 (PMAA/NEFI commented that

    as open interest in markets has grown well beyond the open interest

    assumptions made in 1992, the size of large speculative positions

    has not grown commensurately and that therefore the Commission

    should decrease the marginal multiplier in the position limit

    formula as open interest increases. PMAA/NEFI commented further that

    the Commission should look at the actual positions by traders and

    set limits to constrain the largest positions in the resulting

    distribution).

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

    Goldman Sachs recommended that the Commission use a longer

    observation period than one year for setting position limits and

    provided as an example five years in order to reduce pro-cyclical

    effects (e.g., a decrease in open interest due to decreased speculative

    activity in one period results in a limit in the subsequent period that

    is excessively restrictive or vice-versa).\130\

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

    \130\ See CL-Goldman supra note 90 at 6-7.

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

    As stated in the proposal, the non-spot-month position limits are

    intended to maximize the CEA section 4a(a)(3)(B) objectives, consistent

    with the Commission's historical approach to setting non-spot-month

    speculative position limits.\131\ Such a limits formula, in the

    Commission's view, prevents a speculative trader from acquiring

    excessively large positions and thereby would help prevent excessive

    speculation and deter and prevent market manipulations, squeezes, and

    corners. The Commission also believes, based on its experience under

    part 150, that the 10 and 2.5 percent formula will ensure sufficient

    liquidity for bona fide hedgers and avoids disruption to the price

    discovery process.

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

    \131\ The Commission has used the 10 and 2.5 percent formula in

    administering the level of the legacy all-months position limits

    since 1999. See e.g., 64 FR 24038, 24039, May 5, 1999. See also 17

    CFR 150.5(c)(2).

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

    The Commission notes that Congress implicitly recognized the

    inherent uncertainty regarding future effects associated with setting

    limits prophylactically and therefore directed the Commission, under

    section 719(a) of the Dodd-Frank Act, to study on a

    [[Page 71640]]

    retrospective basis the effects (if any) of the position limits imposed

    pursuant to section 4a on excessive speculation and on the movement of

    transactions from DCMs to foreign venues.\132\ This study will be

    conducted in consultation with DCMs and is to be completed within 12

    months after the imposition of position limits. Following Congress'

    direction, the Commission will conduct an evaluation of position limits

    in performing this study and, thereafter, the Commission plans to

    continue monitoring these limits, considering the statutory objectives

    under section 4a(a)(3), and, if warranted, amend by rulemaking, after

    notice and comment, the formula adopted herein to determine non-spot-

    month position limits. The Commission may determine to reassess the

    formula used to set non-spot-month position limits based on the study's

    findings.

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

    \132\ Dodd-Frank Act, supra note 1, section 719(a).

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

    1. Single-Month, Non-Spot Position Limits

    Under proposed Sec. 151.4(d)(1), the Commission proposed to set

    the single-month limit at the same level as the all-months-combined

    position limit. Several commenters requested that the Commission

    reconsider this approach.\133\ The Air Transportation Association of

    America, for example, argued that the proposed level would exacerbate

    the problem of speculative trading in the nearby (next to expire)

    futures month, the month upon which energy prices typically are

    determined.\134\

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

    \133\ CL-APGA supra note 17 at 2-3; CL-ATAA supra note 94 at 6,

    13; CL-PMAA/NEFI supra note 6 at 11. 6,074 form comment letters

    asked the Commission to adopt ``single-month limits that are no

    higher than two-thirds of the all-months-combined levels.''

    \134\ CL-ATAA supra note 94 at 6. They also asserted that the

    Commission did not provide adequate justification for substantially

    raising the single month limit to the same level as the all-months

    combined limit. Id. at 13.

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

    Three commenters, including ICE, cautioned the Commission not to

    impose position limits that constrain speculative liquidity in the

    outer month expirations of Referenced Contracts, that is, in contracts

    that expire in distant years, as opposed to nearby contract

    expirations.\135\ ICE further asked the Commission to consider whether

    all-months-combined limits are necessary or appropriate in energy

    markets in the outer months. ICE stated that such limits would decrease

    liquidity for hedgers in the outer months and, moreover, all-months

    limits are not appropriate for energy markets where hedging is done on

    a much longer term basis relative to the agricultural markets where

    hedging is primarily conducted to hedge the next year's crops.\136\

    Teucrium Trading argued that by limiting the size of positions that a

    non-commercial market participant can hold in forward (non-spot)

    futures contracts or financially-settled swaps, the Commission would

    restrict the flow of capital into an area where it is needed most--the

    longer term price curve, that is, contracts that expire in distant

    years.\137\

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

    \135\ CL-ICE I supra note 69 at 9-10; CL-ISDA/SIFMA supra note

    21 at 19; and CL-Teucrium supra note 124 at 2.

    \136\ CL-ICE I supra note 69 at 9-10.

    \137\ CL-Teucrium supra note 124 at 2.

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

    The Commission has determined to set the single-month position

    limit levels at the same level as the all-months-combined limits,

    consistent with the proposal. Under current part 150, the Commission

    sets a single-month limit at a level that is lower than the all-months-

    combined limit; it also provides a limited exemption for calendar

    spread positions to exceed that single-month limit under Sec.

    150.4(a)(3), as long as the single month position (including calendar

    spread positions) is no greater than the level of the all-months-

    combined limit. Further, the Commission does not have a standard

    methodology for determining how much smaller the level of the single-

    month limit is set in comparison to the level of the all-months-

    combined limit.

    The Commission has made this determination for two reasons. First,

    setting the single-month limit to the same level as that of the all-

    months-combined limit simplifies the compliance burden on market

    participants and renders the calendar spread exemption unnecessary.

    Second, setting the limits at the same level for both spreaders and

    other speculative traders will permit parity in position size between

    these speculative traders in a single calendar month and, thus, may

    serve to diminish unwarranted price fluctuations.\138\

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

    \138\ The Commission notes that commenters arguing for more

    restrictive individual month limits did not provide any supporting

    data.

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

    With respect to objections to deferred-month limits, the Commission

    notes that Congress instructed the Commission to set limits on the spot

    month, each other month, and the aggregate number of positions that may

    be held by any person for all months.\139\

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

    \139\ CEA section 4a(a)(3)(A), 7 U.S.C. 6a(a)(3)(A).

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

    Finally, the Commission will continually monitor the size,

    behavior, and impact of large speculative positions in single contract

    months in order to determine whether it should adjust the single-month

    limit levels.

    2. ``Step-Down'' Position Limit

    Three commenters recommended that the Commission adopt, in addition

    to the spot-month limit and the single-month and all-months-combined

    limits, an intermediate ``step-down'' limit between the spot-month

    position limit and the single-month non-spot-month position limit.\140\

    This ``step-down'' limit would be less restrictive than the spot-month

    limit, but more restrictive than the single-month limit. BGA

    recommended that the single-month limit should be scaled down

    rationally before it reaches the spot month so that the market will not

    be disrupted by panic selling on the day before the spot-month limit

    becomes effective.\141\ The commenters did not propose alternative

    criteria for imposing a step-down provision.

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

    \140\ CL-BGA supra note 35 at 11; GFI Group (``GFI'') on January

    31, 2011 (``CL-GFI'') at 2 (progressively tighter limits should

    apply for physically-delivered energy contracts as they near

    expiration/delivery); and CL-PMAA/NEFI supra note 6 at 11.

    \141\ CL-BGA supra note 35 at 11.

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

    Currently, the Commission and DCMs establish a single date when the

    spot-month limit becomes effective. DCMs publicly disseminate this date

    as part of their contracts' rules. The advance notice provides

    sufficient time for market participants to reduce their positions as

    necessary. The Commission is not aware of material issues related to

    these provisions regarding the implementation of spot month limits. The

    Commission further believes this practice ensures sufficient market

    liquidity for bona fide hedgers and helps to deter and prevent squeezes

    and corners in the spot period while providing trader flexibility to

    manage positions and remain in compliance with the limits. The

    Commission notes, however, that it will monitor trading activity and

    resulting changes in prices in the transition period into the spot

    month in order to determine whether it should impose a new ``step-

    down'' limit for Referenced Contracts nearing the spot-month period.

    3. Setting and Resetting Non-Spot-Month Limits

    The Commission proposed all-months-combined aggregate limits and

    single-month aggregate limits in proposed Sec. 151.4(d)(1). The

    Commission is adopting those proposed limits in final Sec.

    151.4(b)(1), which sets forth single-month and all-months-combined

    position limits for non-legacy Referenced Contracts (i.e., those

    agricultural contracts that currently are not subject to Federal

    position limits as well as energy and metal contracts).

    [[Page 71641]]

    These limits would be fixed based on the following formula: 10 percent

    of the first 25,000 contracts of average all-months-combined aggregated

    open interest and 2.5 percent of the open interest for any amounts

    above 25,000 contracts of average all-months-combined aggregated open

    interest.

    Under proposed Sec. 151.4(b)(1)(i), aggregated open interest is

    derived from month-end open interest values for a 12-month time period.

    The Commission would use open interest to determine the average all-

    months-combined open interest for the relevant period, which, in turn,

    will form the basis for the non-spot-month position limits.

    Under the Proposed Rules, the Commission would calculate, for all

    Referenced Contracts, open interest on an annual basis for a 12-month

    period, January to December, and then, based on those calculations,

    publish the updated non-spot-month position limits by January 31st of

    the following calendar year. The updated limits would become effective

    30 business days after such publication. With respect to the initial

    limits, they would become effective pursuant to a Commission order

    under proposed Sec. 151.4(h)(3) and would be based on 12 months of

    open interest data.

    Several commenters urged the Commission to use a transparent and

    accessible methodology to determine non-spot-month position

    limits.\142\ Some of these commenters recommended that updated non-

    spot-month limits be determined through rulemaking, and not through

    automatic annual recalculations as proposed.\143\

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

    \142\ CL-FIA I supra note 21 at 12; CL-BlackRock supra note 21

    at 18; CL-CME I supra note 8 at 12; CL-EEI/EPSA supra note 21 at 11;

    CL-KCBT I supra note 97 at 3; CL-NGFA supra note 72 at 3; CL-WGC

    supra note 21 at 5; and CL-ISDA/SIFMA supra note 21 at 21.

    \143\ CL-BlackRock supra note 21 at 18; CL-CME I supra note 8 at

    12; CL-EEI/EPSA supra note 21 at 11; CL-KCBT I supra note 97 at 3;

    CL-NGFA supra note 70 at 3; and CL-WGC supra note 21 at 5. BlackRock

    argued that a formal rulemaking process for adjusting position limit

    levels would provide market participants with advanced notice of any

    potential changes and an opportunity to express their views on such

    changes.

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

    The World Gold Council argued that uncertainty associated with

    floating, annually-set position limits may inadvertently discourage

    market participants from providing the requisite long-term hedges.\144\

    Encana asked the Commission to consider adopting procedures for a

    periodic reevaluation of the formulas to ensure that they do not reduce

    liquidity or impair the price discovery function of the markets.\145\

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

    \144\ CL-WGC supra note 21 at 5.

    \145\ Encana Marketing (USA) Inc. (``Encana'') on March 28, 2011

    (``CL-Encana'') at 2.

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

    Many commenters objected to the proposed timeline for setting

    initial limits.\146\ For example, many comments urged the Commission to

    act ``expeditiously.'' Delta recommended the Commission should use

    sampling and other statistical techniques to make reasonable, working

    assumptions about positions in various market segments to set initial

    limits.

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

    \146\ See e.g., CL-Delta supra note 20 at 11.

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

    In response to comments, the Commission has determined to amend the

    proposed process for setting initial and subsequent non-spot-month

    position limits. With respect to initial non-spot-month position

    limits, under Sec. 151.4(d)(3)(i) the initial non-spot-month limits

    for non-legacy Referenced Contracts will be calculated and published

    after the Commission has received data sufficient to determine average

    all-months-combined aggregate open interest for a full 12-month period.

    The aggregate open interest will be derived from various sources,

    including data received from DCMs pursuant to part 16, swaps data under

    part 20, and data regarding linked, direct access FBOT contracts under

    a condition of a no-action letter and subsequently under part 48

    regarding FBOT registration with the Commission, when finalized and

    made effective. The Commission accepts part of Delta's recommendation

    to utilize reasonable, working assumptions about positions in various

    market segments to set initial limits. In this regard, the Commission

    will strive to establish non-spot-month position limits in an expedited

    manner that complies with the directives of Congress, while ensuring

    that it has sufficient swaps data to properly estimate open interest

    levels for Referenced Contracts.

    To compute 12 months of open interest data in uncleared all-months-

    combined swaps open interest, prior to the timely reporting of all swap

    dealers' net uncleared open swaps and swaptions positions by

    counterparty, the Commission may estimate uncleared open swaps

    positions, based upon uncleared open interest data submitted by

    clearing organizations or clearing members under part 20, in lieu of

    the aggregate of swap dealers' net uncleared open swaps. In developing

    accurate estimates of aggregate open interest under Sec.

    151.4(b)(2)(i), the Commission will adjust such uncleared open interest

    data submitted by clearing organizations or clearing members by an

    appropriate ratio if it determines, using data regarding later periods

    submitted by swap dealers and clearing members, that the uncleared open

    interest data submitted by clearing members differ significantly from

    the open interest data submitted by swap dealers.\147\ The Commission

    has accordingly provided, under Sec. 151.4(b)(2)(ii), that, based on

    data provided to the Commission under part 20, it may estimate

    uncleared swaps open positions for the purpose of setting initial non-

    spot-month position limits.

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

    \147\ An appropriate ratio is the ratio of uncleared open

    interest submitted by swap dealers in such later periods to the

    uncleared open interest submitted by clearing members in such later

    periods.

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

    Under final Sec. 151.4(d)(3)(i), the Commission will review the

    staff computations, including the assumptions made in estimating 12

    months of uncleared all-months-combined swap open interest, for

    consistency with the formula in the final rules. Once the Commission

    determines that the staff computations conform to the established

    formula, the Commission will approve and issue an order under final

    Sec. 151.4(d)(3)(iii), publishing the initial levels of the non-spot-

    month position limits.

    Under final Sec. 151.4(d)(3)(ii), subsequent non-spot-month limits

    for non-legacy Referenced Contracts will be updated and published every

    two years, commencing two years after the initial determinations. These

    subsequent position limits would be based on the higher of the most

    recent 12 months average all-months-combined aggregate open interest or

    24 months average all-months-combined aggregate open interest.\148\

    Under Sec. 151.4(e), these limits would be made effective on the first

    calendar day of the third calendar month after the date of publication

    on the Commission's Web site.

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

    \148\ For example, assume in a particular Referenced Contract

    that open interest has declined over a 24-month period; the average

    all-months-combined aggregate open interest levels are 900,000

    contracts for the most recent 12 months and 1,000,000 contracts for

    the most recent 24 months. Position limits would be based on the

    higher 24-month average level of 1,000,000 contracts. Thereby, the

    higher level of the position limit may serve to ensure sufficient

    market liquidity for bona fide hedgers in the event, for example, a

    decline in use of derivatives occurred in the historical measurement

    period that may be associated with a recession. Because position

    limits apply to prospective time periods, the use of the higher

    level may be appropriate, for example, with a subsequent

    expansionary period.

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

    This procedure may provide for limits that would be generally less

    restrictive than the proposed limits, since, by way of example, a

    continued decline in open interest over two years under the Proposed

    Rule would result in a lower

    [[Page 71642]]

    limit each year, whereas under the final rule the limit for the first

    year would not decline and the limit for the second year would be based

    on the higher 24-month average open interest. The Commission also notes

    that under Sec. 151.4(e) the public would have notice of updated

    position limit levels at least two months in advance of the effective

    date of such limits (i.e., such limits would be made effective on the

    first calendar day of the third calendar month immediately following

    the publication of new limit levels).\149\ Final Sec. 151.5(e)

    requires the Commission to provide all relevant open interest data used

    to derive updated position limit levels. By making public this open

    interest data, the public can monitor and anticipate future position

    limit levels, consistent with the transparency suggestions made by

    several commenters.

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

    \149\ For example, any limits fixed during the month of October

    would take effect on January 1.

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

    In addition, Sec. 151.4(b)(2)(i)(C) provides that, upon the entry

    of an order under Commission regulation 20.9 of the Commission's

    regulations determining that operating swap data repositories

    (``SDRs'') are processing positional data that will enable the

    Commission to conduct surveillance in the relevant swaps markets, the

    Commission shall rely on such data in order to determine all-months-

    combined swaps open interest.

    4. ``Legacy Limits'' for Certain Agricultural Commodities

    The Proposed Rule would set non-spot-month limits for Reference

    Contracts in legacy agricultural commodities at the Federal levels

    currently in place (referred to herein as ``legacy limits''). Several

    commenters recommended that the Commission should keep the legacy

    limits.\150\ The American Bakers Association argued that raising these

    legacy limits would increase hedging margins and increase volatility

    which would ultimately undermine commodity producers' ability to sell

    their product to consumers.\151\ Amcot opined that the Commission need

    not proceed with phased implementation for the legacy agricultural

    markets because it could set their limits based on existing legacy

    limits.\152\

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

    \150\ American Bakers Association (``ABA'') on March 28, 2011

    (``CL-ABA'') at 3-4; CL-AFIA supra note 94 at 3; Amcot on March 28,

    2011 (``CL-Amcot'') at 2; CL-FWW supra note 81 at 13; CL-IATP supra

    note 113 at 5; and CL-NGFA supra note 72 at 1-2.

    \151\ CL-ABA supra note 150 at 3-4.

    \152\ CL-Amcot supra note 150 at 3.

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

    Several other commenters recommended that the Commission abandon

    the legacy limits.\153\ U.S. Commodity Funds argued that the Commission

    offered no justification for treating legacy agricultural contracts

    differently than other Referenced Contract commodities.\154\ Some of

    these commenters endorsed the limits proposed by CME.\155\ Other

    commenters recommended the use of the open interest formula proposed by

    the Commission in determining the position limits applicable to the

    legacy agricultural Referenced Contract markets.\156\ Finally, four

    commenters expressed their preference that non-spot position limits be

    kept consistent for the three wheat Core Referenced Futures

    Contracts.\157\

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

    \153\ CL-AIMA supra note 35 at 4; Bunge on March 28, 2011 (``CL-

    Bunge'') at 1-2; Deutsche Bank AG (``DB'') on March 28, 2011 (``CL-

    DB'') at 6; Gresham Investment Management LLC (``Gresham'') on

    February 15, 2011 (``CL-Gresham'') at 4-5; CL-FIA I supra note 21 at

    12; CL-MGEX supra note 74 at 2; CL-MFA supra note 21 at 18-19; and

    United States Commodity Funds LLC (``USCF'') on March 25, 2011

    (``CL-USCF'') at 10-11.

    \154\ CL-USCF supra note 153 at 10-11.

    \155\ CL-Bunge supra note 153 at 1-2; CL-FIA I supra note 21 at

    12; and CL-Gresham supra note 153 at 5. See CME Petition for

    Amendment of Commodity Futures Trading Commission Regulation 150.2

    (April 6, 2010), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/df26_cmepetition.pdf.

    \156\ CL-CMC supra note 21 at 3; CL-DB supra note 153 at 10; and

    CL-MFA supra note 21 at 19.

    \157\ CL-CMC supra note 21 at 3; CL-KCBT I supra note 97 at 1-2;

    CL-MGEX supra note 74 at 2; and CL-NGFA supra note 72 at 4.

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

    The Commission has determined to adopt the position limit levels

    proposed by the CME for the legacy Core Referenced Futures Contracts.

    Such levels would be effective 60 days after the publication date of

    this rulemaking and those levels would be subject to the existing

    provisions of current part 150 until the compliance date of these

    rules, which is 60 days after the Commission further defines the term

    ``swap'' under the Dodd-Frank Act. At that point, the relevant

    provisions of this part 151, including those relating to bona-fide

    hedging and account aggregation, would also apply. In the Commission's

    judgment, the CME proposal represents a measured approach to increasing

    legacy limits, similar to that previously implemented.\158\ The

    Commission will use the CME's all-months-combined petition levels as

    the basis to increase the levels of the non-spot-month limits for

    legacy Referenced Contracts. The petition levels were based on 2009

    average month-end open interest. Adoption of the petition levels

    results in increases in limit levels that range from 23 to 85 percent

    higher than the levels in existing Sec. 150.2.

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

    \158\ 58 FR 18057, April 7, 1993.

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

    The Commission has determined to maintain the current approach to

    setting and resetting legacy limits because it is consistent with the

    Commission's historical approach to setting such limits. To ensure the

    continuation of maintaining a parity of limit levels for the major

    wheat contracts at DCMs and in response to comments supporting this

    approach, the Commission will also increase the levels of the limits on

    wheat at the MGEX and the KCBT to the level for the wheat contract at

    the CBOT.\159\

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

    \159\ For a discussion of the historical approach, see 64 FR

    24038, 24039, May 5, 1999.

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

    5. Non-Spot Month Class Limits

    The Commission proposed to create two classes of contracts for non-

    spot-month limits: (1) Futures and options on futures contracts and (2)

    swaps. The Proposed Rule would apply single-month and all-months-

    combined position limits to each class separately.\160\ The aggregate

    position limits across contract classes are in addition to the position

    limits within each contract class. Therefore, a trader could hold

    positions up to the allowed limit in each class (futures and options

    and swaps), provided that their overall position remains within the

    applicable position limits. Under the proposal, a trader could net

    positions within a class, such as a long swap position with a short

    swap position, but could not net positions in different classes, such

    as a long futures position with a short swap position. The class limits

    were designed to diminish the possibility that a trader could have

    market power as a result of a concentration in any one submarket and to

    prevent a trader that had a flat net aggregate position in futures and

    swaps combined from establishing extraordinarily large offsetting

    positions.

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

    \160\ Within a contract class, the limits would be set at an

    amount equal to 10 percent of the first 25,000 contracts of average

    all-months-combined aggregate open interest in the contract and 2.5

    percent of the open interest for any amounts above 25,000 contracts.

    The aggregate all-months-combined limits across contract classes

    would be set at 10 percent of the first 25,000 contracts of average

    all-months-combined aggregated open interests, and 2.5 percent of

    the open interest thereafter. The average all-months-combined

    aggregate open interest, which is the basis of these calculations,

    is determined annually by adding the all-months futures open

    interest and the all-month-combined swaps open interest for each of

    the 12 months prior to the effective date and dividing that amount

    by 12. Each trader's positions would be netted for the purpose of

    determining compliance with position limits.

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

    Several commenters stated that the class limits proposal was flawed

    and therefore should not be adopted.\161\ For

    [[Page 71643]]

    example, the CME argued that because the class limits would not permit

    netting across contract classes (that is, across futures and swaps),

    the class limits would not appropriately limit a trader's actual (net)

    speculative positions. CME further objected to this proposal by stating

    that the Commission provided no rationale as to why the positions in

    two futures contracts could be netted but positions in swaps and

    futures could not be netted.\162\ Another commenter similarly argued

    that economically equivalent contracts (futures or swaps) are simply

    two components of a broader derivatives market for a particular

    commodity and, therefore, the concept of establishing limits on a class

    of economically equivalent derivatives was logically flawed.\163\

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

    \161\ CL-AIMA supra note 35 at 3 (they add ``an unnecessary

    level of complexity''); CL-BlackRock supra note 21 at 17; CL-Cargill

    supra note 76 at 10; CL-CME I supra note 8 at 13; CL-DB supra note

    153 at 8-9; CL-Goldman supra note 89 at 6; CL-ICE I supra note 69 at

    9; CL-ISDA/SIFMA supra note 21 at 23; CL-MFA supra note 21 at 18;

    CL-Prof. Pirrong supra note 124 at paras. 24-30; and CL-Shell supra

    note 35 at 6.

    \162\ CL-Shell supra note 35 at 6; CL-BlackRock supra note 21 at

    17 (arguing that the Commission failed to demonstrate that large

    positions in a submarket implies market power). See also CL-Cargill

    supra note 76 at 10; CL-AIMA supra note 35 (commenting that the

    proposed class limits add ``an unnecessary level of complexity'');

    CL-ISDA/SIFMA supra note 21 at 23; CL-ICE I supra note 69 at 9; CL-

    CME I supra note 8 at 13; CL-DB supra note 153 at 8-9; CL-Goldman

    supra note 89 at 6; CL-MFA supra note 21 at 18; and CL-Prof. Pirrong

    supra note 124 at paras. 24-30.

    \163\ CL-ICE I supra note 69 at pg. 9.

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

    In response to the comments, the Commission has determined to

    eliminate class limits from the final rules. The Commission believes

    that comments regarding the ability of market participants to net swaps

    and future positions that are economically equivalent have merit. The

    Commission believes that concerns regarding the potential for market

    abuses through the use of futures and swaps positions can be addressed

    adequately, for the time being, by the Commission's large trader

    surveillance program. The Commission will closely monitor speculative

    positions in Referenced Contracts and may revisit this issue as

    appropriate.

    F. Intraday Compliance With Position Limits

    The Commission proposed to apply position limits on an intraday

    basis, and some commenters urged the Commission to reconsider such a

    requirement.\164\ Barclays commented that the Commission should

    recognize intraday violations of aggregate limits as a form of

    excusable overage because of the challenge of sharing and collating

    position information on a real-time basis.

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

    \164\ CL-Shell supra note 35 at 6-7; CL-API supra note 21 at 14

    (Commission should engage in a rigorous analysis of the regulatory

    burdens of intraday limits and ultimately clarify that position

    limits will only apply at the end of each trading day); Barclays

    Capital (``Barclays I'') on March 28, 2011 (``CL-Barclays I'') at 4-

    5 (Commission should reconsider requiring intraday compliance for

    non-spot-month position limits).

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

    In the Commission's judgment, intraday compliance would constitute

    a marginal compliance cost and not be overly-burdensome. The Commission

    notes that firms may impose risk limits (i.e., position limits

    determined by the internal risk management department or equivalent

    unit) on individual traders and among related entities required to

    aggregate positions under Sec. 151.7 to mitigate the need to create

    systems to ensure intraday compliance. Moreover, the expected levels of

    limits outside of the spot-month are not expected to affect many firms

    and those affected firms should have the capability to establish

    internal risk limits or real-time position reporting to ensure intraday

    compliance with position limits. Finally, the Commission notes that

    intraday compliance with position limits is consistent with existing

    Commission \165\ and DCM \166\ policy. The Commission's policy on

    intraday compliance reflects its concerns with very large speculative

    positions, whether or not they persist through the end of a trading

    day.

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

    \165\ Commodity Futures Trading Commission Division of Market

    Oversight, Advisory Regarding Compliance with Speculative Position

    Limits (May 7, 2010), available at http://www.cftc.gov/ucm/groups/public/@industryoversight/documents/file/specpositionlimitsadvisory0510.pdf.

    \166\ See e.g., CME Rulebook, Rule 443, available at http://

    www.cmegroup.com/rulebook/files/CME_Group_RA0909-5.pdf'') (amended

    Sept. 14, 2009); ICE OTC Advisory, Updated Notice Regarding Position

    Limit Exemption Request Form for Significant Price Discovery

    Contracts, available at https://www.theice.com/publicdocs/otc/advisory_notices/ICE_OTC_Advisory_0110001.pdf (Jan. 4, 2010).

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

    G. Bona Fide Hedging and Other Exemptions

    The new statutory definition of bona fide hedging transactions or

    positions in section 4a(c)(2) of the CEA generally follows the

    definition of bona fide hedging in current Commission regulation

    1.3(z)(1), with two significant differences. First, the new statutory

    definition recognizes a position in a futures contract established to

    reduce the risks of a swap position as a bona fide hedge, provided that

    either: (1) The counterparty to such swap transaction would have

    qualified for a bona fide hedging transaction exemption, i.e., the

    ``pass-through'' of the bona fides of one swap counterparty to another

    (such swaps may be termed ``pass-through swaps''); or (2) the swap

    meets the requirements of a bona fide hedging transaction. Second, a

    bona fide hedging transaction or position must represent a substitute

    for a physical market transaction.\167\

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

    \167\ In 1977, the Commission proposed a general or conceptual

    definition of bona fide hedging that did not include the modifying

    adverb ``normally'' to the verb ``represent.'' 42 FR 14832, Mar. 17,

    1977. The Commission introduced the adverb normally in the

    subsequent final rulemaking in order to accommodate balance sheet

    hedging that would otherwise not have met the general definition of

    bona fide hedging. 42 FR 42748, Aug. 24, 1977. The Commission noted

    that, for example, hedges of asset value volatility associated with

    depreciable capital assets might not represent a substitute for

    subsequent transactions in a physical marketing channel. Id. at

    42749.

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

    Section 4a(c)(1) of the CEA authorizes the Commission to define

    bona fide hedging transactions or positions ``consistent with the

    purposes of this Act.'' Congress directed the Commission, in amended

    CEA section 4a(c)(2), to adopt a definition of bona fide hedging

    transactions or positions for futures contracts (and options) for

    purposes of setting the position limits mandated by CEA section

    4a(a)(2)(A). Pursuant to this authority, the Commission proposed a new

    regulatory definition of bona fide hedging transactions or positions in

    proposed Sec. 151.5(a).\168\ The Commission also proposed Sec. 151.5

    to establish five enumerated exemptions from position limits for bona

    fide hedging transactions or positions for exempt and agricultural

    commodities.

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

    \168\ By its terms, the definition of bona fide hedging applies

    only to futures (and options). Pursuant to section 4a(c), the

    Commission proposed to extend the definition of bona fide hedging

    transactions and positions to all Referenced Contracts, including

    swaps. The Commission is adopting the definition of bona fide

    hedging substantially as proposed. The Commission believes that

    applying the statutory definition of bona fide hedging to swaps is

    consistent with congressional intent as embodied in the expansion of

    the Commission's authority to swaps (i.e., those that are

    economically-equivalent and SPDFs). In granting the Commission

    authority over such swaps, Congress recognized that such swaps

    warrant similar treatment to their economically equivalent futures

    for purposes of position limits and therefore, intended that the

    statutory definition of bona fide hedging also be extended to swaps.

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

    Under the proposal, a trader must meet the general requirements for

    a bona fide hedging transaction or position in proposed Sec.

    151.5(a)(1) and also meet the requirements for an enumerated hedging

    transaction in proposed Sec. 151.5(a)(2). The general requirements

    call for the bona fide hedging transaction or position to represent a

    substitute for transactions in a physical marketing channel (that is,

    the cash market for a physical commodity), to be economically

    appropriate to the reduction of risks in

    [[Page 71644]]

    the conduct and management of a commercial enterprise, and to arise

    from the potential change in the value of certain assets, liabilities,

    or services. The five proposed enumerated hedging transactions are

    discussed below. The proposed section did not provide for non-

    enumerated hedging transactions or positions, which current Commission

    regulations 1.3(z)(3) and 1.47 permit. Under the proposal, Commission

    regulation 1.3(z) would be retained only for excluded commodities.

    Proposed Sec. 151.5(b) established reporting requirements for a

    trader upon exceeding a position limit. The trader would be required to

    submit information not later than 9 a.m. on the business day following

    the day the limit was exceeded. Proposed Sec. 151.5(c) specified

    application and approval requirements for traders seeking an

    anticipatory hedge exemption, incorporating the current requirements of

    Commission regulation 1.48. Proposed Sec. 151.5(d) established

    additional reporting requirements for a trader who exceeded the

    position limits in order to reduce the risks of certain swap

    transactions, discussed above.

    Proposed Sec. 151.5(e) specified recordkeeping requirements for

    traders that acquire positions in reliance on bona fide hedge

    exemptions, as well as for swap counterparties for which a counterparty

    represents that the transaction would qualify as a bona fide hedging

    transaction. Swap dealers availing themselves of a hedge exemption

    would be required to maintain a list of such counterparties and make

    that list available to the Commission upon request. Proposed Sec. Sec.

    151.5(g) and (h) provided procedural documentation requirements for

    such swap participants.

    Proposed Sec. 151.5(f) required a cross-commodity hedger to

    provide conversion information, as well as an explanation of the

    methodology used to determine such conversion information, between the

    commodity exposure and the Referenced Contracts used in hedging.

    Proposed Sec. 151.5(i) required reports by bona fide hedgers to be

    filed for each business day, up to and including the day the trader's

    position level first falls below the position limit that was exceeded.

    The Commission has responded to the many comments received by

    making substantial changes to the Proposed Rules. A full discussion of

    the comments received and of the Commission's responses is found below.

    In summary, in the final rules, the Commission: (1) Clarifies that a

    transaction qualifies as a bona fide hedging transaction without regard

    to whether the hedger's position would otherwise exceed applicable

    position limits; (2) expands the list of enumerated hedging

    transactions to include hedging of anticipated merchandising activity,

    royalty payments, and service contracts; (3) clarifies the conditions

    under which swaps executed opposite a commercial counterparty would be

    recognized as the basis for bona fide hedging; (4) reduces the burden

    of claiming a pass-through swap exemption; (5) introduces new Sec.

    151.5(b) to make the aggregation and bona fide hedging provisions of

    part 151 consistent; (6) clarifies that cash market risk can be hedged

    on a one-to-one transactional basis or can be hedged as a portfolio of

    risk; (7) eliminates the restriction on holding hedges in cash-settled

    contracts up through the last trading day; (8) reduces the daily filing

    requirement for cash market information on the Form 404 and Form 404S

    to a monthly filing of daily reports; (9) allows for self-effectuating

    notice filings for those hedge exemptions that require such a filing;

    and (10) provides an exemption for situations involving ``financial

    distress.''

    1. Enumerated Hedges

    Under proposed Sec. 151.5(a)(1), no transaction or position would

    be classified as a bona fide hedging transaction unless it also

    satisfies the requirements for one of five categories of enumerated

    hedging transactions.\169\

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

    \169\ Thus, for example, an anticipatory merchandising

    transaction could only serve as a basis of an enumerated hedge if

    it, inter alia, reduces the risks attendant to transactions

    anticipated to be made in the physical marketing channel.

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

    The Commission received many comment letters regarding the proposed

    definition of bona fide hedging, with a number of commenters expressing

    concern that the proposed definition was ambiguous and overly

    restrictive.\170\ Morgan Stanley, for example, opined that the ``very

    narrow'' definition of bona fide hedging in the Proposed Rule would

    unnecessarily limit the ability of many market participants to engage

    in ``many well-established risk reducing activities.'' \171\ Several

    commenters requested bona fide hedging recognition for transactions

    beyond those expressly enumerated.\172\ In this respect, some

    commenters, including the FIA and Morgan Stanley, urged the Commission

    to exercise its broad exemptive authority under CEA section 4a(a)(7) to

    accommodate a wider range of legitimate hedging activities, including

    the hedging of general swap position risk, otherwise known as a risk

    management exemption.\173\

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

    \170\ See e.g., CL-FIA I supra note 21 at 14-15; CL-Morgan

    Stanley supra note 21 at 4, 5; and CL-ISDA/SIFMA supra note 21 at 9.

    \171\ CL-Morgan Stanley supra note 21 at 5. According to Morgan

    Stanley, the proposed definition may preclude market participants

    from (i) netting exposure across different categories of related

    futures and swaps; (ii) hedging long-term risks in illiquid markets,

    common in the development of large infrastructure projects; and

    (iii) assuming the positions of a less stable market participant

    during times of market distress.

    \172\ See e.g., CL-Commercial Alliance I supra note 42 at 2-3;

    CL-FIA I supra note 21 at 13; and Economists Inc. on March 28, 2011

    (``CL-Economists Inc.'') at 2.

    \173\ See e.g., CL-FIA I supra note 21 at 13; CL-ISDA/SIFMA

    supra note 21 at 8; CL-BlackRock supra note 21 at 16; CL-Barclays I

    supra note 164 at 3; and CL-ICI supra note 21 at 9.

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

    Several commenters argued that not permitting a risk management

    exemption would be inconsistent with other parts of the Act and

    Commission rulemakings.\174\ For example, CME argued that the hedging

    standard under the major swap participant (``MSP'') definition includes

    swap positions ``maintained by [pension plans] for the primary purpose

    of hedging or mitigating any risk directly associated with the

    operation of the plan.'' \175\ CME also pointed to the commercial end-

    user exception to mandatory clearing requirements, where the

    Commission's proposed definition of hedging ``covers swaps used to

    hedge or mitigate any of a person's business risks.'' \176\

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

    \174\ See e.g., CL-CME I supra note 8 at 18.

    \175\ See id. at 18 citing New CEA section 1a(33), 7 U.S.C.

    1a(33).

    \176\ See id. at 18 citing 75 FR 80747 (Dec. 23, 2010).

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

    As discussed above, the Commission is authorized to define bona

    fide hedging for swaps. The Commission, however, does not believe that

    including a risk management provision is necessary or appropriate given

    that the elimination of the class limits outside of the spot-month will

    allow entities, including swap dealers, to net Referenced Contracts

    whether futures or economically equivalent swaps. As such, under the

    final rules, positions in Referenced Contracts entered to reduce the

    general risk of a swap portfolio will be netted with the positions in

    the portfolio.

    Some commenters also objected to the Commission's failure to

    recognize as bona fide hedging swap transactions that qualify for the

    end-user clearing exception. Such omission, these commenters added,

    will lead to unnecessary disruption to commercial hedgers' legitimate

    business practices.\177\ The end-user clearing exception is available

    for swap transactions used to hedge or mitigate

    [[Page 71645]]

    commercial risk. When Congress inserted a general definition of bona

    fide hedging in CEA section 4a(c)(2), Congress did not include language

    that paralleled the end-user clearing exception; rather, Congress

    included different criteria for bona fide hedging transactions or

    positions.\178\ Accordingly, the Commission believes that the end-user

    exception's broader sweep, that the swap be used for ``hedg[ing] or

    mitigat[ing] commercial risk,'' is not appropriate for a definition of

    a bona fide hedging transaction.\179\

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

    \177\ See e.g., CL-FIA I supra note 21 at 15l and CL-EEI/EPSA

    supra note 21 at 15.

    \178\ The Commission notes that Congress also referred to

    positions held ``for hedging or mitigating commercial risk'' in the

    definition of major swap participant. CEA section 1a(33), 7 U.S.C.

    1a(33). Due to the nearly identical wording, the Commission has

    proposed to interpret this phrase in the implementation of the end-

    user exception in a near-identical manner in the further definition

    of major swap participant. CFTC, Notice of Proposed Rulemaking, End-

    User Exception to Mandatory Clearing of Swaps, 75 FR 80747, 80752-3,

    Dec. 23, 2010. In light of Congress's nearly identical use of this

    language in two separate provisions of the Dodd-Frank Act, but not

    within the definition of bona fide hedging, the Commission does not

    believe that Congress intended that the different wording in section

    4a(c)(2) should be interpreted in an identical manner to these

    differently worded provisions.

    \179\ Under the new statutory definition of a bona fide hedge,

    positions must meet the following requirements: (1) They must

    represent a substitute for transactions made or to be made or

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

    marketing channel; (2) they must be economically appropriate to the

    reduction of risk in the conduct and management of a commercial

    enterprise; and (3) the hedge must manage price risks associated

    with specific types of activities in the physical marketing channel

    (e.g., the production of commodity assets). CEA section 4a(c)(2), 7

    U.S.C. 6a(c)(2). The conditions for the end-user exception may

    overlap with the general statutory definition of bona fide hedging

    on one of the latter's three prongs. Similarly, the statutory

    direction to define bona fide hedging does address whether at least

    one counterparty is not a financial entity and does not address how

    one meets its financial obligations, which are conditions for

    claiming the end-user exception.

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

    Several commenters expressed concern that exemptions were not

    provided for arbitrage or spread positions in the list of enumerated

    bona fide hedges.\180\ Some commenters, such as ISDA/SIFMA, argued that

    the Commission should use its exemptive authority under CEA section

    4a(a)(7) to include an exemption for inter-commodity spread and

    arbitrage transactions, ``which reflect a relationship between two

    commodities rather than an outright directional position in the spread

    components * * *. Arbitrage and inter-commodity spreads do not raise

    the same price volatility concerns as outright positions. On the

    contrary, they constitute a standard investment practice that minimizes

    exposure while capturing inefficiencies in an established relationship

    and aiding price discovery in each contract.'' \181\

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

    \180\ See e.g., CL-CME I supra note 8 at 18; CL-Commercial

    Alliance I supra note 42 at 3, 7, 9, CL-ISDA/SIFMA supra note 21 at

    11; and CL-MFA supra note 21 at 18.

    \181\ CL-ISDA/SIFMA supra note 21 at 17.

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

    With regard to spread exemptions, under current Sec. 150.3(a)(3),

    a trader may use this exemption to exceed the single-month limit

    outside the spot month in a single futures contract or options thereon,

    but not to exceed the all-months limit in any single month. As

    explained in the proposal, the Commission proposed to set the single-

    month limit at the level of the all-months limit, making the ``spread''

    exemption no longer necessary. Since the final rule retains the

    individual-month limit at the same level as the all-months-combined

    limit, it remains unnecessary to extend an exemption to spread

    positions.

    With respect to the existing DCM arbitrage exemptions, under

    existing DCM rules a trader may receive an arbitrage exemption to the

    extent that the trader has offsetting positions at a separate trading

    venue. The Commission does not believe that it is necessary to provide

    for such an exemption from aggregate position limits because the

    Commission has eliminated class limits in these final rules for non-

    spot-month position limits. As such, a trader's offsetting positions

    among Referenced Contracts outside of the spot month, whether futures

    or economically-equivalent swaps, would be netted for purposes of

    applying the position limits and, therefore, there is no need for

    arbitrage exemptions. As discussed in further detail under II.N.3.

    below, however, the Commission has provided for an arbitrage exemption

    from DCM or SEF position limits under certain circumstances.

    With regard to inter-commodity spreads, traders would not be able

    to net such positions unless the positions fall within the same

    category of Referenced Contracts. However, a trader offsetting multiple

    risks in the physical marketing channel may be eligible for a bona fide

    hedging exemption. For example, a processor seeking to hedge the price

    risk associated with anticipated processing activity may receive bona

    fide hedging treatment for an inter-commodity spread economically

    appropriate to the reduction of its anticipated price risks under final

    Sec. 151.5(a)(ii)(C).

    As discussed above, the final rules retain the class limits within

    the spot-month. Otherwise, if a trader were permitted to claim an

    arbitrage exemption in the spot-month across physically-delivered and

    cash-settled spot-month class limits, then that trader would be able to

    amass an extraordinarily large long position in the physically-

    delivered Referenced Contract with an offsetting short position in a

    cash-settled Referenced Contract, effectively cornering the market at

    the entry prices to the contracts. In the proposal, the Commission

    asked whether it should grant a bona fide hedge exemption to an agent

    that is not responsible for the merchandising of the cash positions,

    but is linked to the production of the physical commodity, e.g., if the

    agent is the provider of crop insurance. Amcot recommended that the

    Commission deny exemptions to crop insurance providers.\182\ Similarly,

    Food and Water Watch questioned whether agents merely linked to

    production should be allowed to claim bona fide hedges.\183\ CME, in

    contrast, argued that extending the bona fide hedge exemption to these

    entities would be appropriate.\184\ The Commission notes that crop

    insurance providers and other agents that provide services in the

    physical marketing channel could qualify for a bona fide hedge of their

    contracts for services arising out of the production of the commodity

    underlying a Referenced Contract under Sec. 151.5(a)(2)(vii).

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

    \182\ CL-Amcot supra note 150 at 2.

    \183\ CL-FWW supra note 81 at 2.

    \184\ CL-CME I supra note 8 at 8.

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

    In response to comments, the Commission clarifies in the final rule

    that whether a transaction qualifies as a bona fide hedging transaction

    or position is determined without regard to whether the hedger's

    position would otherwise exceed applicable position limits.\185\

    Accordingly, a person who uses a swap to reduce risks attendant to a

    position that qualifies for a bona fide hedging transaction may pass-

    through those bona fides to the counterparty, even if the person's swap

    position is not in excess of a position limit.

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

    \185\ The Commission also notes that the bona fide hedge

    definition in new CEA section 4a(c)(2), 7 U.S.C. 6a(c)(2), deals

    with an entity's transaction and not the entity itself. As such, the

    Commission declines to provide bona fide hedge status to an entity

    without reference to the underlying transaction.

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

    Proposed Sec. 151.5(a)(2)(ii) stated that purchases of Referenced

    Contracts may qualify as bona fide hedges. However, the language in

    proposed Sec. 151.5(a)(2)(i) provided that sales of any commodity

    underlying Referenced Contracts may qualify as bona fide hedges.

    Existing Commission regulation 1.3(z) treats equally purchases and

    sales of futures contracts (and does not explicitly cover sales or

    purchases of any commodity

    [[Page 71646]]

    underlying). BGA requested that the Commission harmonize the perceived

    difference between the current and Proposed Rule texts.\186\ The

    Commission has deleted the phrase ``any commodity underlying'' from

    ``sales of any commodity underlying Referenced Contracts'' in Sec.

    151.5(a)(2)(i) in order to clarify that it does not intend to treat

    hedges involving the sales of Referenced Contracts any differently than

    hedges involving the purchases of Referenced Contracts.

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

    \186\ CL-BGA supra note 35 at 15. See also CL-FIA I supra note

    21 at 15; and CL-Morgan Stanley supra note 21 at 5.

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

    The Commission received many comments describing transactions that

    the commenters believed would not be covered by the Commission's

    proposed bona fide hedging provisions. Appendix B to part 151 has been

    added to list some of the transactions or positions that the Commission

    deems to qualify for the bona fide hedging exemption.\187\ The appendix

    includes an analysis of each fact pattern to assist market participants

    in understanding the enumerated hedging transactions in final Sec.

    151.5(a)(2). As discussed in section II.G.4. and provided for in Sec.

    151.5(a)(5), if any person is engaging in other risk-reducing practices

    commonly used in the market which the person believes may not be

    specifically enumerated above, such person may ask for relief regarding

    the applicability of the bona fide hedging exemption from the staff

    under Sec. 140.99 or the Commission under section 4a(a)(7) of the CEA.

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

    \187\ Many of these transactions were described in comment

    letters. See e.g., CL-Economists Inc. supra note 172 at 10-17; CL-

    Commercial Alliance I supra note 42 at 5-10; and CL-FIA I supra note

    21 at 14-15.

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

    Further, to provide transparency to the public, the Commission is

    considering publishing periodically general statistical information

    gathered from the bona fide hedging exemptions to inform the public of

    the extent of commercial firms' use of exemptions. This summary data

    may include the number of persons and extent to which such persons have

    availed themselves of cash-market, anticipatory, and pass-through-swaps

    bona fide hedge exemptions.

    2. Anticipatory Hedging

    As discussed in II.G.1. above, some commenters objected that

    proposed Sec. 151.5(a)(1) included the anticipated ownership or

    merchandising of an exempt or agricultural commodity, but such

    transactions were not included in the list of enumerated hedges.\188\

    Commenters pointed out that, while the statutory definition of bona

    fide hedging appears to contemplate hedges of asset price risk,\189\

    including royalty or volumetric production payments,\190\ hedges of

    liabilities or services,\191\ and anticipatory ownership and

    merchandising,\192\ these types of hedge transactions are not

    recognized among enumerated hedge transactions in the proposal.

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

    \188\ See e.g., CL-FIA I supra note 21 at 15; CL-BGA supra note

    35 at 14; CL-ISDA/SIFMA supra note 21 at 11; and CL-EEI/EPSA supra

    note 21 at 15.

    \189\ See CL-Commercial Alliance I supra note 42 at 3. See also

    CL-Bunge supra note 153 at 3-4 (describing ``enterprise hedging''

    needs arising from, inter alia, investments in operating assets and

    forward contract relationships with farmers and consumers that

    create timing mismatches between the cash flow associated with the

    physical commodity commitment and the hedge's cash flow).

    \190\ See e.g., CL-FIA I supra note 21 at 15.

    \191\ See e.g., CL-FIA I supra note 21 at 14; CL-Commercial

    Alliance I supra note 42 at 3; CL-BGA supra note 35 at 14; CL-ISDA/

    SIFMA supra note 21 at 11; and CL-EEI/EPSA supra note 21 at 14.

    \192\ See e.g., CL-FIA I supra note 21 at 15; CL-BGA supra note

    35 at 14; CL-ISDA/SIFMA supra note 21 at 11; and CL-EEI/EPSA supra

    note 21 at 15.

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

    In response to commenters, the Commission is expanding the list of

    enumerated hedging transactions to recognize, in final Sec. Sec.

    151.5(a)(2)(v)-(vii), the hedging of anticipated merchandising

    activity, royalty payments (a type of asset), and service contracts,

    respectively, under certain circumstances as discussed below in detail.

    The Commission has determined that the transactions fall within the

    statutory definition of bona fide hedging transactions and are

    otherwise consistent with the purposes of section 4a of the Act.

    The Commission had never recognized anticipated ownership and

    merchandising transactions as bona fide hedging transactions,\193\ due

    to its historical view that anticipatory ownership and merchandising

    transactions generally fail to meet the second ``appropriateness''

    prong of the Commission's definition of a bona fide hedging

    transaction, \194\ which requires that a hedge be economically

    appropriate and that it reduce risks in the conduct and management of a

    commercial enterprise. For example, a merchant may anticipate that it

    will purchase and sell a certain amount of a commodity, but has not

    acquired any inventory or entered into fixed-price purchase or sales

    contracts. Although the merchant may anticipate such activity, the

    price risk from merchandising activity is yet to be assumed and

    therefore a transaction in Referenced Contracts could not reduce this

    yet-to-be-assumed risk. Such a merchant would not meet the second prong

    of the bona fide hedging definition. To the extent that a merchant

    acquires inventory or enters into fixed-price purchase or sales

    contracts, the merchant would have established a position of risk and

    may meet the requirements of the second prong and the long-standing

    enumerated provisions to hedge those risks.

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

    \193\ The Commission historically has recognized a merchandising

    transaction as a bona fide hedge in the narrow circumstances of an

    agent responsible for merchandising a cash market position which is

    being offset. 17 CFR 1.3(z)(3).

    \194\ The ``appropriateness'' test was contained in Commission

    regulation 1.3(z)(1). Congress incorporated that provision in the

    new statutory definition in 4a(c)(2)(A)(ii), 7 U.S.C.

    6a(c)(2)(A)(ii).

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

    In response to comments, the Commission recognizes that in some

    circumstances, such as when a market participant owns or leases an

    asset in the form of storage capacity, the market participant could

    establish market positions to reduce the risk associated with returns

    anticipated from owning or leasing that capacity. In these narrow

    circumstances, the transactions in question may meet the statutory

    definition of a bona fide hedging transaction. However, to address

    Commission concerns about unintended consequences (e.g., creating a

    potential loophole that may result in granting hedge exemptions for

    types of speculative activity), the Commission will recognize

    anticipatory merchandising transactions as a bona fide hedge, provided

    the following conditions are met: (1) The hedger owns or leases storage

    capacity; (2) the hedge is no larger than the amount of unfilled

    storage capacity currently, or the amount of reasonably anticipated

    unfilled storage capacity during the hedging period; (3) the hedge is

    in the form of a calendar spread (and utilizing a calendar spread is

    economically appropriate to the reduction of risk associated with the

    anticipated merchandising activity) with component contract months that

    settle in not more than twelve months; and (4) no such position is

    maintained in any physical-delivery Referenced Contract during the last

    five days of trading of the Core Referenced Futures Contract for

    agricultural or metal contracts or during the spot month for other

    commodities.\195\ In addition, the anticipatory merchandiser must meet

    specific new filing requirements under Sec. 151.5(d)(1). As is the

    case with other anticipated hedges, the Commission clarifies in the

    final rule that such a hedge can only be maintained so long as

    [[Page 71647]]

    the trader is reasonably certain that he or she will engage in the

    anticipated merchandising activity.

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

    \195\ A specific example of this type of anticipated

    merchandising is described in Appendix B to the final rule.

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

    New Sec. Sec. 151.5(a)(2)(vi)-(vii) provide for royalty and

    services hedges that are available only if: (1) The royalty or services

    contract arises out of the production, manufacturing, processing, use,

    or transportation of the commodity underlying the Referenced Contract;

    and (2) the hedge's value is ``substantially related'' to anticipated

    receipts or payments from a royalty or services contract. Specific

    examples of what types of royalties or service contracts would comply

    with Sec. 151.5(a)(1) and would therefore be eligible as a basis for a

    bona fide hedge transaction are described in Appendix B to the final

    rule.

    Under proposed Sec. 151.5(c), the Commission also limited the

    availability of an anticipatory hedge to a period of one year after the

    request date, in contrast to proposed Sec. 151.5(a)(2), which only

    imposed this requirement for Referenced Contracts in agricultural

    commodities. Several commenters requested that the Commission expand

    the scope of anticipatory hedging to include hedging periods beyond one

    year.\196\ These commenters opined that limiting anticipatory hedging

    to one year may make sense in the agricultural context because the

    risks are typically associated with an annual crop cycle; however, this

    same analysis does not apply to other commodities, particularly for

    electricity generators, utilities, and other energy companies.\197\ For

    example, this restriction would be commercially unworkable for

    infrastructure projects that require multi-year hedges in order to

    secure financing.\198\

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

    \196\ CL-Cargill supra note 76 at 5; CL-FIA I supra note 21 at

    16; CL-AGA supra note 124 at 7-8; and CL-EEI/EPSA supra note 21 at

    5.

    \197\ See CL-EEI/EPSA supra note 21 at 18.

    \198\ See CL-FIA supra note 21 at 6; and CL-Morgan Stanley supra

    note 21 at 6.

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

    The Commission has amended the appropriate exemptions for

    anticipatory activities under Sec. 151.5(a)(2) to clarify that the

    one-year limitation for production, requirements, royalty rights, and

    service contracts applies only to Referenced Contracts in an

    agricultural commodity, except that a one-year limitation for

    anticipatory merchandising, applies to all Referenced Contracts.

    The Commission proposed in Sec. 151.5(a)(2)(i) to recognize the

    hedging of unsold anticipated production as an enumerated hedge. The

    Commission clarifies in the final rule that anticipated production

    includes anticipated agricultural production, e.g., the anticipated

    production of corn in advance of a harvest.

    3. Pass-Through Swaps

    In the proposal, the Commission explained that under CEA section

    4a(c)(2)(B), pass-through swaps are recognized as the basis for bona

    fide hedges if the swap was executed opposite a counterparty for whom

    the transaction would qualify as a bona fide hedging transaction

    pursuant to CEA section 4a(c)(2)(A). Further, a swap in a Referenced

    Contract may be used as a bona fide hedging transaction if that swap

    itself meets the requirements of CEA section 4a(c)(2)(A). CEA section

    4a(c)(2)(A) provides the general definition of a bona fide hedge

    transaction.

    Several commenters requested clarification concerning the so-called

    pass-through provision.\199\ For example, Cargill maintained that the

    rule is not clear on whether the non-hedging counterparty may claim a

    hedge exemption for the swap, and without such an exemption there would

    be less liquidity available to hedgers using swaps because potential

    counterparties would be subject to position limits for the swap

    itself.\200\

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

    \199\ See e.g., CL-Cargill supra note 76 at 6; and CL-FIA I

    supra note 21 at 17.

    \200\ See CL-Cargill supra note 76 at 6; and CL-EEI/EPSA supra

    note 21 at 17.

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

    The Commission clarifies through new Sec. 151.5(a)(3) (entitled

    ``Pass-through swaps'') that positions in futures or swaps Referenced

    Contracts that reduce the risk of pass-through swaps qualify as a bona

    fide hedging transaction. In response to comments regarding the bona

    fide hedging status of the pass-through swap itself, \201\ the

    Commission also clarifies that the non-bona-fide counterparty (e.g., a

    swap-dealer) may classify this swap as a bona fide hedging transaction

    only if that non-bona-fide counterparty enters risk reducing positions,

    including in futures or other swap contracts, which offset the risk of

    the pass-through swap. For example, if a person entered a pass-through

    swap opposite a bona fide hedger, either within or outside of the spot-

    month, that resulted in a directional exposure of 100 long positions in

    a Referenced Contract, that person could treat those 100 long positions

    as a bona fide hedging transaction only if that person also entered

    into 100 short positions to reduce the risk of the pass-through swap.

    Absent this restriction, a non-bona-fide counterparty could create a

    large speculative directional position in excess of limits simply by

    entering into pass-through swaps.

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

    \201\ See e.g., CL-Cargill supra note 76 at 6.

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

    The Commission notes that regardless of the bona fide status of the

    pass-through swap, outside of the spot-month the risk-reducing

    positions in a Referenced Contract will net with the positions from the

    pass-through swap. Similarly, within the spot-month, if the non-bona-

    fide counterparty to a pass-through swap reduces the risk of that swap

    with cash-settled Referenced Contracts, the risk reducing positions in

    cash-settled contracts would net with the pass-through swap for

    purposes of the spot-month position limit.

    Because the spot-month limits include class limits for physical-

    delivery futures contracts and cash-settled contracts, the bona fide

    hedging status of the pass-through swap would impact spot-month

    compliance if the non-bona-fide counterparty reduced the risk of the

    pass-through swap with physical-delivery futures contracts in the spot-

    month. However, as discussed above, so long as the risk of the pass-

    through swap is offset, these final rules would treat both the pass-

    through swap and the risk reducing positions as bona fide hedges. In

    this connection, the Commission notes that the non-bona-fide

    counterparty would still be subject to 151.5(a)(1)(v), and must exit

    the physical delivery futures contract in an orderly manner as the

    person ``lifts'' the hedge of the pass-through swap. Similarly, as with

    all transactions in Referenced Contracts, the person would be subject

    to the intra-day application of position limits. Therefore, as the

    person ``lifts'' the hedge of the pass-through swap, if the pass-

    through swap is no longer offset, only the extent of the pass-through

    swap that is offset would qualify as a bona fide hedge.

    The Commission clarifies through new Sec. 151.5(a)(4) (entitled

    ``Pass-through swap offsets'') that a pass-through swap position will

    be classified as a bona fide hedging transaction for the counterparty

    for whom the swap would not otherwise qualify as a bona fide hedging

    transaction pursuant to paragraph (a)(2) of this section (the ``non-

    hedging counterparty''), provided that the non-hedging counterparty

    purchases or sells Referenced Contracts that reduce the risks attendant

    to such pass-through swaps.

    Commenters also requested further clarity concerning proposed Sec.

    151.5(g), which set forth certain procedural requirements for pass-

    through swap counterparties. FIA and ISDA, for example, stated that it

    was unclear whether the pass-through provision is limited to

    transactions where the swap counterparty is relying on an exemption

    [[Page 71648]]

    to exceed the limits, and not simply entering a swap with a

    counterparty that is a bona fide hedger.\202\ Other commenters

    requested clarification as to whether the hedger must wait until all

    written communications have been exchanged before it can enter into a

    hedging transaction.\203\ According to these commenters, such a

    requirement could delay entering a swap for hours if not days,\204\

    forcing the hedger to assume the risk of price changes during the

    period between when it enters the swap and when the parties complete

    the written documentation process.\205\ Finally, commenters believed

    the rule was unclear on the type of representation that must be

    provided by an end-user and may be relied upon by dealers.\206\

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

    \202\ See e.g., CL-FIA I supra note 21 at 19; and CL-ISDA/SIFMA

    supra note 21 at 10.

    \203\ See CL-FIA I supra note 21 at 18.

    \204\ See CL-EEI/EPSA supra note 21 at 17.

    \205\ See CL-FIA I supra note 21 at 19.

    \206\ See e.g., CL-BGA supra note 35 at 16.

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

    Some commenters recommended a less-costly verification regime that

    would allow parties to rely upon a one-time representation concerning

    eligibility for the bona fide hedging exemption.\207\ ISDA/SIFMA also

    argued that the Commission should confirm the bona fide hedger status

    of a party in order to prevent, among other things, unwarranted

    disclosure of confidential information from an end-user to a

    dealer.\208\ Further, ISDA/SIFMA argued that the determination should

    be on an entity-by-entity basis, and not on a transaction-by-

    transaction basis, in order to promote certainty for bona fide hedgers

    and their swap counterparties.\209\ BGA argued that the proposal to

    require a dealer to continuously monitor whether the underlying swap

    continues to offset the cash commodity risk of the hedging counterparty

    would result in significant and costly burdens on end-users and other

    hedgers.\210\

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

    \207\ See e.g., CL-EEI/EPSA supra note 21 at 17; CL-ISDA/SIFMA

    supra note 21 at 12; and CL-FIA I supra note 21 at 19.

    \208\ See CL-ISDA/SIFMA supra note 21 at 13.

    \209\ See id.

    \210\ See e.g., CL-BGA supra note 35 at 17; and ISDA/SIFMA supra

    note 21 at 12.

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

    In response to these comments, the Commission has determined to

    reduce the burden of claiming a pass-through swap exemption. Under new

    Sec. 151.5(i), in order to rely on a pass-through exemption, a

    counterparty would be required to obtain from its counterparty a

    representation that the swap, in its good-faith belief, would qualify

    as an enumerated hedge under Sec. 151.5(a)(2). Such representation

    must be provided at the inception (i.e., execution) of the swap

    transaction and the parties to the swap must keep records of the

    representation. This representation, which may be made in a trade

    confirmation, must be kept for a period of at least two years following

    the expiration of the swap and furnished to the Commission upon

    request.

    Deutsche Bank also requested clarification as to whether the

    immediate counterparty to the swap must be a bona fide hedger or

    whether the Commission will look to a series of transactions to

    determine if it was connected to a bona fide hedger.\211\ Deutsche Bank

    argued that given the complexity of the swaps marketplace, market

    participants often hedge their risk through multiple combinations of

    intermediaries; hence, the Commission should not require that the

    immediate counterparty be a bona fide hedger, but rather part of a

    network of transactions connected to a bona fide hedger.\212\

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

    \211\ See CL-DB supra note 153 at 8.

    \212\ See id. Barclays similarly noted that it should not matter

    whether the original holder of a pass-through swap risk manages the

    risk itself or asks another to manage it for them and that overall

    systemic risk would increase if risk transfer is made more

    difficult. CL-Barclays I supra note 164 at 4.

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

    The Commission rejects extending the pass-through exemption to a

    series of swap transactions. Rather, consistent with this Congressional

    direction, a pass-through swap will be recognized as a bona fide hedge

    only to the extent it is executed opposite a counterparty eligible to

    claim an enumerated hedge exemption.\213\

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

    \213\ See CEA section 4a(c)(2)(B)(i), 7 U.S.C. 6a(c)(2)(B)(i).

    The Commission notes that the same restrictions on holding a

    position in the spot month or the last five days of trading of

    physical-delivery Core Referenced Futures Contracts that would apply

    to the swap counterparty with the underlying bona fide risk also

    apply to the holder of the pass-through swap. For example, if a swap

    dealer enters into a crude oil swap with an anticipatory production

    hedger, then it would be subject to the same restrictions on holding

    the hedge of that pass-through swap into the spot month of the

    appropriate physical-delivery Referenced Contract.

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

    The Commission clarifies that the pass-through swap exemption will

    allow non-hedging counterparties to such swaps to offset non-Referenced

    Contract swap risk in Referenced Contracts.\214\

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

    \214\ For example, Company A owns cash market inventory in a

    non-Referenced Contract commodity and enters into a Swap N with Bank

    B. Swap N would be an enumerated bona fide hedging transaction for

    Company A under the rules of a DCM or SEF. Because Swap N is not a

    Referenced Contract, Bank B does include Swap H in measuring

    compliance with position limits. However, Bank B, as is economically

    appropriate, may enter into a cross-commodity hedge to reduce the

    risk associated with Swap N. That risk reducing transaction is a

    bona fide hedging transaction for Bank B.

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

    Some commenters recommended that the Commission exclude inter-

    affiliate swaps from any calculation of a trader's position for

    position limit compliance purposes.\215\ API, for example, argued that

    swaps among affiliates would have no net effect on the positions of

    affiliated entities and the final rule should therefore make it clear

    that the Commission will not consider such swaps for purposes of

    position limits.\216\ API commented further that this approach would be

    consistent with the Commission's treatment of inter-affiliate swaps in

    other proposed rulemakings, for example, the proposed rulemaking

    further defining, inter alia, swap dealer.\217\

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

    \215\ CL-COPE supra note 21 at 13; CL-API supra note 21 at 11;

    CL-Shell supra note 35 at 4-5; and CL-WGCEF supra note 35 at 23.

    \216\ CL-API supra note 21 at 11.

    \217\ Id.

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

    In light of the structure of the aggregation rules regarding the

    treatment of a single person or a group of entities under common

    ownership or control, as provided for under Sec. 151.7, the Commission

    has introduced Sec. 151.5(b). This subsection clarifies that entities

    required to aggregate accounts or positions under Sec. 151.7 shall be

    considered the same person for the purpose of determining whether a

    person or persons are eligible for a bona fide hedge exemption under

    Sec. 151.5(a) to the extent that such positions are attributed among

    these entities. The Commission's intention in introducing new Sec.

    151.5(b) is to make the aggregation and bona fide hedging provisions of

    part 151 consistent. For example, a holding company that owns a

    sufficient amount of equity in an operating company would need to

    aggregate the operating company's positions with those of the holding

    company in order to determine compliance with position limits.

    Commission regulation 151.5(b) would clarify that the holding company

    could enter into bona fide hedge transactions related to the operating

    company's cash market activities, provided that the operating company

    has itself not entered into such hedge transactions with another person

    with whom it is not aggregated (i.e., the holding company's hedge

    activity must comply with the appropriateness requirement of Sec.

    151.5(a)(1)). Appendix B to the final regulations provides an

    illustrative example as to how this provision would operate.

    4. Non-Enumerated Hedges

    Many of the commenters objecting to the proposed definition of bona

    fide

    [[Page 71649]]

    hedging requested that the Commission reintroduce a process for

    claiming non-enumerated hedging exemptions.\218\ The Working Group of

    Commercial Energy Firms (``Working Group''), for example, argued that

    the Commission should maintain its current flexibility and preserve its

    ability to allow exemptions.\219\ FIA commented further that such a

    provision is expressly authorized under CEA section 4a(a)(7).\220\ The

    Commission has considered the comments and has expanded the list of

    enumerated hedge transactions, consistent with the statutory definition

    of bona fide hedging.

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

    \218\ See e.g., CL-FIA I supra note 21 at 15; CL-EEI/EPSA supra

    note 21 at 15; CL-CME I supra note 8 at 19; CL-Morgan Stanley supra

    note 21 at 6; and CL-WGCEF supra note 35 at 5. It should be noted,

    however, that at least 184 comment letters opined that the

    Commission should define the bona fide hedge exemption ``in the

    strictest sense possible'' and that ``[b]anks, hedge funds, private

    equity and all passive investors in commodities should not be deemed

    as bona fide hedgers.''

    \219\ CL-WGCEF supra note 35 at 5.

    \220\ CL-FIA I supra note 21 at 15.

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

    In response to questions raised by commenters, the Commission notes

    that market participants may request interpretive guidance (under Sec.

    140.99(a)(3)) regarding the applicability of any of the provisions of

    this part, including whether a transaction or class of transactions

    qualify as enumerated hedges under Sec. 151.5(a)(2). Market

    participants may also petition the Commission to amend the current list

    of enumerated hedges or the conditions therein. Such a petition should

    set forth the general facts surrounding such class of transactions, the

    reasons why such transactions conform to the requirements of the

    general definition of bona fide hedging in Sec. 151.5(a)(1), and the

    policy purposes furthered by the recognition of this class of

    transactions as the basis for enumerated bona fide hedges.

    5. Portfolio Hedging

    Some commenters requested clarification as to whether the new bona

    fide hedging exemption would require one-to-one tracking, and argued

    that portfolio hedging should be allowed because the combination of

    hedging instruments, such as futures, swaps and options, generally

    cannot be individually identified to particular physical

    transactions.\221\ Some of these commenters argued that if the

    Commission does not permit portfolio hedging, the requirement to one-

    to-one track physical commodity transactions with corresponding hedge

    transactions will increase risk by preventing end-users from

    effectively hedging their commercial exposure.\222\

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

    \221\ See e.g., CL-Cargill supra note 76 at 2-3; CL-BGA supra

    note 35 at 15; and CL-ISDA/SIFMA supra note 21 at 10-11.

    \222\ See e.g., CL-BGA supra note 35 at 15.

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

    The Commission notes that the final Sec. 151.5(a)(2) provides for

    bona fide hedging transactions and positions. The Commission intends to

    allow market participants either to hedge their cash market risk on a

    one-to-one transactional basis or to combine the risk associated with a

    number of enumerated cash market transactions in establishing a bona

    fide hedge, provided that the hedge is economically appropriate to the

    reduction of risk in the conduct and management of a commercial

    enterprise, as required under Sec. 151.5(a)(1)(ii). The Commission has

    clarified this intention by adding after ``potential change in the

    value of'' in Sec. 151.5(a)(1)(iii) the phrase ``one or several.''

    \223\

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

    \223\ Similarly, and in light of comments, the Commission has

    elected not to adopt proposed Sec. 151.5(j) in recognition of the

    confusion this provision could have caused to market participants

    who hedge on a portfolio basis and to reduce the burden of requiring

    a continuing representation of bona fides by the swap counterparty.

    The proposed Sec. 151.5(j) provided that a party to a swap opposite

    a bona fide hedging counterparty could establish a position in

    excess of the position limits, offset that position, and then re-

    establish a position in excess of the position limits, so long as

    the swap continued to offset the cash market commodity risk of a

    bona fide hedging counterparty.

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

    6. Restrictions on Hedge Exemptions

    Proposed Sec. 151.5(a)(2)(v) generally followed the Commission's

    existing agricultural commodity position limits regime, which restricts

    cross-commodity hedge transactions from being classified as a bona fide

    hedge during the last five days of trading on a DCM.\224\ Some

    commenters recommended that the Commission eliminate this prohibition,

    otherwise market participants will have to assume risks during that

    time period instead of shifting risks to those willing to assume

    them.\225\ According to the FIA, unhedged risk, such as a commercial

    company unable to hedge jet fuel price exposure with heating oil

    futures or swap contracts in the last five days of trading, would

    reduce market liquidity and increase the risk of operating a commercial

    business.\226\ Further, ISDA opined that the Commission did not

    adequately justify the purpose of applying a prohibition from the

    Commission's agricultural commodity position limits to other

    commodities.\227\

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

    \224\ See Sec. 1.3(z)(2)(iv). In the proposal, anticipatory

    hedge transactions could not be held during the five last trading

    days of any Referenced Contract. This restriction has been clarified

    to be aligned with the trading calendar of the Core Referenced

    Futures Contract and applies to all anticipatory transaction hedges.

    \225\ See e.g., CL-FIA I supra note 21 at 16l and CL-ISDA/SIFMA

    supra note 21 at 11.

    \226\ See CL-FIA I supra note 21 at 16.

    \227\ See CL-ISDA/SIFMA supra note 21 at 11.

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

    The Commission recognizes the restriction on holding cross-

    commodity hedges in the last five days of trading may increase tracking

    risk if the trader were forced out of the Referenced Contract into a

    lesser correlated contract, or into a deferred contract month that was

    less correlated with the relevant cash market risk than the spot month.

    However, the Commission also continues to believe that such cross-

    commodity hedges are not appropriately recognized as bona fide in the

    physical-delivery contracts in the last five days of trading for

    agricultural and metal Referenced Contracts or the spot month for

    energy Referenced Contracts since the trader does not hold the

    underlying commodity for delivery against, or have a need to take

    delivery on, the underlying commodity The Commission agrees with the

    comments regarding the elimination of the restriction on holding a

    cross-commodity hedge in cash-settled contracts during the last five

    days of trading for agricultural and metal contracts and the spot month

    for other contracts and has relaxed this restriction for hedge

    positions established in cash-settled contracts. Under the final rules,

    traders may maintain their cross-commodity hedge positions in a cash-

    settled Referenced Contract through the final day of trading.

    The Commission received a number of comments on similar

    restrictions proposed to apply to other enumerated hedge

    transactions.\228\ The National Milk Producers Federation, for example,

    argued that the restriction on holding a hedge position through the

    last days of trading for cash-settled contracts should be eliminated

    because if a trader carried positions through the last days of trading

    in a cash-settled contract then it could not impact the orderly

    liquidation of the market.\229\

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

    \228\ See e.g., CL-Commercial Alliance I supra note 42 at 9; and

    National Milk Producers Federation (``NMPF'') on July 25, 2011

    (``CL-NMPF'') at 3-4.

    \229\ CL-NMPF, supra note 228 at 3-4.

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

    In response to these comments, the Commission has eliminated all

    restrictions on holding a bona fide hedge position for cash-settled

    contracts and narrowed the restriction on holding a bona fide hedge

    position in physical-delivery contracts. Specifically, a bona fide

    hedge position for anticipatory hedges for production, requirements,

    merchandising, royalty rights, and service contract, and unfixed-price

    calendar spread risk hedges

    [[Page 71650]]

    (Sec. 151.5(a)(2)(iii), and, as discussed above, cross-commodity

    hedges in all bona fide hedge circumstances will not retain bona fide

    hedge status if held, for physical-delivery agricultural and metal

    contracts, in the last five trading days and in the spot month for all

    other physical-delivery contracts. The Commission has modified the

    Proposed Rule in recognition of potential circumstances where

    inefficient hedging would be required if the restriction were

    maintained as proposed, the reduced concerns with a negative impact on

    the market of maintaining such a hedge if held in a cash-settled

    contract (as opposed to a physical-delivery contract), and a generally

    cautious approach to imposing new restrictions on the ability of

    traders active in the physical marketing channel to enter into cash-

    settled transactions to meet their hedging needs.

    7. Financial Distress Exemption

    Some commenters requested that the Commission introduce an

    exemption for market participants in financial distress scenarios.

    Morgan Stanley, for example, commented that during periods of financial

    distress, it may be beneficial for a financially sound entity to assume

    the positions (and corresponding risk) of a less stable market

    participant.\230\ Morgan Stanley argued that not providing for an

    exemption in these types of situations could reduce liquidity and

    increase systemic risk. Similarly, Barclays argued that the Commission

    should preserve the flexibility to accommodate situations involving,

    for example, the exit of a line of business by an entity, a customer

    default at a futures commission merchant (``FCM''), or in the context

    of potential bankruptcy.\231\

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

    \230\ CL-Morgan Stanley supra note 21 at 16.

    \231\ CL-Barclays I supra note 164 at 5.

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

    In recognition of the public policy benefits of including such an

    exemption, the Commission has provided, in Sec. 151.5(j), for an

    exemption for situations involving financial distress. The Commission's

    authority to provide for this exemption is derived from CEA section

    4a(a)(7).\232\ In this regard, the Commission clarifies that this

    exemption for financial distress situations does not establish or

    otherwise represent a form of hedging exemption.

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

    \232\ New CEA section 4a(a)(7) provides that the Commission may

    ``by rule, regulation, or order * * * exempt * * * any person or

    class of persons'' from any requirement it may establish under

    section 4a. 7 U.S.C. 6a(a)(7). This provision requires that any

    exemption, general or bona fide, to position limits granted by the

    Commission, be done by Commission action.

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

    8. Filing Requirements

    Under the proposal, once an entity's total position exceeds a

    position limit, the entity must file daily reports on Form 404 for cash

    commodity transactions and corresponding hedge transactions and on Form

    404S for information on swaps used for hedging.\233\ Several commenters

    argued that bona fide hedgers should only be required to file monthly

    reports to the Commission because daily reporting is onerous and

    unnecessary.\234\ In addition, the commenters pointed out that daily

    reporting will also be costly for the Commission,\235\ and argued that

    the Commission should instead utilize its special call authority on top

    of monthly reporting to ensure that it has sufficient information.\236\

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

    \233\ See Sec. Sec. 151.5(b) and (d).

    \234\ See e.g., CL-Cargill supra note 76 at 3; CL-FIA I supra

    note 21 at 20; CL-Commercial Alliance I supra note 42 at 3-4; CL-BGA

    supra note 35 at 17; CL-EEI/EPSA supra note 21 at 15-16; and CL-

    Utility Group supra note 21 at 14. See also CL-ISDA/SIFMA supra note

    21 at 12 (opposing daily reporting).

    \235\ See CL-FIA I supra note 21 at 21; and CL-ISDA/SIFMA supra

    note 21 at 12.

    \236\ See e.g., CL-Cargill supra note 76 at 4.

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

    The Commission has determined to address these concerns by

    requiring that a trader file a Form 404 three business days following

    the day that a position limit is exceeded and thereafter file daily

    data on a monthly basis. These monthly reports would, under Sec.

    151.5(c)(1), provide cash market positions for each day that the trader

    exceeded the position limits during the monthly reporting period. This

    amendment would reduce the filing burden on market participants. The

    Commission believes the monthly reports, though less timely, would

    generally provide information sufficient to determine a trader's daily

    compliance with position limits, without requiring a trader to file

    additional information under a special call or, as discussed below,

    follow-up information on his or her notice filings. The Commission has

    also reduced the filing burden by allowing all such reports of cash

    market positions to be filed by the third business day following the

    day that a position limit is exceeded, rather than on the next business

    day.

    Final Sec. 151.5(d) asks for information relevant to the three new

    anticipatory hedging exemptions--for merchandising, royalties, and

    services contracts--that would be helpful for the Commission in

    evaluating the validity of such claims. For anticipated merchandising

    hedge exemptions, the Commission is most interested in understanding

    the storage capacity relating to the anticipated and historical

    merchandising activity. For anticipated royalty hedge exemptions, the

    Commission is interested in understanding the basis for the projected

    royalties. For anticipated services, the Commission is interested in

    understanding what types of service contracts have given rise to the

    trader's anticipated hedging exemption request.

    The Commercial Alliance recommended that Form 404A filings for

    anticipatory hedgers be modified to require descriptions of activity,

    as opposed to calling for the submission of data reflecting a one-for-

    one correlation between an anticipated market risk and a hedge

    position.\237\ The Commercial Alliance stated that companies are not

    managed in this manner and the data could not be collated and provided

    to the Commission in this way.\238\ The Commercial Alliance provided

    recommended amendments to the requirements for Form 404A filers to

    reflect that information concerning anticipated activities would be

    appropriate to justify a hedge position, in accordance with regulations

    151.5(a)(1) and (a)(2).

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

    \237\ Commercial Alliance (``Commercial Alliance II'') on July

    20, 2011 (``CL-Commercial Alliance II '') at 1.

    \238\ Id.

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

    The Commission agrees with many of the Commercial Alliance's

    suggestions. For example, Sec. 151.5(c)(2) closely tracks the

    Commercial Alliance's suggested language revisions. The information

    required by this section should allow the Commission to understand

    whether the trader's bona fide hedging activity complies with the

    requirements of Sec. 151.5(a)(1). Final Sec. 151.5(c)(2) clarifies

    that the 404 filing is a notice filing made effective upon submission.

    Many commenters opined that the application and approval process

    for receiving an anticipatory hedge exemption set forth in proposed

    Sec. 151.5(c) would impose an unnecessary compliance burden on

    hedgers.\239\ In response to such comments, the Commission has amended

    the process for claiming an anticipatory hedge in Sec. 151.5(d)(2) to

    allow market participants to claim an exemption by notice filing. The

    notice must be filed at least ten days in advance of the date the

    person expects to exceed the position limits and is effective after

    that ten-day period unless so notified by the Commission.

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

    \239\ See e.g., CL-ICE I supra note 69 at 12; and CL-WGCEF supra

    note 35 at 2-3.

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

    In response to commenters seeking greater procedural certainty for

    obtaining bona fide hedge

    [[Page 71651]]

    exemptions,\240\ Sec. 151.5(e) clarifies the conditions of the

    Commission's review of 404 and 404A notice filings submitted under

    Sec. Sec. 151.5(c) and 151.5(d), respectively. Traders submitting

    these filings may be notified to submit additional information to the

    Commission in order to support a determination that the statement filed

    complies with the requirements for bona fide hedging exemptions under

    paragraph (a) of Sec. 151.5.

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

    \240\ See e.g., CL-WGCEF supra note 35 at 2-3.

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

    H. Aggregation of Accounts

    The proposed part 151 regulations would significantly alter the

    existing position aggregation rules and exemptions currently available

    in part 150. Specifically, the aggregation standards under proposed

    Sec. 151.7 would eliminate the independent account controller

    (``IAC'') exemption under Sec. 150.3(a)(4), restrict many of the

    disaggregation provisions currently available under Sec. 150.4, and

    create a new owned-financial entity exemption. The proposal would also

    require a trader to aggregate positions in multiple accounts or pools,

    including passively-managed index funds, if those accounts or pools

    have identical trading strategies. Lastly, disaggregation exemptions

    would no longer be available on a self-executing basis; rather, an

    entity seeking an exemption from aggregation would need to apply to the

    Commission, with the relief being effective only upon Commission

    approval.\241\

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

    \241\ The Commission did not propose any substantive changes to

    existing Sec. 150.4(d), which allows an FCM to disaggregate

    positions in discretionary accounts participating in its customer

    trading programs provided that the FCM does not, among other things,

    control trading of such accounts and the trading decisions are made

    independently of the trading for the FCM's other accounts. As

    further described below, however, the FCM disaggregation exemption

    would no longer be self-executing; rather, such relief would be

    contingent upon the FCM applying to the Commission for relief.

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

    Some commenters supported the proposed aggregation standards,

    contending that the revised standards would enhance the Commission's

    ability to monitor and enforce position limits by preventing

    institutional investors, including hedge funds, from evading

    application of position limits by creating multiple smaller investment

    funds.\242\ However, many of the commenters on the account aggregation

    rules objected to the change in the aggregation policy and, in

    particular, the proposed elimination of the IAC exemption.\243\

    Generally, these commenters expressed concern that the proposed

    aggregation standards would result in an inappropriate aggregation of

    independently controlled accounts, potentially cause harmful

    consequences to investors and investment managers, and potentially

    reduce liquidity in the commodities markets.

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

    \242\ See e.g., CL-PMAA/NEFI supra note 6 at 16-17; CL-Prof.

    Greenberger supra note 6 at 18; CL-AFR supra note 17 at 8; and CL-

    FWW supra note 81 at 16.

    \243\ See e.g., CL-FIA I supra note 21; CL-Commercial Alliance

    II supra note 237 at 1; CL-DB supra note 153 at 6; CL-CME I supra

    note 8 at 15-16; ICI supra note 21 at 8; CL-BlackRock supra note 21

    at 9; New York City Bar Association--Committee on Futures and

    Derivatives (``NYCBA'') on April 11, 2011 (``CL-NYCBA'') at 2; and

    CL-SIFMA AMG supra note 21 at 10. One commenter did ask that the

    Commission allow for a significant amount of time for an orderly

    transition from the IAC to the more limited account aggregation

    exemptions in the proposed rules. See CL-Cargill supra note 76 at 7.

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

    In response to comments, the Commission is adopting the proposed

    aggregation standard, with modifications as discussed below. In brief,

    the final rules largely retain the provisions of the existing IAC

    exemption and pool aggregation standards under current part 150. The

    final rules reaffirm the Commission's current requirements to aggregate

    positions that a trader owns in more than one account, including

    accounts held by entities in which that trader owns a 10 percent or

    greater equity interest. Thus, for example, a financial holding company

    is required to aggregate house accounts (that is, proprietary trading

    positions of the company) across all wholly-owned subsidiaries.

    1. Ownership or Control Standard

    Under proposed Sec. 151.7, a trader would be required to aggregate

    all positions in accounts in which the trader, directly or indirectly,

    holds an ownership or equity interest of 10 percent or greater, as well

    as accounts over which the trader controls trading.\244\ The Proposed

    Rule also treats positions held by two or more traders acting pursuant

    to an express or implied agreement or understanding the same as if the

    positions were held by a single trader.

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

    \244\ In this regard, the Commission interprets the ``hold'' or

    ``control'' criterion as applying separately to ownership of

    positions and to control of trading decisions.

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

    As proposed, a trader also would be required to aggregate interests

    in funds or accounts with identical trading strategies. Proposed Sec.

    151.7 would require a trader to aggregate any positions in multiple

    accounts or pools, including passively-managed index funds, if those

    accounts or pools had identical trading strategies. The Commission is

    finalizing this provision as proposed.\245\

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

    \245\ Barclays requested that, in light of the fundamental

    changes to the aggregation policy, the Commission should reconsider

    the 10 percent ownership standard. Specifically, Barclays stated

    that the ownership test should be tied to a ``meaningful actual

    economic interest in the result of the trading of the positions in

    question,'' and that 10 percent ownership, in absence of control, is

    no longer a ``viable'' standard. See CL-Barclays I supra note 164 at

    3. In view of the fact that the Commission is finalizing the

    aggregation provisions with modifications to the proposal that will

    substantially address the concerns of the comments, the Commission

    has determined to retain the long-standing 10 percent ownership

    standard that has worked effectively to date. In response to a point

    raised by Commissioner O'Malia in his dissent, the Commission

    clarifies that it will continue to use the 10 percent ownership

    standard and apply a 100 percent position aggregation standard, and

    therefore will not adopt Barclays' recommendation that ``only an

    entity's pro rata share of the position that are actually controlled

    by it or in which it has ownership interest'' be aggregated. Id. at

    3. In the future, the Commission may reconsider whether to adopt

    Barclays' recommendation.

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

    2. Independent Account Controller Exemption

    The Commission proposed to eliminate the IAC exemption in part 150.

    Numerous commenters asserted that the Commission failed to provide a

    reasoned explanation for the departure from its long-standing exception

    from aggregation for independently controlled accounts.\246\ These

    commenters also asserted that the elimination of the IAC exemption

    would force aggregation of accounts that are under the control of

    independent managers subject to meaningful information barriers and,

    hence, do not entail risk of coordinated excessive speculation or

    market manipulation.\247\ Morgan Stanley asserted that the rationale

    for permitting disaggregation for separately controlled accounts is

    that ``the correct application of speculative position limits hinges on

    attributing speculative positions to those actually making trading

    decisions for a particular account.'' \248\ In absence of the IAC

    [[Page 71652]]

    exemption, commenters further noted that otherwise independent trading

    operations would be required to communicate with each other as to their

    trading positions so as to avoid violating position limits, raising the

    risk for concerted trading.\249\

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

    \246\ See e.g., CL-FIA I supra note 21 at 22-23; CL-CME I supra

    note 8 at 15; and CL-CMC supra note 21 at 4; CL-ISDA/SIFMA supra

    note 21 at 14-16; CL-Katten supra note 21 at 3; CL-MFA supra note 21

    at 13; CL-Morgan Stanley supra note 21 at 7; CL-NYCBA supra note 243

    at 2; Barclays Capital (``Barclays II'') on June 14, 2011 (``CL-

    Barclays II'') at 1; and U.S. Chamber of Commerce (``USCOC'') on

    March 28, 2011 (``CL-USCOC'') at 6.

    \247\ See e.g., CL-CME I supra note 8 at 15; CL-ICI supra note

    21 at 9; CL-BlackRock supra note 21 at 4, 9; CL-Katten supra note 21

    at 3; CL-ISDA/SIFMA supra note 21 at 14; CL-AIMA supra note 35 at 5-

    6; DB Commodity Services LLC (``DBCS'') on March 28, 2011 (``CL-

    DBCS'') at 7; and CL-Barclays I supra note 164 at 2.

    \248\ CL-Morgan Stanley supra note 21 at 7. Morgan Stanley added

    that the resulting inability to disaggregate separately controlled

    accounts of its various affiliates will have ``[a] significantly

    adverse effect on Morgan Stanley's ability to provide risk

    management services to its clients and will reduce market

    liquidity.''

    \249\ See e.g., CL-MFA supra note 21 at 13.

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

    The Commission has carefully considered the views expressed by

    commenters and has determined to retain the IAC exemption largely as

    currently in effect, with clarifications to make explicit the

    Commission's long-standing position that the IAC exemption is limited

    to client positions, that is, only to the extent one trades

    professionally for others can one avail him or herself of this IAC

    exemption. Such a person has a fiduciary relationship to those clients

    for whom he or she trades.\250\ Accordingly, eligible entities may

    continue to rely upon the IAC exemption to disaggregate client

    positions held by an IAC. This means that the IAC exemption does not

    extend to proprietary positions in accounts which a trader owns.

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

    \250\ See e.g., 56 FR 14308, 14312 (Apr. 9, 1991) (clarifying,

    among other things, that the IAC exemption is limited to those who

    trade professionally for others, and who have a fiduciary

    relationship to those for whom they trade).

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

    After reviewing the comments in connection with the terms of the

    proposal, the Commission believes that retaining the IAC exemption for

    independently managed client accounts is in accord with the purposes of

    the aggregation policy. The fundamental rationale for the aggregation

    of positions or accounts is the concern that a single trader, through

    common ownership or control of multiple accounts, may establish

    positions in excess of the position limits and thereby increase the

    risk of market manipulation or disruption. Such concern is mitigated in

    circumstances involving client accounts managed under the discretion

    and control of an independent trader and subject to effective

    information barriers. The Commission also recognizes the wide variety

    of commodity trading programs available for market participants. To the

    extent that such accounts and programs are traded independently and for

    different purposes, such trading may enhance market liquidity for bona

    fide hedgers and promote efficient price discovery.

    Under the current IAC exemption provision, an eligible entity,

    which includes banks, CPOs, commodity trading advisors (``CTAs''), and

    insurance companies, may disaggregate customer positions or accounts

    managed by an IAC from its proprietary positions (outside of the spot

    months), subject to the conditions specified therein. Specifically, an

    IAC must trade independently of the eligible entity and of any other

    IAC trading for the eligible entity and have no knowledge of trading

    decisions by any other IAC.\251\

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

    \251\ If the IAC is affiliated with the eligible entity or

    another IAC trading on behalf of the eligible entity, each of the

    affiliated entities must, among other things, maintain written

    procedures to preclude them from having knowledge of, or gaining

    access to data about trades of the other, and each must trade such

    accounts pursuant to separately developed and independent trading

    systems. See Sec. 150.3(a)(4)(i).

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

    A central feature of the IAC exemption is the requirement that the

    IAC trades independently of the eligible entity and of any other IAC

    trading for the eligible entity. The determination of whether a trader

    exercises independent control over the trading decisions of the

    customer discretionary accounts or trading programs within the meaning

    of the IAC exemption must be decided case-by-case based on the

    particular underlying facts and circumstances. In this respect, the

    Commission will look to certain factors or indicia of control in

    determining whether a trader has control over certain positions or

    accounts for aggregation purposes.\252\

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

    \252\ 64 FR 33839, Jun. 13, 1979 (``1979 Aggregation Policy

    Statement''). In that release, the Commission provided certain

    indicia of independence, which included appropriate screening

    procedures, separate registration and marketing, and a separate

    trading system.

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

    A non-exclusive list of such indicia of control includes existence

    of a proper firewall separating the trading functions of the IAC and

    the eligible entity. That is, the Commission will consider, in

    determining whether the IAC trades independently, the degree to which

    there is a functional separation between the proprietary trading desk

    of the eligible entity and the desk responsible for trading on behalf

    of the managed client accounts. Similarly, the Commission will consider

    the degree of separation between the research functions supporting a

    firm's proprietary trading desk and the client trading desk. For

    example, a firm's research information concerning fundamental demand

    and supply factors and other data may be available to an IAC who

    directs trading for a client account of the firm. However, specific

    trading recommendations of the firm contained in such information may

    not be substituted for independently derived trading decisions. If the

    person who directs trading in an account regularly follows the trading

    suggestions disseminated by the firm, such trading activity will be

    evidence that the account is controlled by the firm. In the absence of

    a proper firewall separating the trading or research functions, among

    other things, an eligible entity may not avail itself of the IAC

    exemption.

    3. Exemptions From Aggregation

    Several commenters expressed concern that forced aggregation of

    independently controlled and managed accounts would effectively require

    independent trading operations of commonly-owned entities to coordinate

    trading activities and commercial hedging opportunities, in potential

    violation of contractual and legal obligations, such as FERC affiliate

    rules,\253\ bank regulatory restrictions, and antitrust

    provisions.\254\ Some commenters also asserted that asset managers and

    advisers may be required to violate their fiduciary duty to clients by

    sharing confidential information with third parties, and which could

    also lead to anti-competitive activity if two unrelated entities, such

    as competitors in a joint-venture, are required to share such

    confidential information.\255\ FIA also added that a company with an

    affiliate underwriter may not be aware that its affiliate has acquired

    a temporary, passive interest in another company trading commodities.

    Under the aggregation proposal, the first company would be required to

    share trading information with a temporary affiliate. In such instance,

    FIA concludes, the cost of aggregation ``greatly outweighs the

    unarticulated regulatory benefits.'' \256\

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

    \253\ See e.g., CL-FIA I supra note 21 at 23-24; CL-EEI/ESPA

    supra note 21 at 20; CL-ISDA/SIFMA supra note 21 at 16; and CL-AGA

    supra note 124 at 9.

    \254\ See e.g., CL-FIA I supra note 21 at 24; CL-API supra note

    21 at 11; CL-DBCS supra note 247 at 3; CL-CME I supra note 8 at 17;

    CL-ISDA/SIFMA supra note 21 at 16; CL-MFA supra note 21 at 13; CL-

    Morgan Stanley supra note 21 at 8; CL-SIFMA AMG I supra note 21 at

    11; and CL-Barclays I supra note 164 at 2. See e.g., CL-Morgan

    Stanley supra note 21 at 8 (For example, advisors to private

    investment funds may not be able to permit certain investors to view

    position information unless the information is made available to all

    of the fund's investors on an equal basis).

    \255\ See e.g., CL-CME I supra note 8 at 17; CL-Barclays II

    supra note 2468 at 2; CL-MFA supra note 21 at 13; CL-Morgan Stanley

    supra note 21 at 9; and CL-SIFMA AMG I supra note 21 at 11. See also

    CL-NYCBA supra note 243 at 4.

    \256\ CL-FIA I supra note 21 at 24.

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

    According to commenters, this problem is exacerbated if aggregate

    limits are applied intraday as it requires real-time sharing of

    information, and, when added to the attendant dismantling of

    information barriers and restructuring of information systems, would

    impose significant operational

    [[Page 71653]]

    challenges and massive costly infrastructure changes.\257\

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

    \257\ See e.g., CL-DBCS supra note 247 at 3; CL-CME I supra note

    8 at 17; CL-FIA I supra note 21 at 24; CL-ICI supra note 21 at 8-9;

    CL-ISDA/SIFMA supra note 21 at 17; CL-Barclays II supra note 246 at

    2; and CL-Morgan Stanley supra note 21 at 8.

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

    In view of these considerations, and as discussed above, the

    Commission is reinstating the IAC exemption. The majority of the

    contentions from the commenters stemmed from the removal of the IAC

    exemption, and therefore, incorporating this exemption into the final

    rules should address these concerns. In response to comments,\258\ and

    to further mitigate the impact of the aggregation requirements that

    apply to commonly-owned entities or accounts, the Commission is

    adopting new Sec. 151.7(g), which will allow a person to disaggregate

    when ownership above the 10 percent threshold also is associated with

    the underwriting of securities. In addition to a limited exemption for

    the underwriting of securities, new Sec. 151.7(i) will provide for

    disaggregation relief, subject to notice filing and opinion of counsel,

    in instances where aggregation across commonly-owned affiliates (i.e.,

    above the 10 percent ownership threshold) would require position

    information sharing that, in turn, would result in the violation of

    Federal law.\259\ The Commission notes, however, when a trader has

    actual knowledge of the positions of an affiliate, that trader is

    required to aggregate all such positions.

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

    \258\ See e.g., CL-FIA I supra note 21 at 24.

    \259\ Assume, for example, that Company A owns 10 percent of

    Company B. Company B may not share with Company A information

    regarding its positions unless it makes such data public. In this

    instance, Company A would file a notice with the Commission, along

    with opinion of counsel, that requiring the aggregation of such

    positions will require Company A to obtain information from Company

    B that would violate federal law.

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

    4. Ownership in Commodity Pools Exemption

    Under current Sec. 150.4(b), a trader who is a limited partner or

    shareholder in a commodity pool (other than the pool's commodity pool

    operator (``CPO'')) generally need not aggregate so long as the trader

    does not control the pool's trading decisions. Under Sec. 150.4(c)(2),

    if the trader is also a principal or affiliate of the pool's CPO, the

    trader need not aggregate provided that the trader does not control or

    supervise the pool's trading and the pool operator has proper

    informational barriers. In addition, mandatory aggregation based on a

    25 percent ownership interest is only triggered with respect to a pool

    exempt from CPO registration under existing Sec. 4.13.

    The Commission's proposal would eliminate the disaggregation

    exemption for passive pool participants (i.e., participants who are not

    principals or affiliates of the pool's CPO). Under the Commission's

    proposal, all passive pool participants (with a 10 percent or greater

    ownership or equity interest and regardless of whether they are a

    principal or affiliate) would be subject to the aggregation requirement

    unless they meet certain exemption criteria. These criteria include:

    (i) An inability to acquire knowledge of the pool's positions or

    trading due to informational barriers maintained by the CPO, and (ii) a

    lack of control over the pool's trading decisions. The proposal would

    also require aggregation for an investor with a 25 percent or greater

    ownership interest in any pool, without regard to whether the operator

    operates a small pool exempt from CPO registration.

    Commenters objected to the changes to the disaggregation provision

    applicable to interests in commodity pools, arguing that forcing

    aggregation of independent traders would increase concentration, limit

    investment opportunities, and thus potentially reduce liquidity in the

    U.S. futures markets.\260\ Morgan Stanley stated that the current

    disaggregation exemption for interests in commodity pools ``reflect the

    current reality of investing in commodity pools structured as private

    investment funds.'' \261\ It would be, Morgan Stanley explained,

    ``extraordinarily difficult to monitor and limit ownership thresholds

    given that an investor's stake in a fund may rise due to actions of

    third parties, e.g., redemptions.'' \262\ MFA likewise noted that

    ``monitoring of ownership percentages of investors in a commodity pool

    is burdensome, difficult to manage, and creates a potential trap for

    investors who may unintentionally violate limits.'' \263\

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

    \260\ See e.g., CL-MFA supra note 21 at 14-15; and CL-BlackRock

    supra note 21 at 6-7.

    \261\ CL-Morgan Stanley supra note 21 at 8.

    \262\ Id.

    \263\ CL-MFA supra note 21 at 14.

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

    Upon further consideration, and in response to the comments, the

    Commission has determined to retain the current disaggregation

    exemption for interests in commodity pools. The exemption was

    originally intended in part to respond to the growth of professionally

    managed futures trading accounts and pooled futures investment. The

    Commission finds that disaggregation for ownership in commodity pools,

    subject to appropriate safeguards, may continue to provide the

    necessary flexibility to the markets, while at the same time protecting

    the markets from the undue accumulation of large speculative positions

    owned by a single person or entity.

    5. Owned Non-Financial Entity Exemption

    The Commission proposed a limited disaggregation exemption for an

    entity that owns 10 percent or more of a non-financial entity

    (generally, a non-financial, operating company) if the entity can

    demonstrate that the owned non-financial entity is independently

    controlled and managed.\264\ The Commission explained that this limited

    exemption was intended to allow disaggregation primarily in the case of

    a conglomerate or holding company that ``merely has a passive ownership

    interest in one or more non-financial operating companies. In such

    cases, the operating companies may have complete trading and management

    independence and operate at such a distance from the holding company

    that it would not be appropriate to aggregate positions.'' \265\

    Several commenters argued that the non-financial entity provision was

    too narrow to provide meaningful disaggregation relief and supported

    its extension to financial entities.\266\ These commenters also

    asserted that the failure to extend the exemption was discriminatory

    against financial entities without a proper basis.\267\ Other

    commenters asked for guidance from the Commission on whether business

    units of a company could qualify as owned non-financial

    [[Page 71654]]

    entities for aggregation purposes.\268\ These commenters argued that

    functionally these business units operate the same as separately

    organized entities, and should not be forced to undergo the costs and

    inefficiencies of becoming separately organized for position limit

    purposes.\269\

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

    \264\ The proposed regulations included a non-exclusive list of

    indicia of independence for purposes of this exemption, including

    that the two entities have no knowledge of each other's trading

    decisions, that the owned non-financial entity have written policies

    and procedures in place to preclude such knowledge, and that the

    entities have separate employees and risk management systems.

    \265\ 76 FR 4752, at 4762.

    \266\ See e.g., CL-FIA I supra note 21 at 23-24; CL-DBCS supra

    note 238 at 6; CL-PIMCO supra note 21 at 3; National Rural Electric

    Cooperative (``NREC''), Association American Public Power

    (``AAPP''), and Association Large Public Power Council (``ALLPC'')

    on March 28, 2011 (``CL-NREC/AAPP/ALLPC'') at 20; CL-MFA supra note

    21 at 14; CL-CME I supra note 8 at 16; CL-ISDA/SIFMA supra note 21

    at 15; CL-BlackRock supra note 21 at 9; CL-Morgan Stanley supra note

    21 at 9; and CL-NYCBA supra note 243 at 4.

    \267\ See e.g., CL-FIA I supra note 21 at 22-23; CL-CME I supra

    note 8 at 16-17; CL-ISDA/SIFMA supra note 21 at 15; CL-Morgan

    Stanley supra note 21 at 9; CL-USCOC supra note 246 at 6; CL-DBCS

    supra note 247 at 6; CL-PIMCO supra note 21 at 5 (position limits

    are not high enough to offset elimination of IAC as explained in the

    proposed Sec. ); CL-MFA supra note 21 at 14; Akin Gump Strauss

    Hauer & Field LLP (``Akin Gump'') on March 25, 2011 (``CL-Akin

    Gump'') at 4; and CL-CMC supra note 21 at 4.

    \268\ See e.g., CL-BGA supra note 35 at 21; and CL-Cargill supra

    note 76 at 7.

    \269\ See e.g., CL-Cargill supra note 76 at 7.

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

    In view of the Commission's determination to retain the IAC

    exemption and the aggregation policy in general (which the Commission

    believes has worked effectively to date), provide an exemption for

    Federal law information sharing restrictions in final Sec. 151.7(i)

    and provide an exemption for underwriting in final Sec. 151.7(g), the

    Commission believes that it would not be appropriate, at this time, to

    expand further the scope of disaggregation exemptions to owned non-

    financial or financial entities. As described above, the final rules

    include express disaggregation exemptions to mitigate the impact of the

    aggregation requirements that apply to commonly-owned entities or

    accounts. These disaggregation exemptions are appropriately limited to

    situations that do not present the same concerns as those underlying

    the aggregation policy, namely, the sharing of transaction or position

    information that may facilitate coordinated trading; as such, the

    Commission does not believe further expansion of the disaggregation

    exemptions is warranted at this time.

    6. Funds With Identical Trading Strategies

    The proposal would require aggregation for positions in accounts or

    pools with identical trading strategies (e.g., long-only position in a

    given commodity), including passively-managed index funds. Under this

    provision, the general ownership threshold of 10 percent would not

    apply; rather, positions of any size in accounts or pools would require

    aggregation.

    Several commenters objected to forcing aggregation on the basis of

    identical trading strategies because it did not, in their view, further

    the purpose of preventing unreasonable or unwarranted price

    fluctuations. \270\ These commenters argued that the proposal would

    lead to a decrease in index fund participation, which will reduce

    market liquidity, especially in deferred months, as well as impact

    commodity price discovery. One commenter indicated support for

    extending the aggregation requirement to commodity index funds, and the

    swaps which are indexed to each individual index.\271\ PMAA/NEFI opined

    that positions of passive long speculators should be aggregated to the

    extent that they follow the same trading strategies regardless of

    whether their positions are held or controlled by the same trader in

    order to shield the markets from the cumulative impact of multiple

    passive long speculators who follow the same trading strategies.\272\

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

    \270\ See e.g., CL-CME I supra note 8 at 18; and CL-BlackRock

    supra note 21 at 14.

    \271\ See e.g., CL-Better Markets supra note 37 at 69-70.

    \272\ CL-PMAA/NEFI supra note 6 at 14.

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

    The Commission is adopting this aggregation provision as proposed,

    with the clarification that a trader must aggregate positions

    controlled or held in one account with positions controlled or held in

    one pool with identical trading strategies. As the Commission stated in

    the NPRM, this aggregation provision is intended to prevent

    circumvention of the aggregation requirements. In absence of such

    aggregation requirement, a trader can, for example, acquire a large

    long-only position in a given commodity through positions in multiple

    pools, without exceeding the applicable position limits.

    7. Process for Obtaining Disaggregation Exemption

    In contrast to the existing practice, the proposed aggregation

    exemptions were not self-effectuating. A trader seeking to rely on any

    aggregation exemption would be required to file an application for

    relief with the Commission, and the trader could not rely on the

    exemption until the Commission approved the application.\273\ Further,

    the trader would be subject to an annual renewal application and

    approval.

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

    \273\ See e.g., CL-FIA I supra note 21 at 25; CL-CMC supra note

    21 at 5; and CL-EEI/EPSA supra note 21 at 19-20.

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

    Several commenters objected to the proposed change from self-

    executing disaggregation exemptions to an application-based exemption

    on the basis that it would create an additional burden on traders

    without any benefits. Some of these commenters argued that the

    disaggregation exemptions for FCMs should continue to be self-

    effectuating because FCMs are subject to direct oversight by the

    Commission, and the Proposed Rule does not provide a sufficient

    explanation for the change in policy.\274\ MFA recommended that instead

    of requiring an application for exemptive relief and annual renewals,

    IACs should be required to file a notice informing the Commission that

    they intend to rely on the exemption and a representation that they

    meet the relevant conditions.\275\

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

    \274\ See e.g., CL-Morgan Stanley supra note 21 at 7. See also

    Futures Industry Association (``FIA II'') on May 25, 2011 (``CL-FIA

    II'') at 6.

    \275\ See CL-MFA supra note 21 at 16.

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

    Some of the commenters, objecting to the application-based

    exemption, requested that the Commission make the necessary

    applications for an exemption conditionally effective, rather than

    effective after a Commission determination.\276\ Other commenters

    argued that the Commission should only require that exemption

    applications be initially filed with material updates as opposed to an

    annual reapplication process.\277\

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

    \276\ See e.g., CL-FIA I supra note 21 at 25; Willkie Farr &

    Gallagher LLP (``Willkie'') on March 28, 2011 (``CL-Willkie'') at 7;

    CL-API supra note 21 at 12; Gavilon Group, LLC (``Gavilon'') on

    March 28, 2011(``CL-Gavilon'') at 8; and CL-CMC supra note 21 at 4.

    See also CL-BGA supra note 35 at 22.

    \277\ See e.g., CL-Cargill supra note 76 at 9.

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

    With regard to the specific conditions for applying for an

    aggregation exemption, several commenters requested that the Commission

    remove or clarify the condition that entities submit an independent

    assessment report.\278\ Similarly, commenters opined that the

    Commission should not require applicants to designate an office and

    employees responsible for coordinating compliance with aggregation

    rules and position limits.\279\

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

    \278\ See e.g., CL-FIA I supra note 21 at 26-27; and CL-BGA

    supra note 35 at 22.

    \279\ See e.g., CL-FIA I supra note 21 at 27.

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

    The Commission is adopting the proposal with modifications to

    address the concerns expressed in the comments. Specifically, the

    Commission is eliminating the requirement that a trader seeking to rely

    on a disaggregation exemption file an application for exemptive relief

    and annual renewals. Instead, the trader must file a notice, effective

    upon filing, setting forth the circumstances that warrant

    disaggregation and a certification that they meet the relevant

    conditions.

    The Commission believes that the new notice process (with its

    attendant certification requirement) for disaggregation relief

    represents a less burdensome, yet effective, alternative to the

    proposed application and pre-approval process. The notice procedure

    will allow market participants to rely on aggregation exemptions

    without the potential delay of Commission approval, thus lessening the

    burden on both market participants and the Commission to respond to

    such applications. In addition, the notice filings will give the

    Commission insight into the application

    [[Page 71655]]

    of the various exemptions, which the Commission could not do under a

    self-certification regime.

    Under the notice provisions, upon call by the Commission, any

    person claiming a disaggregation exemption must provide relevant

    information concerning the claim for exemption.\280\ Thus, for example,

    if the Commission identifies potential concerns regarding the integrity

    of the information barrier supporting a trader's reliance on the IAC

    exemption, it can audit the subject trader for adequacy of such

    information barrier and related practices. To the extent the Commission

    finds that a trader is not appropriately following the conditions of

    the exemption, upon notice and opportunity for the affected person to

    respond, the Commission may amend, suspend, terminate, or otherwise

    modify a person's aggregation exemption.

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

    \280\ See Sec. 151.7(h)(2).

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

    In response to the concerns of commenters, the Commission has

    determined to remove the conditions that a person submit an independent

    assessment report and designate an office and employees responsible for

    coordinating compliance with aggregation rules and position limits as

    part of the notice filing for an exemption.

    I. Preexisting Positions

    The Commission proposed to apply the good-faith exemption under CEA

    section 4a(b) for pre-existing positions in both futures and swaps.

    This provided a limited exemption for pre-existing positions that are

    in excess of the proposed position limits, provided that they were

    established in good-faith prior to the effective date of a position

    limit set by rule, regulation, or order. However, ``[s]uch person would

    not be allowed to enter into new, additional contracts in the same

    direction but could take up offsetting positions and thus reduce their

    total combined net positions.'' \281\ Thus, the Commission would

    calculate a person's pre-existing position for purposes of position

    limit compliance, but a person could not violate position limits based

    upon pre-existing positions alone.

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

    \281\ 76 FR at 4752, 4763.

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

    The Commission also proposed a broader scope of the good-faith

    exemption for swaps entered before the effective date of the Dodd-Frank

    Act. Such swaps would not be subject to position limits, and the

    Commission would allow pre-effective date swaps to be netted with post-

    effective date swaps for the purpose of complying with position limits.

    Finally, the Commission proposed to permit persons with risk-

    management exemptions under current Commission regulation 1.47 to

    continue to manage the risk of their swap portfolio that exists at the

    time of implementation of the legacy limits, and no new swaps would be

    covered.

    The Working Group and BGA requested that the Commission grandfather

    any positions put on in good faith prior to the effective date of any

    final rule implementing position limits for Referenced Contracts.\282\

    CME and Blackrock urged that the Commission instead phase in position

    limits to minimize market disruption.\283\

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

    \282\ See CL-BGA supra note 35 at 20; and CL-WGCEF supra note 35

    at 20.

    \283\ CL-CME I supra note 8 at 19-20; CL-BlackRock supra note 21

    at 17; and CL-SIFMA AMG I supra note 21 at 16.

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

    Commenters addressing the pre-existing positions exemption in the

    context of index funds recommended that these funds be grandfathered in

    order that they may ``roll'' their futures positions after the

    effective date of any position limits rule.\284\ Absent such

    grandfather treatment, commenters such as SIFMA opined that funds and

    accounts could be prevented from implementing rollovers in the most

    advantageous manner, and could conceivably be put in the anomalous

    positions of having to liquidate positions to return funds to investors

    if pre-existing positions cannot be replaced as necessary to meet

    stated investment goals.'' \285\ CME also put forth that ``[i]ndex fund

    managers who do not or cannot roll-over positions would also be

    deviating from disclosed-to-investors trading strategies.\286\

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

    \284\ See e.g., CL-CME I supra note 8 at 19-20; CL-SIFMA AMG I

    supra note 21 at 16; CL-BlackRock supra note 21 at 17; CL-MFA supra

    note 21 at 19. These commenters generally explained that these funds

    ``typically replace or `roll over' their contracts in a staggered

    manner, before they reach their spot months, in order to maintain

    position allocations in as stable a manner as possible and without

    causing price impact.''

    \285\ CL-SIFMA AMG I supra note 21 at 16.

    \286\ CL-CME I supra note 8 at 19-20; and CL-BlackRock supra

    note 21 at 17.

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

    With regard to the proposal to permit swap dealers to continue to

    manage the risk of a swap portfolio that exists at the time of

    implementation of the proposed regulations, CME requested that such

    relief be extended to swap dealers with swap portfolios in contracts

    that were not previously subject to position limits and therefore did

    not require exemptions.\287\

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

    \287\ CL-CME I supra note 8 at 19.

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

    The Commission is finalizing the scope of the pre-existing position

    and grandfather exemption as proposed, subject to modifications below,

    in final Sec. 151.9. The exemption for pre-existing positions

    implements the provisions of section 4a(b)(2) of the CEA, and is

    designed to phase in position limits without significant market

    disruption. In response to concerns over the scope of the pre-existing

    position exemption, the Commission clarifies that a person can rely on

    this exemption for futures, options and swaps entered in good faith

    prior to the effective date of the rules finalized herein for non-spot

    month-position limits.\288\ Such pre-existing futures, options and

    swaps transactions that are in excess of the proposed position limits

    would not cause the trader to be in violation based solely on those

    positions. To the extent a trader's pre-existing futures, options or

    swaps positions would cause the trader to exceed the non-spot-month

    limit, the trader could not increase the directional position that

    caused the positions to exceed the limit until the trader reduces the

    positions to below the position limit.\289\ As such, persons who

    established a net position below the speculative limit prior to the

    enactment of a regulation would be permitted to acquire new positions,

    but the Commission would calculate the combined position of a person

    based on pre-existing positions with any new position.\290\

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

    \288\ Notwithstanding the pre-existing exemption in non-spot

    months, a person must comply with spot-month limits. Any spot-month

    limit that is initially set or reset under Final Sec. 151.4(a) will

    apply to all spot month periods. The Commission notes it will

    provide at least two months advance notice of changes to levels of

    such spot-month limits under Final Sec. 151.4(e).

    \289\ For example, if the position limit in a particular

    reference contract is 1,000 and a trader's pre-existing position

    amounted to 1,005 long positions in a Referenced Contract, the

    trader would not be in violation of the position limit. However, the

    trader could not increase its long position with additional new long

    positions until its position decreased to below the position limit

    of 1,000. Once below the position limit of 1,000, this hypothetical

    trader would be subject to the position limit of 1,000.

    \290\ 76 FR at 4763.

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

    Notwithstanding the combined calculation of pre-existing positions

    with new positions, the Commission is also retaining the broader

    exemption for swaps entered prior to the effective date of the Dodd-

    Frank Act and prior to the initial implementation of position limits

    under final Sec. 151.4. The pre-effective date swaps would not be

    subject to the position limits adopted herein, and persons may, but

    need not, net swaps entered before the effective date of Dodd-Frank

    with swaps entered after the effective date.

    With regard to comments addressing index funds that ``roll'' their

    pre-existing positions, the Commission

    [[Page 71656]]

    notes that CEA section 4a(b)(2) only extends the exemption for pre-

    existing positions that were entered ``prior to the effective date of

    such rule, regulation, or order [establishing position limits].'' Given

    this statutory stricture, index funds that ``roll'' their pre-existing

    positions after the effective date of a position limit rule do not fall

    within the scope of the pre-existing position exemption.\291\

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

    \291\ The Commission also notes that absent this limitation on

    pre-existing positions, any entity that rolls futures positions

    would in effect not be subject to position limits because the

    subsequent positions would be subject to exemption.

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

    With regard to persons with existing exemptions under Commission

    regulation 1.47 to manage the risk of their existing swap portfolio,

    the Commission is adopting this provision as proposed. Specifically,

    the Commission is adopting a limited exemption to provide for

    transition into these position limit rules for persons with existing

    Sec. 1.47 exemptions under final Sec. 151.9(d). This limited

    exemption is also designed to limit market disruptions as market

    participants transition to these position limit rules. However, the

    Commission will only apply this relief to market participants with

    existing Sec. 1.47 exemptions because the transitional nature of

    providing such relief dictates that the Commission should not extend a

    general exemption for persons to manage their existing swap book

    outside of Sec. 1.47 exemptions. Further, since the proposed non-spot

    month class limits are not being adopted, such a person may net

    positions across futures and swaps in a Referenced Contract. This

    largely mitigates the need for a risk management exemption.

    J. Commodity Index or Commodity-Based Funds

    The definition of ``Referenced Contract'' in Sec. 151.1 expressly

    excludes commodity index contracts. A commodity index contract is

    defined as a contract, agreement, or transaction ``that is not a basis

    or any type of spread contract, [and] based on an index comprised of

    prices of commodities that are not the same nor substantially the

    same.'' Thus, by the terms of this provision, contracts with

    diversified commodity reference prices are excluded from the proposed

    position limit regime. As a result, single commodity index contracts

    fall within the scope of the proposal. Further, under amended section

    4a(a)(1) of the CEA, the Commission is empowered to establish position

    limits by ``group or class of traders,'' and new section 4a(a)(7) gives

    the Commission authority to provide exemptions from those position

    limits to any ``person or class of persons.''

    A number of commenters argued that commodity index funds (``CIFs'')

    should be exempted from the final rulemaking for position limits.\292\

    DB Commodity Services argued that passive CIFs apply ``zero net buying

    pressure across the commodity term structure.'' \293\ Gresham

    Investments argued that ``unleveraged, solely exchange-traded, fully

    transparent, clearinghouse guaranteed'' CIFs that pose ``no systemic

    risk'' should be treated differently than highly leveraged futures

    traders, who pose a continuing systemic risk to the commodity

    markets.\294\ Three commenters argued that CIFs increase market

    liquidity for bona fide hedgers.\295\ Finally, BlackRock also argued

    that there is no empirical evidence supporting a causal connection

    between CIFs and commodity price volatility.\296\ Senator Blanche

    Lincoln argued that position limits should not apply to diversified,

    unleveraged index funds because they provide ``necessary liquidity to

    assist in price discovery and hedging for commercial users * * * [and]

    are an effective way [for] investors to diversify their portfolios and

    hedge against inflation.'' \297\ Further, Senator Lincoln opined that

    that the Commission should distinguish between ``trading activity that

    is unleveraged or fully collateralized, solely exchange-traded, fully

    transparent, clearinghouse guaranteed, and poses no systemic risk and

    highly leveraged swaps trading in its implementation of position

    limits.'' \298\

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

    \292\ CL-BlackRock supra note 21 at 15; CL-DB supra note 153 at

    2-4; CL-PIMCO supra note 21 at 9; ETF Securities on March 28, 2011

    (``CL-ETF Securities'') at 3-4; and CL-SIFMA AMG I supra note 21 at

    13.

    \293\ CL-DBCS supra note 247 at 3.

    \294\ CL-Gresham supra note 153 at 2, 6-7.

    \295\ CL-BlackRock supra note 21 at 15; CL-PIMCO supra note 21

    at 10 (citing Sen. Lincoln's remarks on index funds); and CL-DBCS

    supra note 247 at 3-4.

    \296\ CL-BlackRock supra note 21 at 15.

    \297\ See Senator Lincoln (``Sen. Lincoln'') on Dec. 16, 2010

    (``CL-Sen. Lincoln'') at 1-2 (``I urge the CFTC not to unnecessarily

    disadvantage market participants that invest in diversified and

    unleveraged commodity indices.'')

    \298\ Id.

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

    Commenters also submitted studies regarding index traders. In

    particular, several studies conducted by two agricultural economists

    were highlighted by commenters. The authors of the studies contended

    that there is no evidence that the influx of index fund trading unduly

    influences prices.\299\ Commenters also cited the Commission's 2008

    Staff Report on Commodity Index Traders and Swap Dealers, in which

    Commission staff provided an overview for the public regarding the

    participation of these types of traders in commodity derivatives

    markets.\300\

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

    \299\ Irwin, Scott and Dwight Sanders ``The Impact of Index and

    Swap Funds on Commodity Futures Markets'', OECD Food, Agriculture,

    and Fisheries Working Papers, (2010); Sanders, Dwight and Scott

    Irwin ``A Speculative Bubble in Commodity Futures Prices? Cross-

    Sectional Evidence'', Agricultural Economics, (2010); Sanders,

    Dwight, Scott Irwin, and Robert Merrin ``The Adequacy of Speculation

    in Agricultural Futures Markets: Too Much of a Good Thing?''

    University of Illinois at Urbana-Champaign, (2008).

    \300\ U.S. Commodity Futures Trading Commission ``Staff Report

    on Commodity Swap Dealers and Index Traders with Commission

    Recommendations'' (2008). While the majority of the report is broad

    in scope and serves as a guide to the special calls issued to swap

    dealers and index traders by the Commission, there is a discussion

    of the impact of these types of participants (generally considered

    to be speculators in most markets). Specifically, the report looks

    at the vast increase in notional value of NYMEX crude oil futures

    contracts in relationship to the vast increase in commodity index

    investment from December 2007 to June 2008. Staff concluded that the

    increase in notional value is due to the appreciation of existing

    positions, and not the influx of new money into the market, citing

    the observation that the actual number of futures-equivalent

    contracts declined over the same period.

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

    Other commenters, however, asserted that CIFs should be subject to

    special, more restrictive position limits.\301\ Some of these

    commenters argued that the presence of CIFs upsets the price discovery

    function of the market because investors buy interests in CIFs without

    regard to the market fundamentals price.\302\ The Air Transport

    Association of America recommended that the Commission undertake a

    study to analyze and determine the effect of such passive, long-only

    traders on the price discovery function of the markets.\303\

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

    \301\ CL-ABA supra note 150 at 4; CL-ATAA supra note 94 at 15;

    CL-ATA supra note 81 at 4,5; CL-PMAA/NEFI supra note 6 at 12-14; CL-

    ICPO supra note 20 at 1; CL-Better Markets supra note 37 at 71

    (``limiting commodity index funds to 10 percent of total market open

    interest would likely have significant beneficial effects [on

    excessive speculation]''); and International Pizza Hut Franchise

    Holders Association (IPHFHA'') on March 24, 2011 (``CL-IPHFHA'') at

    1. There were 6,074 form comment letters that urged the Commission

    to adopt ``lower speculative position limits for passive, long-only

    traders.''

    \302\ CL-PMAA/NEFI supra note 6 at 12-13; CL-Delta supra note 20

    at 7-8; CL-Better Markets supra note 37 at 35-36; and Industrial

    Energy Consumer of America (``IECA'') on March 28, 2011 (``CL-

    IECA'') at 2.

    \303\ CL-ATAA supra note 94 at 15.

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

    Some studies opined that the recent influx of CIF trading has

    caused an increase in prices that is not explained by market

    fundamentals alone.\304\ For

    [[Page 71657]]

    example, one study argued that index speculators have been at least

    partially responsible for the tripling of commodity futures prices over

    the last five years.\305\

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

    \304\ Tang, Ke and Wei Xiong ``Index Investing and the

    Financialization of Commodities'', Working Paper, Department of

    Economics, Princeton University, (2010).; Mou, EthanY. ``Limits to

    Arbitrage and Commodity Index Investment: Front-Running the Goldman

    Roll'', Working Paper, Columbia University, (2010).; Gilbert,

    Christopher L. ``Speculative Influences on Commodity Futures Prices,

    2006-2008'', Working Paper, Department of Economics, University of

    Trento, Italy, (2009).; Gilbert, Christopher L. ``How to Understand

    High Food Prices'', Journal of Agricultural Economics, 61(2): 398-

    425. (2010).

    \305\ Masters, Michael and Adam White ``The Accidental Hunt

    Brothers: How Institutional Investors are Driving up Food and Energy

    Prices'', White Paper, (2008). ``As hundreds of billions of dollars

    have poured into the relatively small commodities futures markets,

    prices have risen dramatically. Index Speculators working through

    swaps dealers have been the single biggest source of new speculative

    money. This has driven prices far beyond the levels that supply and

    demand would indicate, and has done tremendous damage to our economy

    as a result.''

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

    Regardless of whether a CIF is non-diversified or diversified, the

    Commission did not propose to impose different position limits on CIFs

    or to exempt CIFs from position limits. In addition to considering

    comments regarding the role of CIFs in commodity derivatives markets,

    the Commission has reviewed and evaluated studies cited by commenters

    presenting conflicting views on the effect of certain groups of index

    traders.\306\ Historically, the Commission has applied position limits

    to individual traders rather than a group or class of traders, and does

    not have a similar level of experience with respect to group or class

    limits as it has with position limits for individual traders.

    Therefore, the Commission believes more analysis is required before the

    Commission would impose a separate position limit regime, or establish

    an exemption, for a group or class of traders, including CIFs.\307\ The

    Commission welcomes further submissions of studies to assist in

    subsequent rulemakings on the treatment of various groups or classes of

    speculative traders.

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

    \306\ In addition, the Commission has reviewed all other studies

    submitted by commenters; a detailed description can be found in

    Section III of this release.

    \307\ In this regard, the lack of consensus in the studies

    submitted demonstrates the need for additional analysis.

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

    K. Exchange Traded Funds

    CME commented that the Commission should coordinate its position

    limit policy with the Securities and Exchange Commission (``SEC'') in

    order to avoid encouraging market participants to replace their

    commodity derivatives exposures with physical commodity exchange-traded

    fund (``ETF'') exposures.\308\ As previously stated, the Commission

    believes that the final rules will ensure sufficient market liquidity

    for bona fide hedgers in accordance with CEA section 4a(a)(3)(B)(iii).

    With respect to the potential increase in ETF exposures, the Commission

    notes that such products are not within the scope of this rulemaking.

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

    \308\ CL-CME I supra note 8 at 20.

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

    L. Position Visibility

    The Proposed Rule established an enhanced reporting regime for

    traders who hold or control positions in certain energy and metal

    Referenced Contracts above a specified number of net long or net short

    positions.\309\ These ``position visibility levels'' are set below the

    proposed non-spot-month position limit levels. A trader's positions in

    all-months-combined for listed Referenced Contracts would be aggregated

    under the Proposed Rule, including bona fide hedge positions. Once a

    trader crosses a proposed position visibility level, the trader would

    have to file monthly reports with the Commission that generally capture

    the trader's physical and derivatives portfolio in the same commodity

    and substantially same commodity as that underlying the Referenced

    Contract.\310\

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

    \309\ See Proposed Rule 151.6. The position visibility levels

    did not apply to agricultural commodity contracts.

    \310\ While the proposed position visibility regime would only

    trigger reporting requirements, the preamble did note that trading

    at or near such levels was ``in no way intended to imply that

    positions at or near such levels cannot constitute excessive

    speculation or be used to manipulate prices or for other wrongful

    purposes.'' See Proposed Rule at 4759.

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

    The general purpose behind the position visibility levels was to

    enhance the Commission's surveillance functions to better understand

    the largest traders for energy and metal Referenced Contracts, and to

    better enable the Commission to set and adjust subsequent position

    limits, as appropriate.\311\

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

    \311\ 75 FR 4752, 4761-62, Jan. 26, 2011.

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

    Commenters were divided on the utility of position visibility

    levels. A number of commenters supported the proposed visibility

    levels, with some urging the Commission to expand their application to

    agricultural contracts.\312\ Many of the supportive commenters stated

    that the Commission should extend the position visibility regime to

    agricultural Referenced Contracts.\313\ At least one commenter

    specifically requested that the Commission expand the position

    visibility levels to metal-based ETFs as well as contracts traded on

    the London Metals Exchange as a method to deter excessive speculation

    and manipulation.\314\

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

    \312\ See e.g., CL-Prof. Greenberger supra note 6 at 18; CL-AFR

    supra note 17 at 8; and CL-AIMA supra note 35 at 4.

    \313\ See e.g., CL-FWW supra note 81 at 15.

    \314\ See e.g., Vandenberg & Feliu LLP (``Vandenberg'') on March

    28, 2011 (``CL-Vandenberg'') at 2-3.

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

    Several commenters stated that the enhanced reporting requirements

    would be onerous to implement along with other Dodd-Frank Act

    requirements with little benefit to combating excessive

    speculation.\315\ Certain commenters also asserted that the reporting

    requirements would disproportionately impact bona fide hedgers because

    such entities would have to produce reports surrounding their hedging

    activity whereas a speculative trader would not have to produce similar

    reports.\316\ One commenter pointed out that the Commission could

    instead utilize its special call authority under Sec. 18.05 to receive

    data similar to the data to be reported in the position visibility

    regime.\317\ One commenter argued that the reporting frequency should

    be semi-annual as opposed to monthly because the Commission would not

    need to analyze this additional data on a monthly basis.\318\ Another

    commenter assumed that the reporting requirements would be daily and

    therefore requested the Commission alter the requirement to

    monthly.\319\ Some commenters opined that the scope of the position

    visibility reports was vague because it required reporting of uncleared

    swap positions in substantially the same commodity.\320\

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

    \315\ See e.g., CL-BGA supra note 35 at 20-21; CL-FIA I supra

    note 21 at 13; CL-EEI/EPSA supra note 21 at 6 (EEI alternatively

    argued that the Commission should raise the threshold levels for

    certain contracts if the Commission retained the visibility regime);

    CL-MFA supra note 21 at 3; CL-Utility Group supra note 21 at 13-14;

    CL-NREC/AAPP/ALLPC supra note 266 at 12; CL-USCF supra note 153 at

    11; and CL-WGCEF supra note 35 at 23. Some commenters expressed

    concern that the Commission would not have sufficient resources to

    review the data, and therefore the cost of compliance would not

    produce a benefit. See e.g., CL-MFA supra note 21 at 3.

    \316\ See e.g., CL-EEI/EPSA supra note 21 at 6; and CL-WGCEF

    supra note 35 at 23.

    \317\ See e.g., CL-BGA supra note 35 at 20-21.

    \318\ See e.g., CL-USCF supra note 153 at 11.

    \319\ See e.g., CL-NGFA supra note 72 at 5.

    \320\ See e.g., CL-AGA supra note 124 at 12.

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

    Commenters also argued that the Commission should alter the

    position visibility levels to a position accountability regime similar

    to the rules on DCMs. However, among the commenters who supported

    converting position visibility levels to position accountability

    levels, there were two distinct approaches. Some commenters wanted the

    Commission to implement position accountability levels as an interim

    measure until the Commission

    [[Page 71658]]

    could fully implement hard position limits outside of the spot-

    month.\321\ The second group requested that the Commission eliminate

    visibility levels and position limits, and in their place implement

    position accountability levels.\322\

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

    \321\ See e.g., CL-PMAA/NEFI supra note 6 at 15; CL-ATAA supra

    note 94 at 5, 16; CL-APGA supra note 17 at 8-9; and CL-Delta supra

    note 20 at 11.

    \322\ See e.g., CL-BlackRock supra note 21 at 18-19; and CL-CME

    I supra note 8 at 6. See also, CL-FIA I supra note 21 at 13; and CL-

    EEI/EPSA supra note 21 at 10.

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

    The Commission is adopting the position visibility proposal with

    certain modifications in response to comments. The Commission continues

    to believe that position visibility levels represent an important

    surveillance tool in the metal and energy Referenced Contracts because

    the Commission does not anticipate that the number of traders with

    positions in excess of the limits for metal and energy Referenced

    Contracts will constitute a significant segment of the market. As such,

    the Commission would not receive a large number of bona fide hedging

    reports and other data for many traders in excess of the position

    limit, and the position visibility levels would improve the

    Commission's ability to monitor the positions of the largest traders in

    the markets. In this regard, the Commission anticipates that more

    traders in the agricultural Referenced Contracts will be above the

    anticipated position limits, and therefore, the Commission does not

    currently anticipate a similar need to apply the position visibility

    levels to agricultural Referenced Contracts.

    To accommodate compliance cost concerns raised by some commenters

    the position visibility level will be raised to approximately 50

    percent of the projected aggregate position limit (based on current

    futures and swaps open interest data), with the exception of NYMEX

    Light Sweet Crude Oil (CL) and NYMEX Henry Hub Natural Gas (NG)

    Referenced Contracts where the levels have been set lower to

    approximate the point where ten traders, on an annual basis, would be

    subject to position visibility reporting requirements. The Commission

    believes that this increase is appropriate in order to reduce the

    number of traders burdened by the associated reporting obligations. In

    addition, under Sec. 151.6(b)(2)(ii), the Commission will require

    position visibility reports to include uncleared swaps in Referenced

    Contracts, but will not require reporting of swaps in substantially the

    same commodity.\323\ The position visibility rule will become effective

    on the date that new Federal spot month limits become effective.

    Additionally, the Commission has eliminated the requirement to submit

    404A filings under Sec. 151.6 in order to further reduce the

    compliance burden for firms reporting under that provision. The

    Commission believes it will receive sufficient information on the cash

    market activity for general surveillance purposes through 404 filings

    under Sec. 151.6(c).\324\

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

    \323\ Proposed Sec. 151.6(c) required reporting of uncleared

    swaps in substantially the same commodity.

    \324\ The Commission has also amended Sec. 151.6(b)(1) to

    require the reporting of the dates, instead of the total number of

    days, that a trader held a position exceeding visibility levels.

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

    The Commission has eliminated the separate 402S filing and will

    gather information on uncleared swaps through the revised 401 filing.

    The revised 401 filing will provide information for general

    surveillance purposes in light of the data management issues discussed

    in II.C. of this release.

    The Commission has also reduced the required frequency of reporting

    on the 401 and 404 filings. The Commission may request more specific

    data, either in terms of data granularity (e.g., a break-out of data

    based on expirations) or with respect to a trader's position on a

    specific date or dates under its existing authority under Commission

    regulations 18.05 and 20.6. The Commission clarifies that 401 and 404

    filings required under Sec. 151.6 are to reflect the reporting

    person's relevant positions as of the first business Tuesday of a

    calendar quarter and on the date on which the person held the largest

    net position in excess of the level in all months. The Commission would

    require such a filing to be made within ten business days of the last

    day of the quarter in which the trader held a position exceeding

    position visibility levels.

    M. International Regulatory Arbitrage

    Section 4a(a)(2)(C) of the CEA, as amended by section 737 of the

    Dodd-Frank Act, requires the Commission to ``strive to ensure that

    trading on foreign boards of trade in the same commodity will be

    subject to comparable limits and that any limits to be imposed by the

    Commission will not cause price discovery in the commodity to shift to

    trading on the foreign boards of trade.'' The Commission received

    several comments expressing concerns regarding the regulatory arbitrage

    opportunities that might arise as a result of the imposition of

    position limits.\325\

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

    \325\ See e.g., CL-BlackRock supra note 21 at 18 (``The

    variability of position limits from year to year also will create

    uncertainty for market participants as to what limits will apply to

    their long-term trading strategies, causing some participants to

    shift their commodity-risk positions to markets with no limits at

    all or possibly even fixed limits.''); and CL-ISDA/SIFMA supra note

    21 at 24-25 (``* * * we believe that the Proposed Rules will likely

    result in market participants, especially those that operate outside

    the U.S., shifting their trading activity to non- U.S. markets.'').

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

    The U.S. Chamber of Commerce stated that ``hasty and ill-conceived

    limits on the U.S. derivatives markets will undoubtedly lead to a

    significant migration of market participants to less-regulated overseas

    markets.'' \326\ Similarly, ISDA/SIFMA stated that a permanent position

    limit regime should be postponed until the Commission has fully

    consulted with its counterparts around the globe about harmonizing

    limits and phasing them in simultaneously, so as to ensure that

    position limits imposed on U.S. markets do not shift business

    offshore.\327\ Accordingly, ISDA/SIFMA strongly urged ``the CFTC to

    work with foreign regulators to ensure that foreign commodity market

    participants are subject to position limits that are comparable to

    those imposed on U.S. market participants.'' \328\ Michael Greenberger,

    on the other hand, opined that the proposed position limits would

    result in minimal international regulatory arbitrage because (i) The

    Commission has extraterritorial jurisdiction reach under Dodd-Frank Act

    section 722, (ii) many swap dealers would be required to register under

    the Dodd-Frank Act thereby ensuring that the Commission would have

    jurisdiction over them, (iii) other authorities are working to

    harmonize their rules and have expressed a hostility to the

    financialization of commodity markets, and (iv) many other authorities

    have shown a willingness to impose additional requirements on

    expatriate U.S. banks.\329\

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

    \326\ CL-USCOC supra note 246 at 4.

    \327\ CL-ISDA/SIFMA supra note 21 at 24-25 (``* * * we believe

    that the Proposed Rules will likely result in market participants,

    especially those that operate outside the U.S., shifting their

    trading activity to non-U.S. markets.'')

    \328\ Id.

    \329\ CL-Prof. Greenberger supra note 6 at 20.

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

    The Commission agrees that it should seek to avoid regulatory

    arbitrage and participate in efforts to raise regulatory standards

    internationally. The Commission has worked to achieve that general goal

    through its participation in the International Organization of

    Securities Commissions (``IOSCO'').

    [[Page 71659]]

    Most recently, the Commission assisted in the development of an

    international consensus on principles for the regulation and

    supervision of commodity derivatives markets, which included a

    requirement that market authorities should have the authority, among

    other things, to establish ex-ante position limits, at least in the

    delivery month.\330\ The Commission intends, through its activities

    within IOSCO, to seek further elaboration on the degree to which

    commodity derivatives market authorities implement those principles,

    including the extent to which position limits are been imposed.

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

    \330\ See Principles for the Regulation and Supervision of

    Commodity Derivatives Markets, IOSCO Technical Committee (2011).

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

    The Commission rejects the view, however, that section 4a(a)(2)(C)

    of the CEA prohibits Commission rulemaking unless and until there is

    uniformity in position limit policies in the United States and other

    major market jurisdictions. Such a view would subordinate the explicit

    statutory directive to impose position limits as a means to address

    excessive speculation in U.S. derivatives markets to a potentially

    lengthy period of policy negotiations with foreign regulators.

    The Commission also rejects the view suggested in some of the

    comment letters that it is a foregone conclusion that the mere

    existence of differences in position limit policies will inevitably

    drive trading abroad. The Commission's prior experience in determining

    the competitive effects of regulatory policies reveals that it is

    difficult to attribute changes in the competitive position of U.S.

    exchanges to any one factor. For example, prior concerns with regard to

    the competitive effect on U.S. contract markets of alleged lighter

    regulation abroad led the CFTC to study those concerns both in 1994,

    pursuant to a congressional directive,\331\ and again in 1999.\332\ In

    both cases, the Commission's staff reports concluded that differences

    in regulatory regimes between various countries did not appear to have

    been a significant factor in the competitive position of the world's

    leading exchanges.\333\

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

    \331\ The Futures Trading Practices Act of 1992 (``FTPA'')

    required the CFTC to study the competitiveness of boards of trade

    over which it has jurisdiction compared with the boards of trade

    over which ``foreign futures authorities'' have jurisdiction. The

    Commission submitted its report on this issue, ``A Study of the

    Global Competitiveness of U. S. Futures Markets'' (``1994 Study''),

    to the Senate and House agriculture committees in April 1994.

    \332\ The Global Competitiveness of U.S. Futures Markets

    Revisited, CFTC Division of Economic Analysis (November 1999) http://www.cftc.gov/dea/compete/deaglobal_competitiveness.htm.

    \333\ CFTC press release 4333-99F (November 4, 1999)

    http://www.cftc.gov/opa/press99/opa4333-99.htm Among other things,

    the 1999 report concluded that the U.S. share of total worldwide

    futures and option trading activity appears to be stabilizing as the

    larger foreign markets have matured. As in 1994, the most actively

    traded foreign products tend to fill local or regional risk

    management needs and few products offered by foreign exchanges

    directly duplicate products offered by U.S. markets; and the

    increased competition among mature segments of the global futures

    industry, particularly in Europe, may reflect industry restructuring

    and the introduction of new technologies, particularly electronic

    trading.

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

    Nonetheless, the Commission takes seriously the need to avoid

    disadvantaging U.S. futures exchanges and will monitor for any

    indication that trading is migrating away from the United States

    following the establishment of the position limit structure set forth

    in this rulemaking.\334\

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

    \334\ As discussed above in II.E., section 719(a) of the Dodd-

    Frank Act directs the Commission to study the ``effects (if any) of

    the positions limits imposed pursuant to [section 4a] on excessive

    speculation and on the movement of transactions'' from DCMs to

    foreign venues and to submit a report on these effects to Congress

    within 12 months after the imposition of position limits. This study

    will be conducted in consultation with DCMs. See Dodd-Frank Act,

    supra note 1, section 719(a).

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

    N. Designated Contract Market and Swap Execution Facility Position

    Limits and Accountability Levels

    For contracts subject to Federal position limits imposed under

    section 4a(a) of the CEA, sections 5(d)(5)(B) and 5h(f)(6)(B) require

    DCMs and SEFs that are trading facilities,\335\ respectively, to set

    and enforce speculative position limits at a level no higher than those

    established by the Commission. Section 4a(a)(2) of the CEA, in turn,

    directs the Commission to set position limits on ``physical commodities

    other than excluded commodities.'' Section 5(d)(5)(A) of the CEA

    requires that DCMs set, ``as is necessary and appropriate, position

    limitations or position accountability for speculators'' for each

    contract executed pursuant to their rules. A similar duty is imposed on

    SEFs that are trading facilities under section 5h(f)(6)(A) of the CEA.

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

    \335\ All references to ``SEFs'' below are to SEFs that are

    trading facilities.

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

    1. Required DCM and SEF Position Limits for Referenced Contracts

    Proposed Sec. 151.11(a) would have required DCMs and SEFs to set

    spot month, single month, and all-months position limits for all

    commodities, with exceptions for securities futures and some excluded

    commodities. Under proposed Sec. 151.11(a)(1), DCMs and SEFs would be

    required to set additional, DCM or SEF spot-month and non-spot-month

    position limits for Referenced Contracts at a level no higher than the

    Federal position limits established pursuant to proposed Sec. 151.4.

    For other contracts (including other physical commodity contracts),

    under proposed Sec. 151.11(a)(2), DCMs and SEFs would be required to

    set position limits utilizing the Commission's historic approach to

    position limits.

    Shell requested that if the Commission adopts Federal spot month

    limits, exchange-based position limits should be eliminated because

    these limits will be redundant, at best, and may cause unintended

    apportionment of trading across exchanges, at worst.\336\ Several other

    commenters opined that the Commission should require exchanges to set

    spot month limits and to refrain from setting Federal position

    limits.\337\

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

    \336\ CL-Shell supra note 35 at 5-6.

    \337\ See e.g., CL-ICE I supra note 69 at 6-8 (Cash-settled

    contract limits should apply to each exchange-traded contract

    separately and there should not be an aggregate spot-month limit.);

    CL-DB supra note 153 at 9-10; and CL-Centaurus supra note 21 at 4.

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

    The Commission has determined, consistent with the statute and the

    proposal, to require the establishment of position limits by DCMs and

    SEFs for Referenced Contracts.\338\ As discussed above under II.A, the

    Commission has been directed under section 4a(a)(2) of the CEA to

    establish position limits on physical commodity DCM futures and options

    contracts and has been granted discretion to determine the specific

    levels. The Commission has exercised this discretion by imposing

    federally-administered position limits under Sec. 151.4 for 28

    ``Referenced Contract'' physical commodity derivatives markets and

    under Sec. 151.11 by directing DCMs and SEFs to establish

    methodologically similar position limits for Referenced Contracts.\339\

    While DCM or SEF limits are not administered by the Commission, the

    Commission may nonetheless enforce trader compliance with such limits

    as violations of the Act.\340\ The Commission did not propose

    federally-administered position limits over other physical commodity

    [[Page 71660]]

    contracts and intends to do so as practicable in the future. In the

    interim, the Commission will rigorously enforce DCM and SEF compliance

    with Core Principles 5 and 6.

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

    \338\ As discussed below in II.M.3, the Commission has

    recognized an arbitrage exemption for registered entity limits for

    all but physical-delivery contracts in the spot month. This is

    consistent with the Commission's approach on non-spot month class

    limits as it ensures that registered entity limits do not create a

    marginal incentive to establish a position in a class of otherwise

    economically equivalent contracts outside of the spot month.

    \339\ The Commission notes that under Core Principle 1 for DCMs

    and SEFs, the Commission may ``by rule or regulation'' prescribe

    standards for compliance with Core Principles. Sections 5(d)(1)(B)

    and 5h(f)(1)(B) of the CEA, 7 U.S.C. 7(d)(1)(B), 7b-3(f)(1)(B).

    \340\ See section 4a(e) of the CEA, 7 U.S.C. 6a(e).

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

    The Commission notes that section 4a(a)(2) of the CEA requires the

    Commission to establish speculative position limits on physical

    commodity DCM contracts. This requirement does not extend to SEF

    contracts. The Commission has determined that SEF limits for physical

    commodity contracts are ``necessary and appropriate'' because the

    policy purposes effectuated by establishing such limits on DCM

    contracts are equally present in SEF markets.\341\ The Commission notes

    that the Proposed Rules would have required SEFs to establish limits

    for all physical commodity derivatives under proposed Sec.

    151.11(a).\342\ Accordingly, the Commission has determined to establish

    essentially identical standards for establishing position limits (and

    accountability levels) for DCMs and SEFs.

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

    \341\ See Core Principle 6 for SEFs, section 5h(f)(6)(A) of the

    CEA, 7 U.S.C. 7b-3(f)(6)(A).

    \342\ The Commission further notes that it did not receive any

    comments on this specific proposed requirement for SEFs.

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

    Under Sec. 151.11(a), the Commission requires DCMs and SEFs to

    establish spot-month limits for Referenced Contracts at levels no

    greater than 25 percent of estimated deliverable supply for the

    underlying commodity and no greater than the limits established under

    Sec. 151.4(a)(1).

    The requirement in proposed Sec. 151.11(a)(2) for position limits

    for contracts at designation has been modified in Sec. 151.11(b)(3) in

    three important ways. First, consistent with the congressional mandate

    to establish position limits on all DCM physical commodity contracts,

    the Commission is requiring that DCMs (and SEFs by extension) \343\

    establish position limits for all physical commodity contracts. Second,

    the Commission has clarified this provision to apply to new contracts

    offered by DCMs and SEFs. The Commission has further clarified that it

    will be an acceptable practice that the notional quantity of the

    contract subject to such limits corresponds to a notional quantity per

    contract that is no larger than a typical cash market transaction in

    the underlying commodity. For example, if a DCM or SEF offers a new

    physical commodity contract and sets the notional quantity per contract

    at 100,000 units while most transactions in the cash market for that

    commodity are for a quantity of between 1,000 and 10,000 units and

    exactly zero percent of cash market transactions are for 100,000 units

    or greater, then the notional quantity of the derivatives contract

    offered by the DCM or SEF would be atypical. This clarification is

    intended to deter DCMs and SEFs from setting non-spot-month position

    limits for new contracts at levels where they would constitute non-

    binding constraints on speculation through the use of an excessively

    large notional quantity per contract. This clarification is not

    expected to result in additional marginal cost because, among other

    things, it reflects current Commission custom in reviewing new

    contracts and is an acceptable practice for Core Principle compliance

    and not a requirement per se for DCMs or SEFs.

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

    \343\ As discussed above, the Commission has determined that SEF

    limits for physical commodity contracts are ``necessary and

    appropriate'' in order to effectuate the policy purposes underlying

    limits on DCM contracts.

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

    Finally, the Commission in the preamble to the Proposed Rule

    indicated that a DCM or SEF could elect to establish position

    accountability levels in lieu of position limits if the open interest

    in a contract was less than 5,000 contracts.\344\ The Commission did

    not, however, provide for this in the Proposed Rule's text. One

    commenter specifically supported the position taken by the Commission

    in the Proposed Rule's preamble because it recognized that position

    accountability may be more appropriate for certain contracts with lower

    levels of open interest.\345\

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

    \344\ 76 FR at 4752, 4763.

    \345\ CL-AIMA supra note 35 at 6.

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

    The Commission clarifies that it is not adopting the preamble

    discussion for low open interest contracts. Rather, final Sec.

    151.11(b)(3) provides that it shall be an acceptable practice to

    provide for speculative limits for an individual single-month or in

    all-months-combined at no greater than 1,000 contracts for non-energy

    physical commodities and at no greater than 5,000 contracts for other

    commodities.\346\

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

    \346\ Proposed Sec. 151.11(a)(2) and Final Sec. 151.11(b)(3).

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

    2. DCM and SEF Accountability Levels for Non-Referenced and Excluded

    Commodities

    Under proposed Sec. 151.11(c), consistent with current DCM

    practice, DCMs and SEFs have the discretion to establish position

    accountability levels in lieu of position limits for excluded

    commodities.\347\ DCMs and SEFs could impose position accountability

    rules in lieu of position limits only if the contract involves either a

    major currency or certain excluded commodities (such as measures of

    inflation) or an excluded commodity that: (1) Has an average daily open

    interest of 50,000 or more contracts, (2) has an average daily trading

    volume of 100,000 or more contracts, and (3) has a highly liquid cash

    market.

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

    \347\ See Section 1a(19) of the Act, 7 U.S.C. 1a(19).

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

    Under final Sec. 151.11(c)(1), the Commission provides that the

    establishment of position accountability rules are an acceptable

    alternative to position limits outside of the spot month for physical

    commodity contracts when a contract has an average month-end open

    interest of 50,000 contracts and an average daily volume of 5,000

    contracts and a liquid cash market, consistent with current acceptable

    practices for tangible commodity contracts. With respect to excluded

    commodities, consistent with the current DCM practice, DCMs and SEFs

    may provide for exemptions from their position limits for ``bona fide

    hedging.'' The term ``bona fide hedging,'' as used with respect to

    excluded commodities, would be defined in accordance with amended Sec.

    1.3(z).\348\ Additionally, consistent with the current DCM practice,

    DCMs and SEFs could continue to provide exemptions for ``risk-

    reducing'' and ``risk-management'' transactions or positions consistent

    with existing Commission guidelines.\349\ Finally, though the

    Commission is removing the procedure to apply to the Commission for

    bona fide hedge exemptions for non-enumerated transactions or positions

    under Sec. 1.3(z)(3), the Commission will continue to recognize prior

    Commission determinations under that section, and DCMs and SEFs could

    recognize non-enumerated hedge transactions subject to Commission

    review.

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

    \348\ See Sec. 151.11(d)(1)(ii) of these proposed regulations.

    As explained in section G of this release, the definition of bona

    fide hedge transaction or position contained in Sec. 4a(c)(2) of

    the Act, 7 U.S.C. 6a(c)(2), does not, by its terms, apply to

    excluded commodities.

    \349\ See Clarification of Certain Aspects of Hedging

    Definition, 52 FR 27195, Jul. 20, 1987; and Risk Management

    Exemptions From Speculative Position Limits Approved under

    Commission regulation 1.61, 52 FR 34633, Sept. 14, 1987.

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

    3. DCM and SEF Hedge Exemptions and Aggregation Rules

    Final Sec. Sec. 151.11(e) and 151.11(f)(1)(i) require DCMs and

    SEFs to follow the same account aggregation and bona fide exemption

    standards set forth by Sec. Sec. 151.5 and 151.7 with respect to

    exempt and agricultural commodities (collectively ``physical''

    commodities). Section 151.11(f)(2) requires traders seeking a hedge

    exemption to ``comply with the procedures of the designated

    [[Page 71661]]

    contract market or swap execution facility for granting exemptions from

    its speculative position limit rules.''

    MGEX commented on the role of DCMs and SEFs in administering bona

    fide hedge exemptions. MGEX noted that while Sec. 151.5 contemplated a

    Commission-administered bona fide hedging regime, proposed Sec.

    151.11(e)(2) would require persons seeking to establish eligibility for

    an exemption to comply with the DCM's or SEF's procedures for granting

    exemptions. MGEX recommended that the Commission be the primary entity

    for administering bona fide hedge exemptions and that when necessary

    that information be shared with the necessary DCMs and SEFs.

    With respect to a DCM's or SEF's duty to administer hedge

    exemptions, the Commission intended that DCMs and SEFs administer their

    own position limits under Sec. 151.11. Accordingly, under its

    rulemaking, the Commission is requiring that DCMs and SEFs create rules

    and procedures to allow traders to claim a bona fide hedge exemption,

    consistent with Sec. 151.5 for physical commodity derivatives and

    Sec. 1.3(z) for excluded commodities. Section 151.11 contemplates that

    DCMs and SEFs would administer their own bona fide hedge exemption

    regime in parallel to the Commission's regime. Traders with a hedge

    position in a Referenced Contract subject to DCM or SEF limits will not

    be precluded from filing the same bona fide hedging documentation,

    provided that the hedge position would meet the criteria of Commission

    regulation 151.5 for both the purposes of Federal and DCM or SEF

    position limits.

    Section 4a(a) of the CEA provides the Commission with authority to

    exempt from the position limits or to impose different limits on

    spread, straddle, or arbitrage trades. Current Sec. 150.4(a)(3)

    recognizes these exemptions in the context of the single contract

    position limits set forth under Sec. 150.2. MFA opined that the

    Commission should restore the arbitrage exemptions because they are

    central to managing risk and maintaining balanced portfolios.\350\

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

    \350\ CL-MFA supra note 21 at 18.

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

    The Commission has determined to re-introduce a version of this

    exemption in the final rulemaking in response to commenters that opined

    directly on this issue \351\ as well as those that argued against the

    imposition of the proposed class limits, as discussed above in II.D.5.

    The Commission has therefore introduced an arbitrage exemption for DCM

    or SEF limits under Sec. 151.11(g)(2) that allows traders to claim as

    an offset to their positions on a DCM or SEF positions in the same

    Referenced Contracts or in an economically equivalent futures or swap

    position.\352\ This arbitrage exemption does not, however, apply to

    physical-delivery contracts in the spot month. The Commission has

    reintroduced this exemption, available to those traders that

    demonstrate compliance with a DCM or SEF speculative limit through

    offsetting trades on different venues or through OTC swaps in

    economically equivalent contracts.

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

    \351\ See the discussion of non-spot month class limits under

    II.D.5 and II.F.1 supra discussing comments expressing concern that

    arbitrage exemptions were not recognized in the proposal. See e.g.,

    CL-ISDA/SIFMA supra note 21 at 11; and CL-MFA supra note 21 at 18.

    See also, CL-Shell supra note 35 at 5-6.

    \352\ See section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1).

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

    4. DCM and SEF Position Limits and Accountability Rules Effective Date

    Section 151.11(i) provides that generally the effective date for

    the position limits or accountability levels described in Sec. 151.11

    shall be made effective sixty days after the term ``swap'' is further

    defined. The Commission has set this effective date to coincide with

    the effective date of the spot-month limits established under Sec.

    151.4. The one exception to this general rule is with respect to the

    acceptable guidance for DCMs and SEFs in establishing position limits

    or accountability rules for non-legacy Referenced Contracts executed

    pursuant to their rules prior to the implementation of Federal non-

    spot-month limits on such Referenced Contracts. Under Sec. 151.11(j),

    the acceptable practice for these contracts during this transition

    phase will be either to retain existing non-spot-month position limits

    or accountability rules or to establish non-spot-month position limits

    pursuant to the acceptable practice described in Sec. 151.11(b)(2)

    (i.e., to impose limits based on ten percent of the average combined

    futures and delta-adjusted option month-end open interest for the most

    recent two calendar years up to 25,000 contracts with a marginal

    increase of 2.5 percent thereafter) based on open interest in the

    contract and economically equivalent contracts traded on the same DCM

    or SEF.

    O. Delegation

    Proposed Sec. 151.12 would have delegated certain of the

    Commission's proposed part 151 authority to the Director of the

    Division of Market Oversight and to other employee or employees as

    designated by the Director. The delegated authority would extend to:

    (1) Determining open interest levels for the purpose of setting non-

    spot-month position limits; (2) granting an exemption relating to bona

    fide hedging transactions; and (3) providing instructions, determining

    the format, coding structure, and electronic data transmission

    procedures for submitting data records and any other information

    required under proposed part 151. The purpose of this delegation

    provision was to facilitate the ability of the Commission to respond to

    changing market and technological conditions and thus ensure timely and

    accurate data reporting.

    The Commission requested comments on whether determinations of open

    interest or deliverable supply should be adopted through Commission

    orders. With respect to spot-month position limits, a few commenters

    contended that spot month limits should be set by rulemaking.\353\ With

    respect to non-spot-month position limits, several commenters submitted

    that such limits should be calculated by rulemaking not by annual

    recalculation so that market participants can have sufficient advance

    notice and opportunity to comment on changes in position limit

    levels.\354\ CME, for example, commented that the Commission should set

    initial limits through this rulemaking and make subsequent limit

    changes subject to notice and comment, unless the formula's automatic

    annual application would result in higher limits.\355\ BlackRock

    commented that the Commission could mitigate the adverse effects of

    volatile limit levels by setting limits subject to notice and

    comment.\356\

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

    \353\ See e.g., CL-WGCEF supra note 35 at 19-20 (proposing a

    specific schedule for the setting of spot-month position limits by

    notice and comment); CL-BGA supra note 35 at 20. See also, CL-ISDA/

    SIFMA supra note 21 at 22.

    \354\ See e.g., CL-BlackRock supra note 21 at 18; CL-CME I supra

    note 8 at 12; CL-NGFA supra note 72 at 3; CL-EEI/EPSA supra note 21

    at 11; CL-KCBT I supra note 97 at 3; and CL-WGC supra note 21 at 5.

    \355\ CL-CME I supra note 8 at 12.

    \356\ CL-BlackRock supra note 21 at 18.

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

    The Commission has determined to adopt proposed Sec. 151.12

    substantially unchanged with some additional delegations provided for

    in the final rule text. Under Sec. 151.4(b)(2)(i)(A), the Commission

    has addressed concerns about the volatility of non-spot-month position

    limit levels for non-legacy Referenced Contracts by providing for

    automatic adjustments based on the higher of 12 or 24 months of

    aggregate open interest data. As discussed earlier in this release, the

    Commission believes that adjustments to Referenced Contract spot month

    and non-legacy Referenced

    [[Page 71662]]

    Contracts non-spot-month position limit levels on a scheduled basis by

    Commission order provide for a process that is responsive to the

    changing size of the underlying physical and financial market for the

    relevant Referenced Contracts respectively.

    III. Related Matters

    A. Consideration of Costs and Benefits

    In this final rulemaking, the Commission is establishing position

    limits for 28 exempt and agricultural commodity derivatives, including

    futures and options contracts and the physical commodity swaps that are

    ``economically equivalent'' to such contracts. The Commission imposes

    two types of position limits: Limits in the spot-month and limits

    outside of the spot-month. Generally, this rulemaking is comprised of

    three main categories: (1) The position limits; (2) exemptions from the

    limits; and (3) the aggregation of accounts.

    Section 15(a) of the CEA requires the Commission to ``consider the

    costs and benefits'' of its actions 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

    futures markets; (3) price discovery; (4) sound risk management

    practices; and (5) other public interest considerations.\357\ The

    Commission may, in its discretion, give greater weight to any one of

    the five enumerated areas and may determine that, notwithstanding

    costs, a particular rule protects the public interest.

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

    \357\ 7 U.S.C. 19(a).

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

    In the Notice of Proposed Rulemaking, the Commission stated,

    ``[t[he proposed position limits and their concomitant limitation on

    trading activity could impose certain general but significant costs.''

    \358\ In particular, the Commission noted that ``[o]verly restrictive

    position limits could cause unintended consequences by decreasing

    speculative activity and therefore liquidity in the markets for

    Referenced Contracts, impairing the price discovery process in their

    markets, and encouraging the migration of speculative activity and

    perhaps price discovery to markets outside of the Commission's

    jurisdiction.'' \359\ The Commission invited comments on its

    consideration of costs and benefits, including a specific invitation

    for commenters to ``submit any data or other information that they may

    have quantifying or qualifying the costs and benefits of proposed part

    151.'' \360\

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

    \358\ See 76 FR at 4764.

    \359\ Id.

    \360\ Id.

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

    In consideration of the costs and benefits of the final rules, the

    Commission has, wherever feasible, endeavored to estimate or quantify

    the costs and benefits of the final rules; where estimation or

    quantification is not feasible, the Commission provides a qualitative

    assessment of such costs and benefits.\361\ In this respect, the

    Commission notes that public comment letters provided little

    quantitative data regarding the costs and benefits associated with the

    Proposed Rules.

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

    \361\ Accordingly, to assist the Commission and the public to

    assess and understand the economic costs and benefits of the final

    rule, the Commission is supplementing its consideration of costs and

    benefits with wage rate estimates based on salary information for

    the securities industry compiled by the Securities Industry and

    Financial Markets Association (``SIFMA''). The wage estimates the

    Commission uses are derived from an industry-wide survey of

    participants and thus reflect an average across entities; the

    Commission notes that the actual costs for any individual company or

    sector may vary from the average. In response to comments, the

    Commission has also addressed its PRA estimates in this

    Considerations of Costs and Benefits section.

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

    In the following discussion, the Commission addresses the costs and

    benefits of the final rules, considers comments regarding the costs and

    benefits of position limits, and subsequently considers the five broad

    areas of market and public concern under section 15(a) of the CEA

    within the context of the three broad areas of this rule: Position

    limits; exemptions; and account aggregation.

    1. General Comments

    A number of commenters argued that the Commission did not make the

    requisite finding that position limits are necessary to combat

    excessive speculation.\362\ Specifically, one commenter argued that the

    Commission has ignored the wealth of empirical evidence supporting the

    view that the proposed position limits and related exemptions would

    actually be counterproductive by decreasing liquidity in the CFTC-

    regulated markets which, in turn, will increase both price volatility

    and the cost of hedging especially in deferred months.\363\ Similarly,

    some commenters opposing position limits questioned the benefits that

    would be derived from speculative limits in all markets or in

    particular markets.\364\ Several commenters denied or questioned that

    the Commission had demonstrated that excessive speculation exists or

    that the proposed speculative limits were necessary.\365\ Other

    commenters suggested that speculative limits would be inappropriate

    because the U.S. derivatives markets must compete against exchanges

    elsewhere in the world that do not impose position limits.\366\ Some

    commenters argued that even with the provisions concerning contracts on

    FBOTs, speculators could easily circumvent limits by migrating to

    FBOTs, and in fact the Proposed Rules could encourage such

    behavior.\367\ Other commenters opined that certain physical

    commodities, such as gold, should not be subject to position limits due

    to considerations unique to those particular commodities.\368\

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

    \362\ See e.g., CL-CME I supra note 8 at 2; and CL-COPE supra

    note 21 at 2-5.

    \363\ CL-CME I supra note 8 at 2. See also CL-Blackrock supra

    note 21 at 3.

    \364\ See e.g., CL-Utility Group supra note 21 at 2 (submitting

    that the compliance burden of the Commission's position limits

    proposal is not justified by any demonstrable benefits); and CL-COPE

    supra note 21 (stating that there is no predicate for finding

    federal position limits to be appropriate at this time; and the

    Position Limits NOPR is overly complex and creates significant and

    burdensome requirements on end-users).

    \365\ See e.g., CL-Morgan Stanley supra note 21 at 4.

    \366\ See e.g., CL-CME I supra note 8 at 2.

    \367\ See e.g., CL-USCOC supra note 246 at 3; CL-PIMCO, supra

    note 21 at 8; and CL-ISDA/SIFMA, supra note 21 at 24.

    \368\ See e.g., CL-WGC supra note 21 at 3.

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

    One commenter stated that the Commission's cost estimates did not

    accurately reflect the true cost to the market incurred as a result of

    the Proposed Rules because the wage estimates used were inaccurate;

    this commenter also stated that cost estimates in the PRA section were

    not addressed in the costs and benefits section of the Proposed

    Rule.\369\

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

    \369\ See CL-WGCEF supra note 34 at 25-26.

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

    As discussed above in sections II.A and II.C of this release, in

    section 4a(a)(1) Congress has determined that excessive speculation

    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.'' Further, Congress directed

    that for the purpose of ``diminishing, eliminating, or preventing such

    burden,'' the Commission ``shall * * * proclaim and fix such [position]

    limits * * * as the Commission finds are necessary to diminish,

    eliminate, or prevent such burden.'' \370\ New sections 4a(a)(2) and

    4a(a)(5) of the CEA contain an express congressional directive that the

    Commission ``shall'' establish position limits, as appropriate, within

    an expedited timeframe after the date of enactment of the Dodd-Frank

    Act. In requiring these position limits, Congress specified in section

    4a(a)(3)(B) that in

    [[Page 71663]]

    addition to establishing limits on the number of positions that may be

    held by any person to diminish, eliminate, or prevent excessive

    speculation, the Commission should also, to the maximum extent

    practicable, set such limits at a level to ``deter and prevent market

    manipulation, squeezes and corners,'' ``ensure sufficient market

    liquidity for bona fide hedgers,'' and ``to ensure that the price

    discovery function of the underlying market is not disrupted.''

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

    \370\ Section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1).

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

    In light of the congressional mandate to impose position limits,

    the Commission disagrees with comments asserting that the Commission

    must first determine that excessive speculation exists or prove that

    position limits are an effective regulatory tool. Section 4a(a)

    expresses Congress's determination that excessive speculation may

    create an undue and unnecessary burden on interstate commerce and

    directs the Commission to establish such limits as are necessary to

    ``diminish, eliminate, or prevent such burden.'' Congress intended the

    Commission to act to prevent such burdens before they arise. The

    Commission does not believe it must first demonstrate the existence of

    excessive speculation or the resulting burdens in order to take

    preventive action through the imposition of position limits. Similarly,

    the Commission need not prove that such limits will in fact prevent

    such burdens.

    In enacting the Dodd-Frank Act, Congress re-affirmed the findings

    regarding excessive speculation, first enacted in the Commodity

    Exchange Act of 1936, as well as the direction to the Commission to

    establish position limits.\371\ In the Dodd-Frank Act, Congress also

    expressly required that the Commission impose limits, as appropriate,

    to prevent excessive speculation and market manipulation while ensuring

    the sufficiency of liquidity for bona fide hedgers and the integrity of

    price discovery function of the underlying market. Comments to the

    Commission regarding the efficacy of position limits fail to account

    for the mandate that the Commission shall impose position limits. By

    its terms, CEA Section 15(a) requires the Commission to consider and

    evaluate the prospective costs and benefits of regulations and orders

    of the Commission prior to their issuance; it does not require the

    Commission to evaluate the costs and benefits of the actions or

    mandates of Congress.

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

    \371\ See Commodity Exchange Act of 1936, Pub L. 74-675, 49

    Stat. 1491 (1936).

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

    2. Studies

    A number of commenters submitted or cited studies to the Commission

    regarding excessive speculation.\372\ Generally, the comments and

    studies discussed whether or not excessive speculation exists, the

    definition of excessive speculation, and/or whether excessive

    speculation has a negative impact on derivatives markets. Some of these

    studies did not explicitly address or focus on the issue of position

    limits as a means to prevent excessive speculation or otherwise, while

    some studies did generally opine on the effect of position limits on

    derivatives markets.

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

    \372\ Twenty commenters cited over 52 studies by institutional,

    academic, and industry professionals.

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

    Thirty-eight of the studies were focused on the impact of

    speculative activity in futures markets, i.e., how the behavior of non-

    commercial traders affected price levels.\373\ These 38 studies did not

    provide a view on position limits in general or on the Commission's

    implementation of position limits in particular. While the Commission

    reviewed these studies in connection with this rulemaking, the

    Commission again notes that it is not required to make a finding on the

    impact of speculation on commodity markets. Congress mandated the

    imposition of position limits, and the Commission

    [[Page 71664]]

    does not have the discretion to alter an express mandate from Congress.

    As such, studies suggesting that there is insufficient evidence of

    excessive speculation in commodity markets fail to address that the

    Commission must impose position limits, and do not address issues that

    are material to this rulemaking.

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

    \373\ See e.g., Anderson, David, Joe L. Outlaw, Henry L. Bryant,

    James W. Richardson, David P. Ernstes, J. Marc Raulston, J. Mark

    Welch, George M. Knapek, Brian K. Herbst, and Marc S. Allison, The

    Agricultural and Food Policy Center Texas A&M University, Research

    Report 08-1, The Effects of Ethanol on Texas Food and Feed (2008);

    Antoshin, Sergei, Elie Canetti, and Ken Miyajima, IMF, Global

    Financial Stability Report, Financial Stress and Deleveraging,

    Macrofinancial Implications and Policy: Annex 1.2. Financial

    Investment in Commodities Markets, at 62-66 (2008); Baffes, John,

    and Tasos Haniotos, World Bank, Washington DC, Policy Research

    Working Paper 5371, Placing the 2006/08 Commodity Boom into

    Perspective (2010); Brunetti, Celso, and Bahattin Buyuksahin, CFTC,

    Working Paper Series, Is Speculation Destabilizing? (2009);

    Buyuksahin, Bahattin, and Jeff Harris, The Energy Journal, The Role

    of Speculators in the Crude Oil Market (2011); Buyuksahin, Bahattin,

    and Michel Robe, CFTC, Working Paper, Speculators, Commodities, and

    Cross-Market Linkages (2010); Buyuksahin, Bahattin, Michael Haigh,

    Jeff Harris, James Overdahl, and Michel Robe, CFTC, Working Paper,

    Fundamentals, Trader Activity, and Derivative Pricing (2008);

    Eckaus, R.S., MIT Center for Energy and Environmental Policy

    Research, Working Paper 08-007WP, The Oil Price Really Is A

    Speculative Bubble (2008); Einloth, James T., Division of Insurance

    and Research, Federal Deposit Insurance Corporation, Washington, DC,

    Working Paper, Speculation and Recent Volatility in the Price of Oil

    (2009); Gilbert, Christopher L., Department of Economics, University

    of Trento, Italy, Working Paper, Speculative Influences on Commodity

    Futures Prices, 2006-2008 (2009); Gilbert, Christopher L., Journal

    of Agricultural Economics, How to Understand High Food Prices

    (2010); Government Accountability Office (GAO), Issues Involving the

    Use of the Futures Markets to Invest in Commodity Indexes (2009);

    Haigh, Michael, Jana Hranaiova, and James Overdahl, CFTC OCE, Staff

    Research Report, Price Dynamics, Price Discovery, and Large Futures

    Trader Interactions in the Energy Complex (2005); Haigh, Michael,

    Jeff Harris, James Overdahl, and Michel Robe, CFTC, Working Paper,

    Trader Participation and Pricing in Energy Futures Markets (2007);

    Hamilton, James, Brookings Paper on Economic Activity, The Causes

    and Consequences of the Oil Shock of 2007-2008 (2009); HM Treasury

    (UK), Global Commodities: A Long Term Vision for Stable, Secure, and

    Sustainable Global Markets (2008); Interagency Task Force on

    Commodity Markets, Interim Report on Crude Oil (2008); International

    Monetary Fund, World Economic Outlook, Is Inflation Back? Commodity

    Prices and Inflation, at 83-128 (2008); Irwin, Scott and Dwight

    Sanders, OECD Food, Agriculture, and Fisheries Working Papers, The

    Impact of Index and Swap Funds on Commodity Futures Markets (2010);

    Irwin, Scott, Dwight Sanders, and Robert Merrin, Journal of

    Agricultural and Applied Economics, Devil or Angel? The Role of

    Speculation in the Recent Commodity Price Boom (and Bust) (2009);

    Jacks, David, Explorations in Economic History, Populists vs

    Theorists: Futures Markets and the Volatility of Prices (2006);

    Kilian, Lutz, American Economic Review, Not All Oil Price Shocks Are

    Alike: Disentangling Demand and Supply Shocks in the Crude Oil

    Market (2009); Kilian, Lutz, and Dan Murphy, University of Michigan,

    Working Paper, The Role of Inventories and Speculative Trading in

    the Global Market for Crude Oil (2010); Korniotis, George, Federal

    Reserve Board of Governors, Finance and Economics Discussion Series,

    Does Speculation Affect Spot Price Levels? The Case of Metals With

    and Without Futures Markets (2009); Mou, Ethan Y., Columbia

    University, Working Paper, Limits to Arbitrage and Commodity Index

    Investment: Front-Running the Goldman Roll (2010); Nissanke,

    Machinko, University of London School of Oriental and African

    Studies, Commodity Markets and Excess Volatility: Sources and

    Strategies To Reduce Adverse Development Impacts (2010); Phillips,

    Peter C.B., and Jun Yu, Yale University, Cowles Foundation

    Discussion Paper No. 1770, Dating the Timeline of Financial Bubbles

    During the Subprime Crisis (2010); Plato, Gerald, and Linwood

    Hoffman, NCCC-134 Conference on Applied Commodity Price Analysis,

    Forecasting, and Market Risk Management, Measuring the Influence of

    Commodity Fund Trading on Soybean Price Discovery (2007); Robles,

    Miguel, Maximo Torero, and Joachim von Braun, International Food

    Policy Research Institute, IFPRI Issue Brief 57, When Speculation

    Matters (2009); Sanders, Dwight, and Scott Irwin, Agricultural

    Economics, A Speculative Bubble in Commodity Futures Prices? Cross-

    Sectional Evidence (2010); Sanders, Dwight, Scott Irwin, and Robert

    Merrin, University of Illinois at Urbana-Champaign, The Adequacy of

    Speculation in Agricultural Futures Markets: Too Much of a Good

    Thing? (2008); Smith, James, Journal of Economic Perspectives, World

    Oil: Market or Mayhem? (2009); Technical Committee of the

    International Organization of Securities Commission. IOSCO, Task

    Force on Commodity Futures Markets Final Report (2009); Stoll, Hans,

    and Robert Whaley, Vanderbilt University, Working Paper, Commodity

    Index Investing and Commodity Futures Prices (2009); Tang, Ke, and

    Wei Xiong, Department of Economics, Princeton University, Working

    Paper, Index Investing and the Financialization of Commodities

    (2010); Trostle, Ronald, ERS (USDA), Global Agricultural Supply and

    Demand: Factors Contributing to the Recent Increase in Food

    Commodity Prices (2008); U.S. Commodity Futures Trading Commission,

    Staff Report on Commodity Swap Dealers and Index Traders With

    Commission Recommendations (2008); Wright, Brian, World Bank, Policy

    Research Working Paper, International Grain Reserves and Other

    Instruments To Address Volatility in Grain Markets (2009).

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

    The remaining studies did generally addresses the concept of

    position limits as part of their discussion of speculative activity.

    The authors of some of these studies and papers expressed views that

    speculative position limits were an important regulatory tool and that

    the CFTC should implement limits to control excessive speculation.\374\

    For example, one author opined that ``* * * strict position limits

    should be placed on individual holdings, such that they are not

    manipulative.'' \375\ Another stated, ``[S]peculative position limits

    worked well for over 50 years and carry no unintended consequences. If

    Congress takes these actions, then the speculative money that flowed

    into these markets will be forced to flow out, and with that the price

    of commodities futures will come down substantially. Until speculative

    position limits are restored, investor money will continue to flow

    unimpeded into the commodities futures markets and the upward pressure

    on prices will remain.'' \376\ The authors of one study claimed that

    ``Rules for speculative position limits were historically much stricter

    than they are today. Moreover, despite rhetoric that imposing stricter

    limits would harm market liquidity, there is no evidence to support

    such claims, especially in light of the fact that the market was

    functioning very well prior to 2000, when speculative limits were

    tighter.'' \377\

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

    \374\ Greenberger, Michael, The Relationship of Unregulated

    Excessive Speculation to Oil Market Price Volatility, at 11 (2010)

    (On position limits: ``The damage price volatility causes the

    economy by needlessly inflating energy and food prices worldwide far

    outweighs the concerns about the precise application of what for

    over 70 years has been the historic regulatory technique for

    controlling excessive speculation in risk-shifting derivative

    markets.''.); Khan, Mohsin S., Peterson Institute for International

    Economics, Washington, DC, Policy Brief PB09-19, The 2008 Oil Price

    `Bubble', at 8 (2009) (``The policies being considered by the CFTC

    to put aggregate position limits on futures contracts and to

    increase the transparency of futures markets are moves in the right

    direction.''); U.S. Senate, Permanent Subcommittee on

    Investigations, Excessive Speculation in the Wheat Market, at 12

    (2009) (``The activities of these index traders constitute the type

    of excessive speculation the CFTC should diminish or prevent through

    the imposition and enforcement of position limits as intended by the

    Commodity Exchange Act.''); U.S. Senate, Permanent Subcommittee on

    Investigations, Excessive Speculation in the Natural Gas Market at

    8'' (2007) (The Subcommittee recommended that Congress give the CFTC

    authority over ECMs, noting that ``[to] ensure fair energy pricing,

    it is time to put the cop back on the beat in all U.S. energy

    commodity markets.''); UNCTAD, The Global Economic Crisis: Systemic

    Failures and Multilateral Remedies: Report by the UNCTAD Secretariat

    Task Force on Systemic Issues and Economic Cooperation, at 14,

    (2009) (The UNCTAD recommends that ``* * * regulators should be

    enabled to intervene when swap dealer positions exceed speculative

    position limits and may represent `excessive speculation.'); UNCTAD,

    United Nations, Trade and Development Report, 2009: Chapter II: The

    Financialization of Commodity Markets, at 26 (2009) (The report

    recommends tighter restrictions, notably closing loopholes that

    allow potentially harmful speculative activity to surpass position

    limits.).

    \375\ De Schutter, O., United Nations Special Report on the

    Right to Food: Briefing Note 02, Food Commodities Speculation and

    Food Price Crises at 8 (2010).

    \376\ Masters, Michael, and Adam White, White Paper: The

    Accidental Hunt Brothers: How Institutional Investors Are Driving up

    Food and Energy Prices at 3 (2008).

    \377\ Medlock, Kenneth, and Amy Myers Jaffe, Rice University:

    Who Is in the Oil Futures Market and How Has It Changed?'' at 8

    (2009).

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

    One study claimed that position limits will not restrain

    manipulation,\378\ while another argued that position limits in the

    agricultural commodities have not significantly affected

    volatility.\379\ Another study noted that while position limits are

    effective as an anti-manipulation measure, they will not prevent asset

    bubbles from forming or stop them from bursting.\380\ One study

    cautioned that while limits may be effective in preventing

    manipulation, they should be set at an optimal level so as to not harm

    the affected markets.\381\ One study claimed that position limits

    should be administered by DCMs, as those entities are closest to and

    most familiar with the intricacies of markets and thus can implement

    the most efficient position limits policy.\382\ Finally, one commenter

    cited a study that notes the similar efforts under discussion in

    European markets.\383\

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

    \378\ Ebrahim, Muhammed: Working Paper, Can Position Limits

    Restrain Rogue Traders?'' at 27 (2011) (``* * * binding constraints

    have an unintentional effect. That is, they lead to a degradation of

    the equilibria and augmenting market power of Speculator in addition

    to other agents. We therefore conclude that position limits are not

    helpful in curbing market manipulation. Instead of curtailing price

    swings, they could exacerbate them.''

    \379\ Irwin, Scott, Philip Garcia, and Darrel L. Good: Working

    Paper, The Performance of Chicago Board of Trade Corn, Soybean, and

    Wheat Futures Contracts After Recent Changes in Speculative Limits

    at 16 (2007) (``The analysis of price volatility revealed no large

    change in measures of volatility after the change in speculative

    limits. A relatively small number of observations are available

    since the change was made, but there is little to suggest that the

    change in speculative limits has had a meaningful overall impact on

    price volatility to date.'').

    \380\ Parsons, John: Economia, Vol. 10, Black Gold and Fools

    Gold: Speculation in the Oil Futures Market at 30 (2010)

    (``Restoring position limits on all nonhedgers, including swap

    dealers, is a useful reform that gives regulators the powers

    necessary to ensure the integrity of the market. Although this

    reform is useful, it will not prevent another speculative bubble in

    oil. The general purpose of speculative limits is to constrain

    manipulation . * * * Position limits, while useful, will not be

    useful against an asset bubble. That is really more of a

    macroeconomic problem, and it is not readily managed with

    microeconomic levers at the individual exchange level.'').

    \381\ Wray, Randall, The Levy Economics Institute of Bard

    College: The Commodities Market Bubble: Money Manager Capitalism and

    the Financialization of Commodities at 41, 43 (2008) ``(''While the

    participation of traditional speculators offers clear benefits,

    position limits must be carefully administered to ensure that their

    activities do not ``demoralize'' markets. * * *The CFTC must re-

    establish and enforce position limits.'').

    \382\ CME Group, Inc.: CME Group White Paper, Excessive

    Speculation and Position Limits in Energy Derivatives Markets at 6

    (``Indeed, as the Commission has previously noted, the exchanges

    have the expertise and are in the best position to fix position

    limits for their contracts. In fact, this determination led the

    Commission to delegate to the exchanges authority to set position

    limits in non-enumerated commodities, in the first instances, almost

    30 years ago.'').

    \383\ European Commission, Review of the Markets in Financial

    Instruments Directive (2010), note 282:

    European Parliament resolution of 15 June 2010 on derivatives

    markets: future policy actions (A7-0187/2010) calls on the

    Commission to develop measures to ensure that regulators are able to

    set position limits to counter disproportionate price movements and

    speculative bubbles, as well as to investigate the use of position

    limits as a dynamic tool to combat market manipulation, most

    particularly at the point when a contract is approaching expiry. It

    also requests the Commission to consider rules relating to the

    banning of purely speculative trading in commodities and

    agricultural products, and the imposition of strict position limits

    especially with regard to their possible impact on the price of

    essential food commodities in developing countries and greenhouse

    gas emission allowances.

    Id. at 82.

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

    Although these studies generally discuss the impact of position

    limits, they do not address or provide analysis of how the Commission

    should specifically implement position limits under section 4a. As the

    Commission explained in the proposal, ``overly restrictive'' limits can

    negatively impact market liquidity and price discovery. These

    consequences are detailed in several of the studies criticizing the

    impact of position limits.\384\ Similarly, limits that are set too high

    fail to address issues surrounding market manipulation and excessive

    speculation. Market manipulation and excessive speculation are also

    detailed in several of the studies claiming the need for position

    limits.\385\ In section 4a(a)(3)(B) Congress sought to ensure that the

    Commission would ``to the maximum extent practicable'' ensure that

    position limits would be set at a

    [[Page 71665]]

    level that would ``diminish, eliminate, or prevent excessive

    speculation'' and deter or prevent market manipulation, while at the

    same time ensure there is sufficient market liquidity for bona fide

    hedgers and the price discovery function of the market would be

    preserved. The Commission historically has recognized the potential

    impact of both overly restrictive and unrestrictive limits, and through

    the consideration of the statutory objectives in section 4a(a)(3)(B) as

    well as the costs and benefits, has determined to finalize these rules.

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

    \384\ See e.g., Wray, Randall, supra.

    \385\ See e.g., Medlock, Kenneth and Amy Myers Jaffe, supra.

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

    3. General Costs and Benefits

    As stated in the Proposed Rule, the Commission anticipates that the

    final rules establishing position limits and related provisions will

    result in costs to market participants. Generally, market participants

    will incur costs associated with developing, implementing and

    maintaining a method to ensure compliance with the position limits and

    its attendant requirements (e.g., bona fide hedging exemptions and

    aggregation standards). Such costs will include those related to the

    monitoring of positions in the relevant Referenced Contracts, related

    filing, reporting, and recordkeeping requirements, and the costs (if

    any) of changes to information technology systems. It is expected that

    market participants whose positions are exclusively in swaps (and hence

    currently not subject to any position limits regime) will incur larger

    initial costs relative to those participants in the futures markets, as

    the latter should be accustomed to operating under DCM and/or

    Commission position limit regimes.

    The final rules are also expected to result in costs to market

    participants whose market participation and trading strategies will

    need to take into account and be limited by the new position limits

    rule. For example, a swap dealer that makes a market in a particular

    class of swaps may have to ensure that any further positions taken in

    that class of swaps are hedged or offset in order to avoid increasing

    that trader's position. Similarly, a trader that is seeking to adopt a

    large speculative position in a particular commodity and that is

    constrained by the limits would have to either diversify or refrain

    from taking on additional positions.\386\

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

    \386\ In this respect, the costs of these limits may not in fact

    be additional expenditures or outlays but rather foregone benefits

    that would have accrued to the firm had it been permitted to hold

    positions in excess of the limits. For ease of reference, the term

    ``costs'' as used in this context also refers to foregone benefits.

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

    The Commission does not believe it is reasonably feasible to

    quantify or estimate the costs from such changes in trading strategies.

    Quantifying the consequences or costs of market participation or

    trading strategies would necessitate having access to and understanding

    of an entity's business model, operating model, and hedging strategies,

    including an evaluation of the potential alternative hedging or

    business strategies that would be adopted if such limits were imposed.

    Because the economic consequences to any particular firm will vary

    depending on that firm's business model and strategy, the Commission

    believes it is impractical to develop any type of generic or

    representative calculation of these economic consequences.\387\

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

    \387\ Further, the Commission also believes it would be

    impractical to require all potentially affected firms to provide the

    Commission with the information necessary for the Commission to make

    this determination or assessment for each firm. In this regard, the

    Commission notes that none of the commenters provided or offered to

    provide any such analysis to the Commission.

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

    The Commission believes that many of the costs that arise from the

    application of the final rules are a consequence of the congressional

    mandate that the Commission impose position limits. As described more

    fully below, the Commission has considered these costs in adopting

    these final rules, and has, where appropriate, attempted to mitigate

    costs while observing the express direction of Congress in section 4a

    of the CEA.

    In the discussions below as well as in the Paperwork Reduction Act

    (``PRA'') section of this release, the Commission estimates or

    quantifies the implementing costs wherever reasonably feasible, and

    where infeasible provides a qualitative assessment of the costs and

    benefits of the final rule. In many instances, the Commission finds

    that it is not feasible to estimate or quantify the costs with reliable

    precision, primarily due to the fact that the final rules apply to a

    heretofore unregulated swaps markets and, as previously noted, the

    Commission does not have the resources or information to determine how

    market participants may adjust their trading strategies in response to

    the rules.\388\

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

    \388\ Further, as previously noted, market participants did not

    provide the Commission with specific information regarding how they

    may alter their trading strategies if the limits were adopted.

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

    At present, the Commission has limited data concerning swaps

    transactions in Referenced Contracts (and market participants engaged

    in such transactions).\389\ In light of these data limitations, to

    inform its consideration of costs and benefits the Commission has

    relied on: (1) Its experience in the futures markets and information

    gathered through public comment letters, its hearing, and meetings with

    the industry; and (2) relevant data from the Commission's Large Trader

    Reporting System and other relevant data concerning cleared swaps and

    SPDCs traded on ECMs.\390\

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

    \389\ The Commission should be able to obtain an expanded set of

    swaps data through its swaps large trader reporting and SDR

    regulations. See Large Trader Reporting for Physical Commodity

    Swaps, 76 FR 43851, Jul. 22, 2011; and Swap Data Repositories:

    Registration Standards, Duties and Core Principles, 76 FR 54538,

    Sept. 1, 2011.

    \390\ Prior to the Dodd-Frank Act and at least until the

    Commission can begin regularly collecting swaps data under the Large

    Trader Reporting for Physical Commodity Swaps regulations (76 FR

    43851, Jul. 22, 2011), the Commission's authority to collect data on

    the swaps market was generally limited to Commission regulation

    18.05 regarding Special Calls, and Part 36 of the Commission's

    regulations.

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

    4. Position Limits

    To implement the Congressional mandate under Dodd-Frank, the

    proposal identified 28 core physical delivery futures contracts in

    proposed Regulation 151.2 (``Core Referenced Futures Contracts''),\391\

    and would apply aggregate limits on a futures equivalent basis across

    all derivatives that are (i) directly or indirectly linked to the price

    of a Core Referenced Futures Contracts, or (ii) based on the price of

    the same underlying commodity for delivery at the same delivery

    location as that of a Core Referenced Futures Contracts, or another

    delivery location having substantially the same supply and demand

    fundamentals (``economically equivalent contracts'') (collectively with

    Core Referenced Futures Contracts, ``Referenced Contracts'').\392\

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

    \391\ This is discussed in greater detail in II.B. of this

    release. These Core Referenced Futures Contracts are listed in

    regulation 151.2 of these final rules.

    \392\ 76 FR at 4753.

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

    As explained in the proposal, the 28 Core Referenced Futures

    Contracts were selected on the basis that (i) they have high levels of

    open interest and significant notional value or (ii) they serve as a

    reference price for a significant number of cash market transactions.

    The Commission believes that contracts that meet these criteria are of

    particular significance to interstate commerce, and therefore warrant

    the imposition of federally administered limits. The remaining physical

    commodity contracts traded on a DCM or SEF that is a trading facility

    will be subject to limits set by those facilities.\393\

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

    \393\ The Commission further considers registered entity limits

    in section III.A.3.e.

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

    [[Page 71666]]

    With regard to the scope of ``economically equivalent'' contracts

    that are subject to limits concurrently with the 28 Core Referenced

    Futures Contract limits, this definition incorporates contracts that

    price the same commodity at the same delivery location or that utilize

    the same cash settlement price series of the Core Referenced Futures

    Contracts (i.e., ``look-alikes'' as discussed above in II.B.).\394\ The

    Commission continues to believe, as mentioned in the proposal, that

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

    \394\ The Commission notes economically equivalent contracts are

    a subset of ``Referenced Contracts.''

    ``[t]he proliferation of economically equivalent instruments

    trading in multiple trading venues, * * * warrants extension of

    Commission-set position limits beyond agricultural products to

    metals and energy commodities. The Commission anticipates this

    market trend will continue as, consistent with the regulatory

    structure established by the Dodd-Frank Act, economically equivalent

    derivatives based on exempt and agricultural commodities are

    executed pursuant to the rules of multiple DCMs and SEFs and other

    Commission registrants. Under these circumstances, uniform position

    limits should be established across such venues to prevent

    regulatory arbitrage and ensure a level playing field for all

    trading venues.'' \395\

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

    \395\ See 75 FR 4755.

    In addition, by imposing position limits on contracts that are based on

    an identical commodity reference price (directly or indirectly) or the

    price of the same commodity at the same delivery location, the final

    rules help to prevent manipulative behavior. Absent such limits on

    related markets, a trader would have a significant incentive to attempt

    to manipulate the physical-delivery market to benefit a large position

    in the cash-settled market.

    The final rule should provide for lower costs than the proposal

    with respect to determining whether a contract is a Referenced Contract

    because the final rule provides an objective test for determining

    Referenced Contracts and does not require case by case analysis of the

    correlation between contracts. In response to comments, the Commission

    eliminated the category of Referenced Contracts regarding contracts

    that have substantially the same supply and demand fundamentals of the

    Core Referenced Futures Contracts because this category did not

    establish objective criteria and would be difficult to administer when

    the correlation between two contracts change over time.

    The final categories of economically equivalent Referenced

    Contracts should also limit the costs of determining whether a contract

    is a Referenced Contract because the scope is objectively defined and

    does not require case by case analysis of the correlation between

    contracts. In this regard, the Commission eliminated the category of

    Referenced Contracts regarding contracts that have substantially the

    same supply and demand fundamentals of the Core Referenced Futures

    Contracts because this category did not establish objective criteria

    and would be difficult to administer when the correlation between two

    contracts change over time.

    The definitional criteria for the core physical delivery futures

    contracts, together with the criteria for ``economic equivalent''

    derivatives, are intended to ensure that those contracts that are of

    major significance to interstate commerce and show a sufficient nexus

    to create a single market across multiple venues are subject to Federal

    position limits.\396\ Nevertheless, the Commission recognizes that the

    criteria informing the scope of Referenced Contracts may need to evolve

    given the Commission's limited data and changes in market structure

    over time. As the Commission gains further experience in the swaps

    market, it may determine to expand, restrict, or otherwise modify

    through rulemaking the 28 Core Referenced Futures Contracts and the

    related definition of ``economically equivalent'' contracts.

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

    \396\ One commenter (CL-WGC supra note 21 at 3) opined that gold

    should not be subject to position limits because ``gold is not

    consumed in a normal sense, as virtually all the gold that has ever

    been mined still exists'' and given the ``beneficial qualities of

    gold to the international monetary and financial systems.'' Section

    4a requires the Commission to impose limits on all physical-delivery

    contracts and relevant ``economically equivalent'' contracts. The

    Commission notes that Congress directed the Commission to impose

    limits on physical commodities, including exempt and agricultural

    commodities. The scope of such commodities includes metal

    commodities.

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

    The Commission anticipates that the additional cost of monitoring

    positions in Referenced Contracts should be minimal for market

    participants that currently monitor their positions throughout the day

    for purposes such as compliance with existing DCM or Commission

    position limits, to meet their fiduciary obligations to shareholders,

    to anticipate margin requirements, etc. The Commission estimates that

    trading firms that currently track compliance with DCM or Commission

    position limits will incur an additional implementation cost of two or

    three labor weeks in order to adjust their monitoring systems to track

    the position limits for Referenced Contracts. Assuming an hourly wage

    of $78.61,\397\ multiplied by 120 hours, this implementation cost would

    amount to approximately $12,300 per firm, for a total across all

    estimated participants affected by such limits (as described in

    subsequent sections) of $4.2 million.\398\ These costs are generally

    associated with adjusting systems for monitoring futures and swaps

    Referenced Contracts to track compliance with position limits.\399\

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

    \397\ The Commission staff's estimates concerning the wage rates

    are based on salary information for the securities industry compiled

    by the Securities Industry and Financial Markets Association

    (``SIFMA''). The $78.61 per hour is derived from figures from a

    weighted average of salaries and bonuses across different

    professions from the SIFMA Report on Management & Professional

    Earnings in the Securities Industry 2010, modified to account for an

    1800-hour work-year and multiplied by 1.3 to account for overhead

    and other benefits. The wage rate is a weighted national average of

    salary and bonuses for professionals with the following titles (and

    their relative weight): ``programmer (senior)'' (30 percent);

    ``programmer'' (30 percent); ``compliance advisor'' (intermediate)

    (20 percent); ``systems analyst'' (10 percent); and ``assistant/

    associate general counsel'' (10 percent).

    \398\ Although one commenter provided a wage estimate of $120

    per hour, the Commission believes that the SIFMA industry average

    properly accounts for the differing entities that would be subject

    to these limits. See CL-WGCEF supra note 35 at 26, ``Internal data

    collected and analyzed by members of the Working Group suggest that

    the average cost per hour is approximately $120, much higher than

    SIFMA's $78.61, as relied upon by the Commission.'' In any event,

    even using the Working Group's higher estimated wage cost, the

    resulting cost per firm of approximately $18,000 per firm would not

    materially change the Commission's consideration of these costs in

    relation to the benefits from the limits, and in light of the

    factors in CEA section 15(a), 7 U.S.C. 19(a).

    \399\ Among other things, a market participant will be required

    to identify which swap positions are subject to position limits

    (i.e., swaps that are Referenced Contracts) and allocate these

    positions to the appropriate compliance categories (e.g., the spot

    month, all months, or a single month of a Referenced Contract).

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

    Participants currently without reportable futures positions (i.e.,

    those who trade solely or mostly in the swaps marketplaces, or ``swaps-

    only'' traders), and traders with certain positions outside of the spot

    month in Referenced Contracts that do not currently have position

    limits or position accountability levels, would likely incur an initial

    cost in excess of those traders that do monitor their positions for the

    purpose of compliance with position limits. Because firms with

    positions in the futures markets should already have systems and

    procedures in place for monitoring compliance with position limits, the

    Commission believes that firms with positions mostly or only in the

    swaps markets would be representative of the highest incremental costs

    of the rules. Specifically, swaps-only traders may incur larger start-

    up costs to develop a compliance system to monitor their

    [[Page 71667]]

    positions in Referenced Contracts and to comply with an applicable

    position limit. The Commission estimates that approximately 100 swaps-

    only firms would be subject to position limits for the first time.

    The Commission believes that many swaps-only market participants

    potentially affected by the spot month limits are likely to have

    developed business processes to control the size of swap positions for

    a variety of business reasons, including (i) managing counterparty

    credit risk exposure, (ii) limiting the value at risk to such swap

    positions, and (iii) ensuring desired accounting treatment (e.g., hedge

    accounting under Generally Accepted Accounting Principles (``GAAP'')).

    These processes are more likely to be well developed by people with a

    larger exposure to swaps, particularly those persons with position

    sizes with a notional value close to a spot-month position limit. For

    example, traders with positions in Referenced Contracts at the spot-

    month limit in the final rule would have a notional value of

    approximately $8.2 million to a maximum of $544.3 million, depending on

    the underlying physical commodity.\400\ The minimum value in this range

    represents a significant exposure in a single payment period for swaps;

    therefore, the Commission expects that traders with positions at the

    spot-month limit will have already developed some system to control the

    size of their positions on an intraday basis. The Commission also

    anticipates, based on current swap market data, comment letters, and

    trade interviews, that very few swaps-only traders would have positions

    close to the non-spot-month position limits imposed by the final rules,

    given that the notional value of a position at an all-months-combined

    limit will be much larger than that of a position at a spot-month

    limit.

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

    \400\ These notional values were determined based on notional

    values determined as of September 7, 2011 closing prices. The

    computation used was a position at the size of the spot-month limit

    in appendix A to part 151 (e.g., 600 contracts in wheat) times the

    unit of trading (e.g., 5,000 bushels per contract) times the closing

    price per quantity of commodity (e.g., dollars per bushel).

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

    As explained above, the Commission expects that traders with

    positions at the spot-month limit will have already developed some

    system to control the size of their positions on an intraday basis.

    However, the Commission recognizes that there may be a variety of ways

    to monitor positions for compliance with Federal position limits. While

    specific cost information regarding such swaps-only entities was not

    provided to the Commission in comment letters, the Commission

    anticipates that a firm could implement a monitoring regime amid a wide

    range of compliance systems based on the specific, individual needs of

    the firm. For example, a firm may elect to utilize an automatic

    software system, which may include high initial costs but lower long-

    term operational and labor costs. Conversely, a firm may decide to use

    a less capital-intensive system that requires more human labor to

    monitor positions. Thus, taking this range into account, the Commission

    anticipates, on average, labor costs per entity ranging from 40 to

    1,000 annual labor hours, $5,000 to $100,000 in total annualized

    capital/start-up costs, and $1,000 to $20,000 in annual operating and

    maintenance costs.\401\

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

    \401\ These costs would likely be lower for firms with swaps-

    only positions far below the speculative limit, as those firms may

    not need comprehensive, real-time analysis of their swaps positions

    for position limit compliance to observe whether they are at or near

    the limit. Costs may be higher for firms with very large or very

    complex positions, as those firms may need comprehensive, real-time

    analysis for compliance purposes. Due to the variation in both

    number of positions held and degree of sophistication in existing

    risk management systems, it is not feasible for the Commission to

    provide a greater degree of specificity as to the particularized

    costs for firms in the swaps market.

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

    During the initial period of implementation, a large number of

    traders are expected to be able to avail themselves of the pre-existing

    position exemption as defined in Sec. 151.9. As preexisting positions

    are replaced with new positions, traders will be able to incorporate an

    understanding of the new regime into existing and new trading

    strategies. The Commission has also incorporated a broader exclusion

    for swaps entered into before the effective date of the Dodd-Frank Act

    in addition to the general application of position limits to pre-

    existing futures and swaps positions entered into before the effective

    date of this rulemaking, which should allow swaps market participants

    to gradually transition their trading activity into compliance with the

    position limits set forth in part 151.

    The final position limit rules impose the costs outlined above on

    traders who hold or control Referenced Contracts to monitor their

    futures and swaps positions on both an end-of-day and on an intraday

    basis to ensure compliance with the limit.\402\ Commenters raised

    concerns regarding the ability for their current compliance systems to

    conduct the requisite tracking and monitoring necessary to comply with

    the Proposed Rules, citing the additional contracts and markets needing

    monitoring in real-time.\403\

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

    \402\ The Commission notes that generally, entities have not

    previously tracked their swaps positions for purposes of position

    limit compliance. With regard to implementing systems to monitor

    positions for this rule, the Commission also notes that some

    entities that engage in only a small amount of swaps activity

    significantly below the applicable position limit may determine,

    based on their own assessment, not to track their position on an

    intraday basis because their positions do not raise concerns about a

    limit.

    \403\ CL-COPE supra note 21 at 5; and CL-Utility Group supra

    note 21 at 6. See also CL-Barclays I supra note 164 at 5; CL-API

    supra note 21 at 14; and CL-Shell supra note 35 at 6-7.

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

    The Commission and DCMs have historically applied position limits

    to both intraday and end-of-day positions; the regulations do not

    represent a departure from this practice.\404\ In this regard, the

    costs necessary to monitor positions in Referenced Contracts on an

    intraday basis outlined above do not constitute a significant

    additional cost on market participants.\405\ Positions above the limit

    levels, at any time of day, provide opportunity and incentive to trade

    such large quantities as to unduly influence market prices. The absence

    of position limits during the trading day would make it impossible for

    the Commission to detect and prevent market manipulation and excessive

    speculation as long as positions were below the limit at the end of the

    day.

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

    \404\ See section II.F of this release. See also Commodity

    Futures Trading Commission Division of Market Oversight, Advisory

    Regarding Compliance with Speculative Position Limits (May 7, 2010),

    available at http://www.cftc.gov/ucm/groups/public/@industryoversight/documents/file/specpositionlimitsadvisory0510.pdf. See e.g., CME Rulebook, Rule

    443, quoted at http://www.cmegroup.com/rulebook/files/CME_Group_

    RA0909-5.pdf'') (amended Sept. 14, 2009); ICE OTC Advisory, Updated

    Notice Regarding Position Limit Exemption Request Form for

    Significant Price Discovery Contracts, available at https://www.theice.com/publicdocs/otc/advisory_notices/ICE_OTC_Advisory_0110001.pdf (Jan. 4, 2010).

    \405\ The Commission notes that the CEA mandates DCMs and SEFs

    to have methods for conducting real-time monitoring of trading.

    Sections 5(d)(4)(A) and 5h(f)(4)(B) of the CEA, 7 U.S.C. 7(d)(4)(A),

    7b-3(f)(4)(B).

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

    Further, as discussed above, the Commission anticipates that the

    cost of monitoring positions on an intraday basis should be marginal

    for market participants that are already required to monitor their

    positions throughout the day for compliance purposes. For those

    entities whose positions historically have been only in the swaps or

    OTC markets, the costs of monitoring intraday positions have been

    calculated as part of the costs to create and monitor compliance

    systems for position limits in general, discussed above in further

    detail.

    As the Commission gains further experience and data regarding the

    swaps market and market participants trading

    [[Page 71668]]

    therein, it may reevaluate the scope of the Core Referenced Futures

    Contracts, including the definition of economically equivalent

    contracts.

    a. Spot-Month Limits for Physical Delivery Contracts

    The Commission is establishing position limits during the spot-

    month for physically delivered Core Referenced Futures Contracts. For

    non-enumerated agricultural, as well as energy and metal Referenced

    Contracts, the Commission initially will impose spot-month position

    limits for physical-delivery contracts at the levels currently imposed

    by the DCMs. Thereafter, the Commission will establish the levels based

    on the 25 percent of estimated deliverable supply formula with DCMs

    submitting estimates of deliverable supply to the Commission to assist

    in establishing the limit. For legacy agricultural Reference Contracts,

    the Commission will impose the spot-month limits currently imposed by

    the Commission.

    Pursuant to Core Principles 3 and 5 under the CEA, DCMs generally

    are required to fix spot-month position limits to reduce the potential

    for manipulation and the threat of congestion, particularly in the spot

    month.\406\ Pursuant to these Core Principles and the Commission's

    implementing guidance,\407\ DCMs have generally set the spot-month

    position limits for physical-delivery futures contracts based on the

    deliverable supply of the commodity in the spot month. These spot-month

    limits under current DCM rules are generally within the levels that

    would be established using the 25 percent of deliverable supply formula

    described in these final rules. The Commission received several

    comments regarding costs of position limits in the spot month.

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

    \406\ Core Principle 3 specifies that a board of trade shall

    list only contracts that are not readily susceptible to

    manipulation, while Core Principle 5 obligates a DCM to establish

    position limits and position accountability provisions where

    necessary and appropriate ``to reduce the threat of market

    manipulation or congestion, especially during the delivery month.''

    \407\ See appendix B, part 38, Commission regulations.

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

    One commenter noted the definition of deliverable supply was vague

    and could increase costs to market participants.\408\ One commenter

    suggested that the Commission instead base spot-month limits on

    ``available deliverable supply,'' a broader measure of physical

    supply.\409\ Commenters also raised an issue with the schedule for

    resetting limits, explaining that resetting the limits on an annual

    basis would introduce uncertainty into the market, increase the burden

    on DCMs, and increase costs for the Commission.\410\

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

    \408\ See e.g., CL-API supra note 21 at 5.

    \409\ ``Available deliverable supply'' includes (i) all

    available local supply (including supply committed to long-term

    commitments), (ii) all deliverable non-local supply, and (iii) all

    comparable supply (based on factors such as product and location).

    See CL-ISDA/SIFMA supra note 21 at 21. Another commenter, AIMA,

    similarly advocated a more expansive definition of deliverable

    supply. CL-AIMA supra note 35 at 3 (``This may include all supplies

    available in the market at all prices and at all locations, as if a

    party were seeking to buy a commodity in the market these factors

    would be relevant to the price.'').

    \410\ See e.g., CL-MGEX supra note 74 at 2-4; and CL-BGA supra

    note 35 at 20.

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

    In addition to the costs associated with generally monitoring

    positions in Referenced Contracts, the Commission anticipates some

    costs associated with the level of this spot-month position limit for

    physical-delivery contracts. The Commission estimates,\411\ on an

    annual basis, 84 traders in legacy agricultural Core Referenced Futures

    Contracts, approximately 50 traders in non-legacy agricultural

    Referenced Contracts, 12 traders in metal Referenced Contract, and 85

    traders in energy Referenced Contracts would hold or control positions

    that could exceed the spot-month position limits in Sec.

    151.4(a).\412\ For the majority of participants, the 25 percent of

    deliverable supply formula is estimated to impose limits that are

    sufficiently high, so as not to affect their hedging or speculative

    activity; thus, the number of participants potentially in excess of

    these limits is expected to be small in proportion to the market as a

    whole.\413\

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

    \411\ The Commission's estimates of the number of affected

    participants for both spot-month and non-spot-month limits are based

    on the data it currently has on futures, options, and the limited

    set of data it has on cleared swaps. As such, the actual number of

    affected participants may vary from these estimates.

    \412\ These estimates are based on the number of unique traders

    holding hedge exemptions for existing DCM, ECM, or FBOT spot-month

    position limits for Referenced Contracts.

    \413\ To illustrate this, the Commission selected examples from

    each category of Core Referenced Futures Contracts. In the CBOT Corn

    contract (a legacy agricultural Referenced Contract), only

    approximately 4.8 percent of reportable traders are estimated to be

    impacted using the methods explained above. Using the ICE Futures

    Coffee contract as an example of a non-legacy agricultural

    Referenced Contract, COMEX Gold as an example of a metal Referenced

    Contracts, and NYMEX Crude Oil as an example of an energy Referenced

    Contract, the Commission estimates only 1.7 percent, 1.2 percent,

    and 8 percent (respectively) of all reportable traders in those

    markets would be impacted by the spot-month limit for physical-

    delivery contracts. These estimates indicate that the number of

    affected entities is expected to be small in comparison to the rest

    of the market.

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

    To estimate the number of traders potentially affected by the spot-

    month position limits in physically delivered contracts, the Commission

    looked to the number of traders currently relying on hedging and other

    exemptions from DCM position limits.\414\ While the Commission believes

    that the statutory definition of bona fide hedging will to a certain

    extent overlap with the bona fide hedging exemptions applied at the

    various DCMs, the definitions are not completely co-extensive. As such,

    the costs of adjusting hedging strategies or reducing the size of

    positions both within and outside of the spot-month are difficult to

    determine. For example, some of the traders relying on a current DCM

    hedging exemption may be eligible for bona fide hedging or other

    exemptions from the limits adopted herein, and thus incur the costs

    associated with filing exemption paperwork. However, other traders may

    incur the costs associated with the reduction of positions to ensure

    compliance. Absent data on the application of a bona fide hedge

    exemption, the Commission cannot determine at this time the number of

    entities who will be eligible for an exemption under the revised

    statute, and thus cannot determine the number of participants who may

    realize the benefits of being exempt from position limits and would

    incur a filing cost for the exemption, compared to those who may need

    to reduce their positions.\415\ The estimated monetary costs associated

    with claiming a bona fide hedge exemption are discussed below in

    consideration of the costs and benefits for bona fide hedging as well

    as in the PRA section of this final rule.

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

    \414\ Currently, DCMs report to the Commission which

    participants receive hedging and other exemptions that allow those

    participants to exceed position limit levels in the spot month.

    \415\ The Commission notes that under the pre-existing positions

    exemption, a trader would not be in violation of a position limit

    based solely upon the trader's pre-existing positions in Referenced

    Contracts. Further, swaps entered into before the effective date of

    the Dodd-Frank Act will not count toward a speculative limit, unless

    the trader elects to net such swaps positions to reduce its

    aggregate position.

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

    Regarding costs related to market participation and trading

    strategies that need to take into account the new position limits rule,

    as mentioned above, the Commission is currently unable to estimate

    these costs associated with the spot-month position limit. Market

    participants who are the primary source of such information did not

    provide the Commission with any such information in their comments on

    the proposal. Additionally, the Commission believes it would not be

    feasible to require market participants to share such strategies with

    the Commission, or for the Commission to attempt its own

    [[Page 71669]]

    assessment of the costs of potential business strategies of market

    participants. While the Commission does anticipate some cost for

    certain firms to adjust their trading and hedging strategy to account

    for position limits, the Commission does not believe such costs to be

    overly burdensome. All of the 28 Core Referenced Futures Contracts have

    some form of spot-month position limits currently in place by their

    respective DCMs, and thus market participants with very large positions

    (at least those whose primary activity is in futures and options

    markets) should be currently incurring costs (or foregoing benefits)

    associated with those limits. Further, the Commission notes that CEA

    section 4a(a) mandates the imposition of a spot-month position limit,

    and therefore, a certain level of costs is already necessary to comply

    with the Congressional mandate.

    The Commission further notes that the spot limits continue current

    market practice of establishing spot-month position limits at 25

    percent of deliverable supply. This continuity in the regulatory scheme

    should reduce the number of strategy changes that participants may need

    to make as a result of the promulgation of the final rule, particularly

    for current futures market participants who already must comply with

    this limit under the current position limits regimes.

    With regard to the use of deliverable supply to set spot-month

    position limits, in the Commission's experience of overseeing the

    position limits established at the exchanges as well as federally-set

    position limits, ``spot-month speculative position limits levels are

    `based most appropriately on an analysis of current deliverable

    supplies and the history of various spot-month expirations.' '' \416\

    The comments received provide no compelling reason for changing that

    view. The Commission continues to believe that deliverable supply

    represents the best estimate of how much of a commodity is actually

    available in the cash market, and is thus the best basis for

    determining the proper level to deter manipulation and excessive

    speculation while retaining liquidity and protecting price discovery.

    In this regard, the Commission and exchanges have historically applied

    the formula of 25 percent of deliverable supply to set the spot-month

    position limit, and in the Commission's experience, this formula is

    effective in diminishing the potential for manipulative behavior and

    excessive speculation without unduly restricting liquidity for bona

    fide hedgers or negatively impacting the price discovery process.

    Further, the definition of deliverable supply adopted in these final

    rules is consistent with the current DCM practice in setting spot-month

    limits. The Commission believes that this consistent approach

    facilitates an orderly transition to Federal limits.

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

    \416\ 64 FR 24038, 24039, May 5, 1999.

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

    The final rules require DCMs to submit estimates of deliverable

    supply to the Commission every other year for each non-legacy

    Referenced Contract. The Commission will use this information to

    estimate deliverable supply for a particular commodity in resetting

    position limits. The Commission does not anticipate a significant

    additional burden on DCMs to submit estimates of deliverable supply

    because DCMs currently monitor deliverable supply to comply with Core

    Principles 3 and 5 and they must, as part of their self-regulatory

    responsibilities, make such calculations to justify initial limits for

    newly listed contracts or to justify changes to position limits for

    listed contracts. Given that DCMs that list Core Referenced Futures

    Contracts have considerable experience in estimating deliverable supply

    for purposes of position limits, this expertise will be of significant

    benefit to the Commission in its determination of the level of

    deliverable supply for the purpose of resetting spot-month position

    limits. The additional data provided by DCMs will help the Commission

    to accurately determine the amounts of deliverable supply, and

    therefore the proper level of spot-month position limits.

    Moreover, the Commission has staggered the resetting of position

    limits for agricultural contracts, energy contracts, and metal

    contracts as outlined in II.D.5. and II.E.3. of this release in order

    to further reduce the burden of calculating and submitting estimates of

    deliverable supply to the Commission. As explained in the PRA section,

    the Commission estimates the cost to DCMs to submit deliverable supply

    data to be a total marginal burden, across the six affected entities,

    of 5,000 annual labor hours for a total of $511,000 in labor costs and

    $50,000 in annualized capital and start-up costs and annual total

    operating and maintenance costs.

    b. Spot-Month Limits for Cash-Settled Contracts

    A spot-month limit is also being implemented for cash-settled

    contract markets, including cash-settled futures and swaps. Under the

    final rules, with the exception of natural gas contracts, a market

    participant could hold positions in cash-settled Referenced Contracts

    equal to twenty-five percent of deliverable supply underlying the

    relevant Core Referenced Futures Contracts. With regard to cash-settled

    natural gas contracts, a market participant could hold positions in

    cash-settled Referenced Contracts that are up to five times the limit

    applicable to the relevant physical-delivery Core Referenced Futures

    Contracts. The final rules also impose an aggregate spot-month limit

    across physical-delivery and cash-settled natural gas contracts at a

    level of five times the spot month limit for physical-delivery

    contracts. The Commission has determined not to adopt the proposed

    conditional spot-month limit, under which a trader could maintain a

    position of five times the position limit in the Core Referenced

    Futures Contract only if the participant did not hold positions in

    physical-delivery Core Referenced Futures Contracts and did not hold 25

    percent or more of the deliverable supply of the underlying cash

    commodity.

    Several commenters questioned the application of proposed spot-

    month position limits to cash-settled contracts.\417\ Some of these

    commenters suggested that cash-settled contracts should not be subject

    to spot-month limits based on estimated deliverable supply, and should

    be subject to relatively less restrictive spot-month position limits,

    if subject to any limits at all.\418\

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

    \417\ CL-ISDA/SIFMA supra note 21 at 6-7, 19; CL-Goldman supra

    note 90 at 5; CL-ICI supra note 21 at 10; CL-MGEX supra note 74 at 4

    (particularly current MGEX Index Contracts that do not settle to a

    Referenced Contract should be considered exempt from position limits

    because cash-settled index contracts are not subject to potential

    market manipulation or creation of market disruption in the way that

    physical-delivery contracts might be); CL-WGCEF supra note 35 at 20

    (``the Commission should reconsider setting a limit on cash-settled

    contracts as a function of deliverable supply and establish a much

    higher, more appropriate spot-month limit, if any, on cash-settled

    contracts''); CL-MFA supra note 21 at 16-17; and CL-SIFMA AMG I

    supra note 21 at 7.

    \418\ CL-BGA supra note 35 at 19; CL-ICI supra note 21 at 10;

    CL-MFA supra note 21 at 16-17; CL-WGCEF supra note 35 at 20; CL-

    Cargill supra note 76 at 13; CL-EEI/EPSA supra note 21 at 9; and CL-

    AIMA supra note 35 at 2. See also CL-NGSA/NCGA supra note 124 at 4-5

    (cash-settled contracts should have no limits, or at least limits

    much greater than the proposed limit, given the different economic

    functions of the two classes of contracts).

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

    BGA, for example, argued that position limits on swaps should be

    set based on the size of the open interest in the swaps market because

    swap contracts do not provide for physical delivery.\419\ Further,

    certain commenters argued that imposing an aggregate speculative limit

    on all cash-settled contracts will reduce substantially the cash-

    settled positions that a trader can

    [[Page 71670]]

    hold because, currently, each cash-settled contract is subject to a

    separate, individual limit, and there is no aggregate limit.\420\ Other

    commenters urged the Commission to eliminate class limits and allow for

    netting across futures and swaps contracts so as not to impact

    liquidity.\421\

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

    \419\ CL-BGA supra note 35 at 10.

    \420\ See e.g., CL-FIA I supra note 21 at 10; and CL-ICE I supra

    note 69 at 6.

    \421\ See e.g., CL-ISDA/SIFMA supra note 21 at 8.

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

    A number of commenters objected to limiting the availability of a

    higher limit in the cash-settled contract to traders not holding any

    physical-delivery contract.\422\ For example, CME argued that the

    proposed conditional limits would encourage price discovery to migrate

    to the cash-settled contracts, rendering the physical-delivery contract

    ``more susceptible to sudden price movements during the critical

    expiration period.'' \423\ AIMA commented that the prohibition against

    holding positions in the physical-delivery Core Referenced Futures

    Contract will cause investors to trade in the physical commodity

    markets themselves, resulting in greater price pressure in the physical

    commodity.\424\

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

    \422\ CL-AFIA supra note 94 at 3; CL-AFR supra note 17 at 6; CL-

    ATAA supra note 94 at 7; CL-BGA supra note 35 at 11-12; CL-Centaurus

    Energy supra note 21 at 3; CL-CME I supra note 8 at 10; CL-WGCEF

    supra note 35 at 21-22; and CL-PMAA/NEFI supra note 6 at 14.

    \423\ CL-CME I supra note 8 at 10. Similarly, BGA argued that

    conditional limits incentivize the migration of price discovery from

    the physical contracts to the financial contracts and have the

    unintended effect of driving participants from the market, thereby

    increasing the potential for market manipulation with a very small

    volume of trades. CL-BGA supra note 35 at 12.

    \424\ CL-AIMA supra note 35 at 2.

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

    Some of these commenters, including the CME Group and KCBT,

    recommended that cash-settled Referenced Contracts and physical-

    delivery contracts be subject to the same position limits.\425\ Two

    commenters opined that if the conditional limits are adopted, they

    should be greater than five times the 25 percent of deliverable supply

    formula.\426\ ICE recommended that they be increased to at least ten

    times the 25 percent of deliverable supply.\427\

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

    \425\ CL-CME I supra note 8 at 10; CL-KCBT I supra note 97 at 4;

    and CL-APGA supra note 17 at 6, 8. Specifically, the KCBT argued

    that parity should exist in all position limits (including spot-

    month limits) between physical-delivery and cash-settled Referenced

    Contracts; otherwise, these limits would unfairly advantage the

    look-alike cash-settled contracts and result in the cash-settled

    contract unduly influencing price discovery. Moreover, the higher

    spot-month limit for the financial contract unduly restricts the

    physical market's ability to compete for spot-month trading, which

    provides additional liquidity to commercial market participants that

    roll their positions forward. CL-KCBT I supra note 97 at 4.

    \426\ CL-AIMA supra note 35 at 2; and CL-ICE I supra note 69 at

    8.

    \427\ CL-ICE I supra note 69 at 8. ICE also recommended that the

    Commission remove the prohibition on holding a position in the

    physical-delivery contract or the duration to a narrower window of

    trading than the final three days of trading.

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

    Several commenters expressed concern that the conditional spot-

    month limits would ``restrict the physically-delivered contract

    market's ability to compete for spot-month speculative trading

    interest,'' thereby restricting liquidity for bona fide hedgers in

    those contracts.\428\ Another noted that the limit may be detrimental

    to the physically settled contracts because it restricts the ability of

    a trader to be in both the physical-delivery and cash-settled

    markets.\429\ Conversely, one commenter expressed concern that the

    anti-manipulation goal of spot-month position limits would not be met

    because the structure of the conditional limit in the Proposed Rule

    allowed a trader to be active in both the physical commodity and cash-

    settled contracts, and so could use its position in the cash commodity

    to manipulate the price of a physically settled contract to benefit a

    leveraged cash-settled position.\430\

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

    \428\ See e.g., CL-KCBT I supra note 97 at 4 ``[T]he higher

    spot-month limit for the financial contract unduly restricts the

    physical market's ability to compete for spot month speculative

    trading interests, which provide additional liquidity to commercial

    market participants (bona fide hedgers) as they unwind or roll their

    positions forward.'')

    \429\ See e.g., CL-Centaurus Energy supra note 21 at 3.

    \430\ See e.g., CL-Prof. Pirrong supra note 124.

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

    With regard to the application of position limits to cash-settled

    contracts, the Commission notes that Congress specifically directed the

    Commission to impose aggregate spot-month limits on DCM futures

    contracts and swaps that are economically equivalent to such contracts.

    Therefore, the Commission is required to impose limits on such

    contracts. As explained in the proposal, the Commission believes that

    ``limiting a trader's position at expiration of cash-settled contracts

    diminishes the incentive to exert market power to manipulate the cash-

    settlement price or index to advantage a trader's position in the cash-

    settlement contract.'' Further, absent such limits on related markets,

    a trader would have a significant incentive to attempt to manipulate

    the physical-delivery market to benefit a large position in the cash-

    settled economically equivalent contract.

    The Commission is adopting, on an interim final rule basis, spot-

    month limits for cash-settled contract, other than natural gas

    contracts, at 25 percent of the estimated deliverable supply. These

    limits will be in parity with the spot-month limits set for the related

    physical-delivery contracts. As discussed in section II.D.3. of this

    release, the Commission has determined that the one-to-one ratio for

    commodities other than natural gas between the level of spot-month

    limits on physical-delivery contracts and the level on cash-settled

    contracts maximizes the objectives enumerated in section 4a(a)(3) of

    the CEA by ensuring market liquidity for bona fide hedgers, while

    deterring the potential for market manipulation, squeezes, and corners.

    The Commission further notes that this formula is consistent with the

    level the Commission staff has historically deemed acceptable for cash-

    settled contracts, as well as the formula for physical-delivery

    contracts under Acceptable Practices for Core Principle 5 set forth in

    part 38 of the Commission's regulations.

    At this time, the Commission's data set does not allow the

    Commission to estimate the specific number of traders that could

    potentially be impacted by the limits on cash-settled contracts in the

    spot-month for agricultural, metals and energy commodities (other than

    natural gas). However, given the Commission's understanding of the

    overall size of the swaps market in these commodities, the Commission

    believes that a one-to-one ratio of position limits for physical-

    delivery and cash-settled Referenced Contracts maximizes the four

    statutory factors in section 4a(a)(3)(B) of the CEA.

    The Commission is also adopting, on an interim final rule basis, an

    aggregate spot-month limit for physical-delivery and cash-settled

    natural gas contracts, as well as a class limit for cash-settled

    natural gas contracts, both set at a level of five times the level of

    the spot-month limit in the relevant Core Referenced physical-delivery

    natural gas contract.

    As discussed in section II.D.3. of this release, the Commission has

    determined that the one-to-five ratio between the level of spot-month

    limits on physical-delivery natural gas contracts and the level of

    spot-month limits on cash-settled natural gas contracts maximizes the

    objectives enumerated in section 4a(a)(3) of the CEA by ensuring market

    liquidity for bona fide hedgers, while deterring the potential for

    market manipulation, squeezes, and corners. The Commission notes that

    this formula is consistent with the administrative experience with

    conditional limits in DCM and exempt commercial market natural gas

    contracts.

    As described in section II.D.3. of the release, this aggregate

    limit for natural gas contracts responds to commenters'

    [[Page 71671]]

    concerns regarding potentially negative impacts on liquidity and the

    price discovery function of the physical-delivery contract if traders

    are not permitted to hold any positions in the physical-delivery

    contract when they hold contracts in the cash-settled Referenced

    Contract (which are subject to higher limits than the physical-delivery

    contracts).

    The Commission is also no longer restricting the higher limit for

    cash-settled natural gas contracts to entities that hold or control

    less than 25 percent of the deliverable supply in the cash commodity.

    As pointed out by certain commenters,\431\ this provision would create

    significant compliance costs for entities to track whether they meet

    such a condition. The Commission believes at this time that the class

    and aggregate limits in the spot month for natural gas contracts should

    adequately account for market manipulation concerns with regard to

    entities with large cash-market positions; however, the Commission will

    continue to monitor developments in the market to determine whether to

    incorporate a cash-market restriction in the higher cash-settled

    contract limit, and the extent of the benefit provided through

    restricting cash-market positions.

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

    \431\ CL-ISDA/SIFMA supra note 21 at 7.

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

    The Commission expects that its estimate as to the number of

    traders affected by the limits in cash-settled contracts will change as

    swap positions are reported to the Commission through its Large Swaps

    Trader Reporting and SDR regulations. Given the Commission's limited

    data with regard to swaps, the Commission looked to exemptions from

    position limits granted by DCMs and ECMs to estimate the number of

    traders that may be affected by the finalized limits for cash-settled

    contracts. At this time, the only data available pertains to energy

    commodities. The Commission estimates that approximately 70 to 75

    traders hold exemptions from DCM and ECM limits and therefore at least

    this number of traders may be impacted by the spot-month limit for

    cash-settled contracts. Until the Commission has accurate information

    on the size and composition of off-exchange cash-settled Referenced

    Contracts for agricultural, metal, and energy contracts, it is unable

    more precisely to determine the number of traders potentially impacted

    by the aggregate limit.\432\ As discussed above, by implementing the

    one-to-one and one-to-five ratios on an interim basis, the Commission

    can further gather and analyze the ratio and its impact on the market.

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

    \432\ The Commission notes that it is currently unable to

    determine the applicability of bona fide hedge exemptions because of

    differences in the revised statutory definition compared to the

    current definition applied by DCMs and ECMs. In addition, traders

    may net cash-settled contracts for purposes of the class limit in

    the spot month. Thus, absent complete data on swaps positions, the

    Commission cannot accurately estimate a trader's position for the

    purposes of compliance with spot-month limits for cash-settled

    contracts.

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

    The Commission also notes that swap dealers and commercial firms

    enter into a significant number of swap transactions that are not

    submitted to clearing.\433\ Based on the nature of the commercial

    counterparty to such transactions, the Commission anticipates that many

    of these transactions involving commercial firm counterparties would

    likely be entitled to bona fide hedging exemptions as provided for in

    Sec. 151.5, which should limit the number of persons affected by the

    spot-month limit in cash-settled contracts without an applicable

    exemption.

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

    \433\ This observation is based upon Commission staff

    discussions with members of industry. See http://www.cftc.gov/LawRegulation/.

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

    The Commission also notes that swaps and other over-the-counter

    market participants may face additional costs (including foregone

    benefits) in terms of adjusting position levels and trading strategies

    to the position limits on cash-settled contracts. While current data

    precludes estimating the extent of the financial impact to swap market

    participants, these costs are inherent in establishing limits that

    reach swaps that are economically equivalent to DCM futures contracts,

    as required under section 4a(a)(5).

    c. Non-Spot-Month Limits

    Section 151.4(b) provides that the non-spot-month position limits

    for non-legacy Referenced Contracts shall be fixed at a number

    determined as a function of the level of open interest in the relevant

    Referenced Contract. This formula is defined as 10 percent of the open

    interest up to the first 25,000 contracts plus 2.5 percent of open

    interest thereafter (``10-2.5 percent formula''). This is the same

    formula that has been historically used to set position limits on

    futures exchanges.\434\ With regard to the nine legacy agricultural

    Core Referenced Futures Contracts, which are currently subject to

    Commission imposed non-spot-month position limits, as described in

    section II.E.4. of this release, the Commission is raising those

    existing position limits to the levels described in the CME petition.

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

    \434\ See 17 CFR part 150 (2010).

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

    Commenters expressed concern that non-spot-month limits could be

    harmful, potentially distorting price discovery or liquidity and

    damaging long term hedging strategies.\435\ Others argued that there

    should be no limits outside the spot-month or that the Commission had

    not adequately justified non-spot-month limits.\436\ One commenter

    argued that the proposed non-spot-month class limits would increase

    costs for hedgers and harm market liquidity.\437\ Several commenters

    opined that the Commission should increase the open interest

    multipliers used in determining the non-spot-month position

    limits,\438\ while some commenters explained that the Commission should

    decrease the open interest multipliers to 5 percent of open interest

    for first 25,000 contracts and 2.5 percent thereafter.\439\ Other

    commenters suggested significantly different methodologies for setting

    limits that would result in relatively more restrictive limits on

    speculators.\440\

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

    \435\ See e.g., CL-Teucrium supra note 124 at 2; and CL-ICE I

    supra note 69 at 6.

    \436\ See e.g., CL-WGCEF supra note 35 at 5; and CL-Goldman

    supra note 89 at 2.

    \437\ See e.g., CL-DBCS supra note 247 at 8-9.

    \438\ CL-AIMA supra note at 35 pg. 3; CL-CME I supra note 8 at

    12 (for energy and metals); CL-FIA I supra note 21 at 12 (10% of

    open interest for first 25,000 contracts and then 5%); CL-ICI supra

    note 21 at 10 (10% of open interest until requisite market data is

    available); CL-ISDA/SIFMA supra note 21 at 20; CL-NGSA/NCGA supra

    note 124 at 5 (25% of open interest); and CL-PIMCO supra note 21 at

    11.

    \439\ CL-Greenberger supra note 6 at 13; and CL-FWW supra note

    81 at 12.

    \440\ See e.g., CL-ATA supra note 81 at 4-5; CL-AFR supra note

    17 at 5-6; CL-ATAA supra note 94 at 3, 6, 9-10, 12; CL-Better

    Markets supra note 37 at 70-71 (recommending the Commission to limit

    non-commodity index and commodity index speculative participation in

    the market to 30% and 10% of open interest respectively); CL-Delta

    supra note 20 atpg.5; and CL-PMAA/NEFI supra note 6 at 7.

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

    Several commenters recommended that the Commission should keep the

    legacy limits for legacy agricultural Referenced Contracts.\441\ One

    commenter argued that raising these limits would increase hedging

    margins and increase volatility which would ultimately undermine

    commodity producers' ability to sell their product to consumers.\442\

    Another opined that the Commission need not proceed with phased

    implementation for the legacy agricultural markets because it could set

    [[Page 71672]]

    their limits based on existing legacy limits.\443\

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

    \441\ CL-ABA supra note 150 at 3-4; CL-AFIA supra note 94 at 3;

    CL-Amcot supra note 150 at 2; CL-FWW supra note 81 at 13; CL-IATP

    supra note 113 at 5; and CL-NGFA supra note 72 at 1-2.

    \442\ CL-ABA supra note 150 at 3-4.

    \443\ CL-Amcot supra note 150 at 3.

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

    Several other commenters recommended that the Commission abandon

    the legacy limits.\444\ One commenter argued that the Commission

    offered no justification for treating legacy agricultural contracts

    differently than other Referenced Contract commodities.\445\ Some of

    these commenters endorsed the limits proposed by CME.\446\ Other

    commenters recommended the use of the open interest formula proposed by

    the Commission in determining the position limits applicable to the

    legacy agricultural Referenced Contract markets.\447\ Finally, four

    commenters expressed their preference that non-spot position limits be

    kept consistent for the wheat Referenced Contracts.\448\

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

    \444\ CL-AIMA supra note 35 at 4; CL-Bunge supra note 153 at 1-

    2; CL-DB supra note 153 at 6; CL-Gresham supra note 153 at 4-5; CL-

    FIA I supra note 21 at 12; CL-MGEX supra note 74 at 2; CL-MFA supra

    note 21 at 18-19; and USCF supra note 153 at 10-11.

    \445\ CL-USCF supra note 153 at 10-11.

    \446\ CL-Bunge supra note 153 at 1-2; CL-FIA I supra note 21 at

    12; and CL-Gresham supra note 153 at 5. See CME Petition for

    Amendment of Commodity Futures Trading Commission Regulation 150.2

    (April 6, 2010), available at http//www.cftc.gov/LawRegulation/DoddFrankAct/Rulemaking/DF_26_PosLimits/index.htm.

    \447\ CL-CMC supra note 21 at 3; CL-DB supra note 153 at 10; and

    CL-MFA supra note 21 at 19.

    \448\ CL-CMC supra note 21 at 3; CL-KCBT I supra note 97 at 1-2;

    CL-MGEX supra note 74 at 2; and CL-NGFA supra note 72 at 4.

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

    In addition to the costs associated with generally monitoring

    positions in Referenced Contracts on an intraday basis, the Commission

    anticipates some costs to result from the establishment of the non-

    spot-month position limit, though the Commission expects the resulting

    costs should be minimal for most market participants. To determine the

    number of potentially affected entities, the Commission took existing

    data and calculated the number of traders whose positions would be over

    the final non-spot-month limits.\449\ For the majority of participants,

    the non-spot-month levels are estimated to impose limits that are

    sufficiently high so as to not affect their hedging or speculative

    activity; thus, the Commission projects that relatively few market

    participants will have to adjust their activities to ensure that their

    positions are not in excess of the limits.\450\ According to these

    estimates, the position limits in Sec. 151.4(d) would affect, on an

    annual basis, eighty traders in agricultural Referenced Contracts,

    twenty-five traders in metal Referenced Contracts, and ten traders in

    energy Referenced Contracts.\451\

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

    \449\ The data was based on the Commission's large trader

    reporting data for futures contracts and limited swaps data covering

    certain cleared swap transactions.

    \450\ To illustrate this, the Commission selected examples from

    each category of Core Referenced Futures Contracts. In the CBOT Corn

    contract (an agricultural Referenced Contract), only approximately

    4.8% of reportable traders are estimated to be impacted using the

    methods explained above. Using the COMEX Gold contract as an example

    of a metal Referenced Contracts, and NYMEX Crude Oil as an example

    of an energy Referenced Contract, the Commission estimates only 1.4%

    and .2% (respectively) of all reportable traders in those markets

    would be impacted by the non-spot-month limit. These estimates

    indicate that the number of affected entities is expected to be

    small in comparison to the rest of the market.

    \451\ These estimates do not take into account open interests

    from a significant number of swap transactions, and therefore, the

    Commission believes that the size of the non-spot position limit

    will increase over this estimate as the Commission is able to

    analyse additional data.

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

    As noted above, the Commission's data on uncleared swaps is

    limited. The information currently available to the Commission

    indicates that the uncleared swaps market is primarily comprised of

    transactions between swap dealers and commercial entities. As such,

    some of the above entities that may hold positions in excess of the

    non-spot-month limits may be entitled to bona fide hedging exemptions

    as provided for in Sec. 150.5. Moreover, the Commission understands

    that swap dealers, who constitute a large percentage of those

    anticipated to be near or above the position limits set forth in Sec.

    151.4, generally use futures contracts to offset the residual portfolio

    market risk of their uncleared swaps positions.\452\ Under these final

    rules, market participants can net their physical delivery and cash-

    settled futures contracts with their swaps transactions for purposes of

    complying with the non-spot-month limit. In this regard, the netting of

    futures and swaps positions for such swap dealers would reduce their

    exposure to an applicable position limit.

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

    \452\ The estimated monetary costs associated with claiming a

    bona fide hedge exemption are discussed below in consideration of

    the costs and benefits for bona fide hedging as well as in the

    Paperwork Reduction Act section of this final rule.

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

    Taking these considerations into account, the Commission

    anticipates that for the majority of participants, the non-spot month

    levels are estimated to impose limits that are sufficiently high so as

    to not affect their hedging or speculative activity as these

    participants could either rely on a bona fide hedge exemption or hold a

    net position that is under the limit. Thus, the Commission projects

    that relatively few market participants will have to adjust their

    activities to ensure that their positions are not in excess of the

    limits.

    The economic costs (or foregone benefits) of the level of position

    limits is difficult to determine accurately or quantify because, for

    example, some participants may be eligible for bona fide hedging or

    other exemptions from limits, and thus incur the costs associated with

    filing exemption paperwork, while others may incur the costs associated

    with altering their business strategies to ensure that their aggregate

    positions do not exceed the limits. In the absence of data on the

    extent to which the bona fide hedge exemption will apply to swaps

    transactions, at this time the Commission cannot determine or estimate

    the number of entities that will be eligible for such an exemption.

    Accordingly, the Commission cannot determine or estimate the total

    costs industry-wide of filing for the exemption.\453\

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

    \453\ As previously noted, the costs to an individual firm of

    filing an exemption are estimated at section III.A.3.

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

    Similarly, the Commission is unable to determine or estimate the

    number of entities that may need to alter their business

    strategies.\454\ Commenters did not provide any quantitative data as to

    such potential impacts from the proposed limits, and the Commission

    cannot independently evaluate the potential costs to market

    participants of such changes in strategies, which would necessarily be

    based on the underlying business models and strategies of the various

    market participants.

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

    \454\ The Commission notes that under the pre-existing positions

    exemption, a trader would not be in violation of a position limits

    based solely upon the trader's pre-existing positions in Referenced

    Contracts. Further, swaps entered before the effective date of the

    Dodd-Frank Act will not count toward a speculative limit, unless the

    trader elects to net such swaps positions to reduce their aggregate

    position.

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

    While the Commission is unable to quantify the resulting costs to

    the relatively few number of market participants that the Commission

    estimates may be affected by these limits; to a certain extent costs

    associated with a change in business or trading strategies to comply

    with the non-spot-month position limits imposed by the Commission are a

    consequence of the Congressionally-imposed mandate for the Commission

    to establish such limits. Commenters suggesting that the Commission

    should not adopt non-spot-month position limits fail to address the

    mandate of Congress in CEA section 4a(a)(3)(A) that the Commission

    impose non-spot-month limits. Based on the Commission's long-standing

    experience with the application of the 10--2.5 percent formula to

    establish non-spot-month limits in the futures market as

    [[Page 71673]]

    well as the Commission's limited swaps data, the Commission anticipates

    that the application of this similar formula to both the futures and

    swaps market will appropriately maximize the statutory objectives in

    section 4a(a)(3). The data regarding the swaps market that is currently

    available to the Commission indicates that a limited number of market

    participants will be at or near the speculative position limits and

    that the imposition of these limits should not result in a significant

    decrease in liquidity in these markets. Accordingly, the Commission

    believes that non-spot-month limits imposed as a result of these final

    rules will ensure there continues to be sufficient liquidity for bona

    fide hedgers and the price discovery of the underlying market will not

    be disrupted.

    The Commission has determined to adopt the position limit levels

    proposed by the CME for the legacy Referenced Contracts. Such levels

    would be effective 60 days after the publication date of this

    rulemaking and those levels would be subject to the existing provisions

    of current part 150 until the compliance date of these rules, which is

    60 days after the Commission further defines the term ``swap'' under

    the Dodd-Frank Act. At that point, the relevant provisions of this part

    151, including those relating to bona-fide hedging and account

    aggregation, would also apply. In the Commission's judgment, the CME

    proposal represents a measured approach to increasing legacy limits,

    similar to that previously implemented.\455\ The Commission will use

    the CME's all-months-combined petition levels as the basis to increase

    the levels of the non-spot-month limits for legacy Referenced

    Contracts. The petition levels were based on 2009 average month-end

    open interest. Adoption of the petition levels results in increases in

    limit levels that range from 23 to 85 percent higher than the levels in

    existing Sec. 150.2.

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

    \455\ 58 FR 18057, April 7, 1993.

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

    The Commission has determined to maintain the current approach to

    setting and resetting legacy limits because it is consistent with the

    Commission's historical approach to setting such limits and ensures the

    continuation of maintaining a parity of limit levels for the major

    wheat contracts at DCMs. In response to comments supporting this

    approach, the Commission will also increase the levels of the limits on

    wheat at the MGEX and the KCBT to the level for the wheat contract at

    the CBOT.\456\

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

    \456\ For a discussion of the historical approach, see 64 FR

    24038, 24039, May 5, 1999.

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

    d. Position Visibility

    As discussed in II.L. of this release, the Commission is adopting

    position visibility levels as a supplement to position limits. These

    levels will provide the Commission with the ability to conduct

    surveillance of market participants with large positions in the energy

    and metal Reference Contracts.\457\ As discussed in the Paperwork

    Reduction Act section of these final rules, the Commission increased

    the position visibility levels and reduced the reporting requirements

    in order to decrease the compliance costs associated with position

    visibility levels.

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

    \457\ As discussed in section II.L of this release, the

    Commission is not extending position visibility reporting to

    agricultural contracts because the Commission believes that

    reporting related to bona fide hedging and other exemptions should

    provide the Commission with sufficient data on the largest traders

    in agricultural Referenced Contracts.

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

    Commenters generally stated that the position visibility

    requirements are unnecessary, redundant, burdensome, and overly

    restrictive.\458\ While some commenters acknowledged the usefulness of

    the data collected through position visibility requirements, they

    maintained the burden associated with complying with these requirements

    was too great.\459\ One commenter noted that it is too costly to

    require monthly visibility reporting; another suggested these

    compliance costs would most affect bona fide hedgers because of the

    extra information required of those claiming a bona fide hedging

    exemption.\460\ Another commenter noted that position visibility

    requirements may prove duplicative once the Commission can evaluate

    data received from swaps dealers and major swaps participants, DCOs,

    SEFs and SDRs.\461\

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

    \458\ See e.g., CL-BGA supra note 35 at 19-20; CL-CME I supra

    note 8 at 6; CL-WGCEF supra note 35 at 23; and CL-MFA supra note 21

    at 3.

    \459\ See e.g., CL-USCF supra note 153 at 11.

    \460\ See e.g., CL-USCF supra note 153 at 11; and CL-WGCEF supra

    note 35 at 22-23.

    \461\ CL-FIA I supra note 21, at 13.

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

    The comments that suggested semi-annual reporting or no reporting

    at all, instead of monthly reporting, have not been adopted because of

    the surveillance utility afforded by the visibility reporting. The

    Commission notes that once an affected person adopts processes to

    comply with the standard reporting format, visibility reporting may

    result in a lesser burden when compared to the alternative of frequent

    production of books and records under special calls. With regard to

    frequency, reporting that is too infrequent may undermine the

    effectiveness of the Commission's surveillance efforts, as one goal of

    reporting under position visibility levels is to provide the Commission

    with timely and accurate data regarding the current positions of a

    market's largest traders in order to detect and deter manipulative

    behavior. The Commission notes that until SDRs are operational and the

    Commission's large trader reporting for physical commodity swaps are

    fully implemented, the Commission would not have access to the data

    necessary to have a holistic view of the marketplace and to set

    appropriate position limit levels.

    To further mitigate costs on reporting entities, the Commission has

    determined to reduce the filing burden associated with position

    visibility to one filing per trader per calendar quarter, as opposed to

    a monthly filing. This reduced reporting is not anticipated to

    significantly impact the overall surveillance benefit provided through

    the position visibility reporting. However, if the large position

    holders subject to position visibility reporting requirements were to

    submit reports any less often, then the reports would not provide

    sufficiently regular information for the Commission to be able to

    determine the nature (hedging or speculative) of the largest positions

    in the market. This data should assist the Commission in its required

    report to Congress regarding implementation of position limits,\462\

    and in ongoing assessment of the appropriateness of the levels of such

    limits.

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

    \462\ See section 719 of the Dodd-Frank Act.

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

    The Commission has also raised the visibility levels to

    approximately 50 to 60 percent of the projected aggregate position

    limits for the Reference Contract (from 10 to 30 percent of the limit

    in the Proposed Rule), with the exception of the Light, Sweet Crude Oil

    (CL) and Henry Hub Natural Gas (NG) Referenced Contracts, for which

    these levels have been raised from the proposal but are still lower

    than 50 to 60 percent of projected aggregate position limits in order

    to capture a target number of traders.\463\ Based on the Commission's

    current data regarding futures and certain cleared swap transactions,

    the higher visibility levels as compared to the Proposed Rule will

    reduce the number of traders (including bona fide hedgers) subject to

    the reporting requirements, while still providing the Commission

    sufficient data on the positions of the largest traders in the

    respective Referenced Contract.

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

    \463\ See Sec. 151.6.

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

    The Commission estimates that, on an annual basis, at most 73

    traders would

    [[Page 71674]]

    be subject to position visibility reporting requirements. As discussed

    in the PRA section of this release, the Commission estimates the costs

    of compliance to be a total burden, across all of these entities, of

    7,760 annual labor hours resulting in a total of $611,000 in annual

    labor costs and $7 million in annualized capital and start-up costs and

    annual total operating and maintenance costs.

    The Commission estimates that 25 of the traders affected by

    position visibility regulations would be bona fide hedgers.

    Specifically with regard to bona fide hedgers, the Commission estimates

    compliance costs for position visibility reporting to be a total

    burden, across all bona fide hedgers, of 2,000 total annual labor hours

    resulting in a total of $157,200 in annual labor costs and $1.625

    million in annualized capital and start-up costs and annual total

    operating and maintenance costs. The Commission notes that these

    estimated costs for bona fide hedgers are a subset of, and not in

    addition to, the costs for all participants combined enumerated above.

    The information gained from position visibility levels provides

    essential transparency to the Commission as a means of preventing

    potentially manipulative behavior. In the Commission's judgment, such

    data is a critical component of an effective position limit regime as

    it will help to maximize to the extent practicable the statutory

    objectives of preventing excessive speculation and manipulation, while

    ensuring sufficient liquidity for bona fide hedgers and protecting the

    price discovery function of the underlying market. It allows the

    Commission to monitor the positions of the largest traders and the

    effects of those positions in the affected markets. While the extent of

    these benefits is not readily quantifiable, the ability to better

    understand the balance in the market between speculative and non-

    speculative positions is critical to the Commission's ability to

    monitor the effectiveness of position limits and potentially

    recalibrate the levels in order to ensure the limits sufficiently

    address the statutory objectives that the Commission must consider and

    maximize in establishing appropriate position limits. In this way,

    position visibility levels are not unlike position accountability

    levels that are currently utilized for many DCM contracts. Finally, as

    discussed under section II.C.2. of this release, position visibility

    reporting will enable the Commission to address data gaps that will

    exist prior to the availability of comprehensive data from SDRs.

    e. DCMs and SEFs

    Pursuant to Core Principle 5(B) for DCMs and Core Principle 6(B)

    for SEFs that are trading facilities, such registered entities are

    required to establish position limits ``[f]or any contract that is

    subject to a position limitation established by the Commission pursuant

    to section 4a(a).'' The core principles require that these levels be

    set ``at a level not higher than the position limitation established by

    the Commission.'' As such, the final rules require DCMs and SEFs to set

    position limits on the 28 physical commodity Referenced Contracts

    traded or executed on such DCMs and SEFs.

    Under the proposal, DCMs and SEFs would have been required to

    implement a position limit regime for all physical commodity contracts

    executed on their facility. This proposal would effectively create a

    class limit for the trading facility's contracts. Because the

    Commission determined to eliminate class limits outside of the spot-

    month for the 28 contracts subject to Commission limits, the Commission

    has determined not to adopt the proposed requirements that would have

    effectively created class limits for a particular trading venue.

    Accordingly, the final rules permit the trading facility to grant

    spread or arbitrage exemptions regardless of the trading facility or

    market in which such positions are held. To remain consistent with the

    Commission's class limits within the spot-month, DCMs and SEFs cannot

    grant spread or arbitrage exemptions with regard to physical-delivery

    commodity contracts. These provisions allow DCMs and SEFs to comply

    with the core principles for contracts subject to Commission position

    limits without creating an incentive for traders to migrate their

    speculative positions off of the trading facility to avoid the SEF or

    DCM limit.\464\

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

    \464\ For example, traders could utilize swaps not traded on a

    DCM or SEF.

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

    The Commission notes that the establishment of Federal limits on

    the 28 Core Referenced Futures Contracts should not significantly

    affect the compliance costs for DCMs because they currently impose

    spot-month limits for physical commodity contracts in compliance with

    existing Core Principle 5.\465\ DCMs in particular have long enforced

    spot-month limits, and the Commission notes that such spot-month

    position limits are currently in place for all physical-delivery

    physical commodity futures under Core Principle 5 of section 5(d) of

    the CEA. The final rule on physical-delivery spot-month limits should

    impose minimal, if any, additional compliance costs on DCMs.

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

    \465\ The Commission has further provided for acceptable

    practices for DCMs and SEFs seeking compliance with their respective

    position limit and accountability-related Core Principles in other

    commodity contracts.

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

    As outlined above in this section III.A.3, the Commission believes

    that the position limits finalized herein will likely cause relevant

    DCMs, SEFs, and market participants to incur various additional costs

    (or forego benefits). At this time, the Commission is unable to

    quantify the cost of such changes because the effect of this

    determination will vary per market and because the requirements

    applicable to SEFs extend to swaps, which heretofore were generally not

    subject to federally-set position limits. The Commission also notes

    that to a certain extent these costs are a consequence of the statutory

    requirement for DCMs and SEFs to set and administer position limits on

    contracts that have Federal position limits in accordance with the Core

    Principles applicable to such facilities.

    For the remaining physical commodity contracts executed on a DCM or

    SEF that is a trading facility, i.e., those contracts which are not

    Referenced Contracts, DCMs and SEFs are required to comply with new

    Core Principle 5 for DCMs and Core Principle 6 for SEFs in establishing

    position limitations or position accountability levels. The costs

    resulting from this requirement also are a consequence of the statutory

    provision requiring DCMs and SEFs to set and administer position limits

    or accountability levels.

    f. CEA Section 15(a) Considerations: Position Limits

    As stated above, section 15(a) of the CEA requires the Commission

    to consider the costs and benefits of its actions 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 futures markets; (3) price discovery; (4) sound

    risk management practices; and (5) other public interest

    considerations.

    i. Protection of Market Participants and the Public

    Congress has determined that excessive speculation 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.'' Further, Congress directed that for the

    purpose of ``diminishing, eliminating, or preventing such burden,'' the

    [[Page 71675]]

    Commission ``shall * * * proclaim and fix such [position] limits * * *

    as the Commission finds are necessary to diminish, eliminate, or

    prevent such burden.'' \466\ This rulemaking responds to the

    Congressional mandate for the Commission to impose position limits both

    within and outside of the spot-month on DCM futures and economically

    equivalent swaps.

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

    \466\ Section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1).

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

    The Congressional mandate also directed that the Commission set

    limits, to the maximum extent practicable, in its discretion, to

    diminish, eliminate or prevent excessive speculation, deter or prevent

    market manipulation, ensure sufficient liquidity for bona fide hedgers,

    and ensure that the price discovery function of the underlying market

    is not disrupted.\467\ To that end, the Commission evaluated its

    historical experience setting limits and overseeing DCMs that

    administer limits, reviewed available futures and swaps data, and

    considered comments from the public in order to establish limits that

    address, to the maximum extent practicable within the Commission's

    discretion, the above mentioned statutory objectives.

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

    \467\ See section 4a(a)(3)(B) of the CEA, 7 U.S.C. 6a(a)(3)(B).

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

    The spot-month limit, set at 25% of deliverable supply, retains

    current practice in setting spot-month position limits, and in the

    Commission's experience this formula is effective in diminishing the

    potential for manipulative behavior and excessive speculation within

    the spot-month. As evidenced by the limited number of traders that may

    need to adjust their trading strategies to account for the limits, the

    Commission does not believe that this formula will impose an overly

    stringent constraint on speculative activity; and therefore, should

    ensure sufficient liquidity for bona fide hedgers and that the price

    discovery function of the underlying market is not disrupted. In

    addition, continuing the practice of registered entity spot-month

    position limits should serve to more effectively monitor trading to

    prevent manipulation and in turn protect market participants and the

    price discovery process.

    With regard to the interim final rules for cash-settled contracts

    in the spot-month, as previously explained the Commission believes that

    the level of five times the applicable limit for the physical-delivery

    natural gas contracts should protect market participants through

    maximizing, to the extent practicable, the objectives set forth by

    Congress in CEA section 4a(a)(3)(B). In addition, based upon the

    Commission's limited swaps data, the limits on cash-settled

    agricultural, metals, and energy (other than natural gas) contracts

    should ensure sufficient liquidity for bona fide hedgers and avoid

    disruption to price discovery in the underlying market due to the

    overall size of the swap market in those commodities. Nevertheless, the

    Commission intends to monitor trading activity under the new limits to

    determine the effect on market liquidity of these limits and whether

    the limits should be modified to further maximize the four statutory

    objectives set forth in CEA section 4a(a)(3)(B). The Commission also

    invites public comment as to these determinations.

    With regard to the non-spot-month position limits, which are set at

    a percentage of open interest, the Commission believes such limits will

    also protect market participants and the public through maximization,

    to the extent practicable, the four objectives set forth in CEA section

    4a(a)(3)(B). The Commission selected the general 10-2.5% formula for

    calculating position limits as a percentage of market open interest

    based on the Commission's longstanding experience overseeing DCM

    position limits outside of the spot-month, which are based on the same

    formula. Further, as evidenced by the relatively few traders that the

    Commission estimates would hold positions in excess of such levels, the

    relatively small percentage of total open interest these traders would

    hold in excess of these limits, and that many large traders are

    expected to be bona fide hedgers; the Commission concludes that these

    limits should protect the public through ensuring sufficient liquidity

    for bona fide hedgers and protecting the price discovery function of

    the underlying market.

    Finally, the position visibility levels established in these final

    rules should protect market participants by giving the Commission data

    to monitor the largest traders in Referenced metal and energy

    contracts. The data reported under position visibility levels will help

    the Commission in considering whether to reset position limits to

    maximize further the four statutory objectives in section 4a(a)(3(B) of

    the CEA. Further, monitoring the largest traders in these markets

    should provide the Commission with data that may help prevent or detect

    potentially manipulative behavior.

    ii. Efficiency, Competiveness, and Financial Integrity of Futures

    Markets

    The Federal spot-month and non-spot-month formulas adopted under

    the final rules are designed, in accordance with CEA section

    4a(a)(3)(B),to deter and prevent manipulative behavior and excessive

    speculation, while also maintaining sufficient liquidity for hedging

    and protecting the price discovery process. To the extent that the

    position limit formulas achieve these objectives, the final rules

    should protect the efficiency, competitiveness, and financial integrity

    of futures markets.

    iii. Price Discovery

    Based on its historical experience, the Commission believes that

    adopting formulas for position limits that are based on formulas that

    have historically been used by the Commission and DCMs to establish

    position limits maximizes the extent practicable, at this time, the

    four statutory objectives set forth by Congress in CEA section

    4a(a)(3). Based on its prior experience with these limits, the

    Commission believes that the price discovery function of the underlying

    market will not be disrupted. Similarly, as effective price discovery

    relies on the accuracy of prices in futures markets, and to the extent

    that the position limits described herein protect prices from market

    manipulation and excessive speculation, the final rules should protect

    the price discovery function of futures markets.

    iv. Sound Risk Management Practices

    To the extent that these position limits prevent any market

    participant from holding large positions that could cause unwarranted

    price fluctuations in a particular market, facilitate manipulation, or

    disrupt the price discovery process, such limits serve to prevent

    market participants from holding positions that present risks to the

    overall market and the particular market participant as well. To this

    extent, requiring market participants to ensure that they do not

    accumulate positions that, when traded, could be disruptive to the

    overall market--and hence themselves as well--promotes sound risk

    management practices by market participants.

    v. Public Interest Considerations

    The Commission has not identified any other public interest

    considerations related to the costs and benefits of the rules

    establishing limits on positions.

    5. Exemptions: Bona Fide Hedging

    As discussed section II.G. of this release, the Dodd-Frank Act

    provided a definition of bona fide hedging for futures contracts that

    is more narrow than the Commission's existing definition under

    regulation Sec. 1.3(z). Pursuant to sections 4a(c)(1) and (2) of the

    CEA, the Commission incorporated the narrowed definition of bona fide

    [[Page 71676]]

    hedging into the Proposed Rules, and incorporates this definition into

    these final rules. The Commission also limited bona fide hedging

    transactions to those specifically enumerated transactions and pass-

    through swap transactions set forth in final Sec. 151.5. In response

    to commenters' inquiries over whether certain transactions qualified as

    an enumerated hedge transaction, the Commission expanded the list of

    enumerated hedge transactions eligible for the bona fide hedging

    exemption, and also gave examples of enumerated hedge transactions in

    appendix B to this release.\468\

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

    \468\ This appendix provides examples of transactions that would

    qualify as an enumerated hedge transaction; the enumerated examples

    do not represent the only transactions that could qualify.

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

    Pursuant to CEA section 4a(c)(1), the Commission also proposed to

    extend the definition of bona fide hedging transactions to all

    referenced contracts, including swaps transactions. The Commission is

    adopting the definition of bona fide hedging as proposed. The

    Commission believes that applying the statutory definition of bona fide

    hedging to swaps is consistent with congressional intent as embodied in

    the expansion of the Commission's authority to swaps (i.e., those that

    are economically-equivalent and SPDFs). In granting the Commission

    authority over such swaps, Congress recognized that such swaps warrant

    similar treatment to their economically equivalent futures for purposes

    of position limits and therefore, intended that statutory definition of

    bona fide hedging also be extended to swaps.\469\

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

    \469\ The Commission notes that the impact of the definition of

    bona fide hedging for both futures and swaps will vary depending of

    the positions of each entity. Due to this variability among

    potentially affected entities, the specifics of which are not known

    to the Commission, and cannot be reasonably ascertained, the

    Commission cannot reasonably quantify the impact of applying the

    same definition of bona fide hedging for swaps and futures

    transactions.

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

    The Commission also established a reporting and recordkeeping

    regime for bona fide hedge exemptions. Under the proposal, a trader

    with positions in excess of the applicable position limit would be

    required to file daily reports to the Commission regarding any claimed

    bona fide hedge transactions. In addition, all traders would be

    required to maintain records related to bona fide hedging exemptions,

    including the exemption for ``pass-through'' swaps. In response to

    comments, the Commission has reduced the reporting frequency from daily

    to monthly, and streamlined the recordkeeping requirements for pass-

    through swap counterparties. These modifications should permit the

    Commission to retain its surveillance capabilities to ensure the proper

    application of the bona fide hedge exemption as defined in the statute,

    while addressing commenters' concerns regarding costs.

    Commenters argued that the definition of bona fide hedging, as

    proposed, was too narrow and, if applied, would reduce liquidity in

    affected markets.\470\ These commenters suggested that the list of

    enumerated transactions did not adequately take into account all

    possible hedging transactions.\471\ The lack of a broad risk management

    exemption also caused concerns among some commenters, who noted that

    the cost of reclassifying transactions would be significant and could

    induce companies to do business in other markets.\472\ Other commenters

    expressed concerns regarding the pass-through exemption for swap

    dealers whose counterparties are bona fide hedgers, suggesting that the

    provision implied bona fide hedgers must manage the hedging status of

    their transactions and report them to the swap dealer, thus burdening

    the hedger in favor of the swap dealer.\473\ Some commenters suggested

    that the Commission develop a method for exempting liquidity providers

    in order to retain the valuable services such participants

    provide.\474\ One commenter urged the Commission to remove limit

    exemptions for index fund investors in agricultural markets in order to

    decrease volatility and allow for true price discovery.\475\ Another

    commenter requested that the Commission allow categorical exemptions

    for trade associations to reduce the burden on smaller entities.\476\

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

    \470\ See e.g., CL-Gavilon supra note 276 at 6; CL-FIA I supra

    note 21 at 14-15.

    \471\ See e.g., CL-Commercial Alliance I supra note 42 at 2; CL-

    FIA I supra note 21 at 14; and CL-Economists Inc. supra note 172 at

    19.

    \472\ See e.g., CL-Gavilon supra note 276 at 6.

    \473\ CL-BGA supra note 35 at 17.

    \474\ See e.g., CL-FIA I supra note 21 at 17-18; and CL-Katten

    supra note 21 at 2-3.

    \475\ CL-ABA supra note 150 at 6.

    \476\ CL-NREC/AAPP/ALLPC supra note 266 at 27.

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

    Many commenters argued that the reporting requirements were overly

    burdensome and requested monthly reporting of bona fide hedging

    activity as opposed to the daily reporting that would be required by

    the Proposed Rule.\477\ The commenters also criticized proposed

    restrictions on holding a hedge into the last five days of

    trading.\478\ Some commenters on anticipatory hedging exemptions noted

    the proposed one year limitation on anticipatory hedging was biased

    toward agricultural products and did not take into account the

    different structure of other markets.\479\ One commenter noted that the

    requirement to obtain approval for anticipatory hedge exemptions at a

    time close to when the position may exceed the limit is

    burdensome.\480\

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

    \477\ See e.g., CL-API supra note 21 at 10; CL-Encana supra note

    145 at 3; CL-FIA I supra note 21 at 21; CL-WGCEF supra note 35 at

    14-15; CL-ICE I supra note 69 at 11-12; CL-COPE supra note 21 at 12;

    CL-EEI/ESPA supra note 21 at 6-7.

    \478\ See e.g., CL-FIA I supra note 21 at 16; and CL-ISDA/SIFMA

    supra note 21 at 11.

    \479\ See e.g., CL-Economists, Inc. supra note 172 at 20-21.

    \480\ See e.g., CL-AGA supra note 124 at 7.

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

    The Commission is implementing the statutory directive to define

    bona fide hedging for futures contracts as provided in CEA section

    4a(c)(2). In this respect, the Commission does not have the discretion

    to disregard a directive from Congress concerning the narrowed scope of

    the definition of bona fide hedging transactions.\481\ Thus, for

    example, as discussed in section II.G. of this release, the final rules

    do not provide for risk management exemptions, given that the statutory

    definition of bona fide hedging generally excludes the application of a

    risk management exemption for entities that generally manage the

    exposure of their swap portfolio.\482\ As discussed above, the

    Commission is authorized to define bona fide hedging for swaps and in

    this regard, may construe bona fide hedging to include risk management

    transactions. The Commission, however, does not believe that including

    a risk management provision is necessary or appropriate given that the

    elimination of the class limits outside of the spot-month will allow

    entities, including swap dealers, to net Referenced Contracts whether

    futures or economically equivalent swaps.\483\ As such, under the final

    rules, positions in

    [[Page 71677]]

    Referenced Contracts entered to reduce the general risk of a swap

    portfolio will be netted with the positions in the portfolio outside of

    the spot-month.\484\

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

    \481\ Some commenters suggested that the Commission should use

    its exemptive authority in section 4a(a)(7) of the CEA, 7 U.S.C.

    6a(a)(7), to expand the definition of bona fide hedging to include

    certain transactions; however, the Commission cannot use its

    exemptive authority to reshape the statutory definition provided in

    section 4a(c)(2) of the CEA, 7 U.S.C. 6a(c)(2).

    \482\ As discussed in II.G.1, the plain text of the new

    statutory definition directs the Commission to define bona fide

    hedging for futures contracts to include hedging for physical

    commodities (other than excluded commodities derivatives) only if

    such transactions or positions represent substitutes for cash market

    transactions and offset cash market risks. This definition excludes

    hedges of general swap position risk (i.e., a risk-management

    exemption), but does include a limited exception for pass-through

    swaps.

    \483\ The removal of class limits should also generally mitigate

    the impact of not having a risk management exemption across futures

    and swaps because affected traders can net risk-reducing positions

    in the same Referenced Contract outside of the spot-month.

    \484\ The statutory definition of bona fide hedging does not

    include a risk management exemption for futures contracts. The

    impact of not having a risk-management exemption will vary depending

    on the positions of each entity, and the extent of mitigation

    through netting futures and swaps outside of the spot-month will

    also vary depending on the positions of each entity. Due to this

    variability among potentially affected entities, the specifics of

    which are not known to the Commission, and cannot be reasonably

    ascertained, the Commission cannot reasonably quantify the impact of

    not incorporating a risk-management exemption within the definition

    of bona fide hedging. Further, as noted above, the Commission is

    currently unable to quantify the cost that a firm may incur as a

    result of position limits impacting trading strategies.

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

    The Commission estimates that there may be significant costs (or

    foregone benefits) associated with the implementation of the new

    statutory definition of bona fide hedging to the extent that the

    restricted definition of bona fide hedging may require traders to

    potentially adjust their trading strategies. Additionally, there may be

    costs associated with the application of the narrowed bona fide hedging

    definition to swaps. The Commission anticipates that certain firms may

    need to adjust their trading and hedging strategies to ensure that

    their aggregate positions do not exceed position limits. As previously

    noted, however, the Commission is unable to estimate the costs to

    market participants from such adjustments in trading and hedging

    strategies. Commenters did not provide any quantitative data as to such

    potential impacts from the proposed limits and the Commission does not

    have access to any such business strategies of market participants;

    thus, the Commission cannot independently evaluate the potential costs

    to market participants of such changes in strategies.

    In light of the requests from commenters for clarity on whether

    specific transactions qualified as bona fide hedge transactions, the

    Commission developed Appendix B to these Final Rules to detail certain

    examples of bona fide hedge transactions provided by commenters that

    the Commission believes represent legitimate hedging activity as

    defined by the revised statute.\485\

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

    \485\ See II.G.1. of this release.

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

    As described further in the PRA section, the Commission estimates

    the costs of bona fide hedging-related reporting requirements will

    affect approximately 200 entities annually and result in a total burden

    of approximately $29.8 million across all of these entities, including

    29,700 annual labor hours resulting in a total of $2.3 million in

    annual labor costs and $27.5 million in annualized capital and start-up

    costs and annual total operating and maintenance costs. These estimated

    costs amount to approximately $149,000 per entity. The reduction in the

    frequency of reporting from daily in the proposal to monthly in the

    final rule will decrease the burden on bona fide hedgers while still

    providing the Commission with adequate data to ensure the proper

    application of the statutory definition of bona fide hedging

    transaction. Further, the advance application required for an

    anticipatory exemption has also been changed to a notice filing, which

    should also decrease costs for bona fide hedgers as such entities can

    rely on the exemption and implement hedging strategies upon filing the

    notice as opposed to incurring a delay while awaiting the Commission to

    respond to the application.

    The Commission has also eliminated restrictions on maintaining

    certain types of bona fide hedges (e.g., anticipatory hedges) in the

    last five days of trading for all cash-settled Referenced Contracts.

    The Commission will maintain this general restriction for physically-

    delivered Referenced Contracts. However, the Commission is clarifying

    the time period for these restrictions in the physical delivery

    contracts, distinguishing the agricultural physical-delivery contacts

    from the non-agricultural physical delivery contracts. The Commission

    will retain the proposed restrictions for the last five days of trading

    in agricultural physical-delivery Referenced Contracts, while non-

    agricultural physical delivery Referenced Contracts will be subject to

    a prohibition that applies to holding the hedge into the spot month.

    The Commission has removed these restrictions in cash settled contracts

    in order to avoid, for example, requiring a trader with an anticipatory

    hedge exemption either to apply for a hedge exemption based on newly

    produced inventories (i.e., the hedge no longer being anticipatory) or

    to roll before the spot period restriction. The restriction on holding

    an anticipatory hedge into the last days of trading on a physical-

    delivery contract mitigates concerns that liquidation of a very large

    bona fide hedging position would have a negative impact on a physical-

    delivery contract during the last few days since such an anticipatory

    hedger neither intended to make nor take delivery and, thus, would

    liquidate a large position at a time of reduced trading activity,

    impacting orderly trading in the contracts. Such concerns generally are

    not present in cash-settled contracts, since a trader has no need to

    liquidate to avoid delivery. The Commission believes that permitting

    the maintenance of such hedges in cash settled contracts will not

    negatively affect the integrity of these markets.

    Also in response to commenters, the one-year limitation on

    anticipatory hedging has been amended in the final rules to apply only

    to agricultural markets; the limitation has been lifted on energy and

    metal markets, in recognition of the differences in the characteristics

    of the markets for different commodities, such as the annual crop cycle

    for agricultural commodities, that are not present in energy and metal

    commodities.

    a. CEA Section 15(a) Considerations: Bona Fide Hedging

    Congress established the definition of bona fide hedge transaction

    for contracts of future delivery in CEA section 4a(c)(2), and the

    Commission incorporated this definition into the final rules. As

    described in section II.G. of this release and in the consideration of

    costs and benefits, Congress limited the scope of bona fide hedging

    transactions to those tied to a physical marketing channel.\486\ The

    Commission believes the enumerated hedges provide an appropriate scope

    of exemptions for market participants, consistent with the statutory

    directive for the Commission to define bona fide hedging transactions

    and positions.

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

    \486\ For the reasons discussed above in this section III.A.4.,

    the Commission is defining bona fide hedging for swaps to replicate

    the statutory definition for futures contracts.

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

    i. Protection of Market Participants and the Public

    The Commission's filing and recordkeeping requirements for bona

    fide hedging activity are intended to enhance the Commission's ability

    to monitor bona fide hedging activities, and in particular, to

    ascertain whether large positions in excess of an applicable position

    limit reflect bona fide hedging and thus are exempt from position

    limits. The Commission anticipates that the filing and recordkeeping

    provisions will impose costs on entities. However, the Commission

    believes that these costs provide the benefit of ensuring that the

    Commission has access to information to determine whether positions in

    excess of a position limit relate to bona fide hedging or speculative

    activity. To reduce the compliance burden on bona fide hedgers, the

    Commission has reduced the reporting frequency from daily to monthly.

    As a necessary

    [[Page 71678]]

    component of an effective position limits regime, the Commission

    believes that the requirements related to bona fide hedging will

    protect participants and the public.

    ii. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    In CEA section 4a, as amended by the Dodd-Frank Act, Congress

    explicitly exempted those market participants with legitimate bona fide

    hedge positions from position limits. In implementing this definition,

    the final rules' position limits will not constrict the ability for

    hedgers to mitigate risk--a fundamental function of futures markets. In

    addition, as previously noted, the Commission has set these position

    limits at levels that will, in the Commission's judgment, to the

    maximum extent practicable at this time, meet the objectives set forth

    in CEA section 4a(a)(3)(B), which includes ensuring sufficient

    liquidity for bona fide hedgers. In maximizing these objectives, the

    Commission believes that such limits will preserve the efficiency,

    competitiveness, and financial integrity of futures markets. Similarly,

    the filing and recordkeeping requirements should help to ensure the

    proper application of the bona fide hedge exemption.

    However, Congress also narrowed the definition of what the

    Commission could consider to be a bona fide hedge for contracts as

    compared to the Commission's definition in regulation 1.3(z). The

    Commission has attempted to mitigate concerns regarding any potential

    negative impact to the efficiency of futures markets based upon the new

    statutory definition. For instance, the Commission has expanded the

    list of enumerated hedging transactions to clarify the application of

    the statutory definition.\487\ In addition, the Commission has removed

    the application of class limits outside of the spot-month, which should

    mitigate the impact of narrowing the bona fide hedge exemption, since

    positions taken in the futures market to hedge the risk from a position

    established in the swaps market (or vice versa) can be netted for the

    purpose of calculating whether such positions are in excess of any

    applicable position limits. In light of these considerations, the

    Commission anticipates that the Commission's implementation of the

    statutory definition of bona fide hedging will not negatively affect

    the competitiveness or efficiency of the futures markets.

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

    \487\ As described in earlier sections and as found in Appendix

    B of these rules.

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

    iii. Price Discovery

    As discussed above, the Commission is implementing the new

    statutory definition of bona fide hedging. Based on its historical

    experience with position limits at the levels similar to those

    established in the final rules, and in light of the measures taken to

    mitigate the effects of the narrowed statutory definition of bona fide

    hedging, the Commission does not anticipate the rules relating to the

    bona fide hedge exemption will disrupt the price discovery process.

    iv. Sound Risk Management Practices

    While the bona fide hedging requirements will cause market

    participants to monitor their physical commodity positions to track

    compliance with limits, the bona fide hedging requirements do not

    necessarily affect how a firm establishes and implements sound risk

    management practices.

    v. Public Interest Considerations

    The Commission has not identified any other public interest

    considerations related to the costs and benefits of the rules with

    respect to bona fide hedging.

    6. Aggregation of Accounts

    The final regulations, as adopted, largely clarify existing

    Commission aggregation standards under part 150 of the Commission's

    regulations. As discussed in section II.H. of this release, the

    Commission proposed to significantly alter the current aggregation

    rules and exemptions. Specifically, proposed part 151 would eliminate

    the independent account controller (IAC) exemption under current Sec.

    150.3(a)(4), restrict many of the disaggregation provisions currently

    available under Sec. 150.4 and create a new owned-financial entity

    exemption. The proposal would also require a trader to aggregate

    positions in multiple accounts or pools, including passively managed

    index funds, if those accounts or pools have identical trading

    strategies. Lastly, disaggregation exemptions would no longer be

    available on a self-executing basis; rather, an entity seeking an

    exemption from aggregation would need to apply to the Commission, with

    the relief being effective only upon Commission approval.\488\

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

    \488\ The Commission did not propose any substantive changes to

    existing Sec. 150.4(d), which allows an FCM to disaggregate

    positions in discretionary accounts participating in its customer

    trading programs provided that the FCM does not, among other things,

    control trading of such accounts and the trading decisions are made

    independently of the trading for the FCM's other accounts. As

    further described below, however, the FCM disaggregation exemption

    would no longer be self-executing; rather, such relief would be

    contingent upon the FCM applying to the Commission for relief.

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

    Commenters asserted that the elimination of the longstanding IAC

    exemption would lead to a variety of negative effects, including

    reduced liquidity and distorted price signals, among many other

    things.\489\ One commenter mentioned that without the IAC exemption,

    multi-advisor commodity pools may become impossible.\490\ Commenters

    also expressed concerns that the proposed owned non-financial entity

    exemption lacked a rational basis for drawing a distinction between

    financial and non-financial entities; and the absence of the IAC

    exemption could force a firm to violate other Federal laws by sharing

    of position information across otherwise separate entities.\491\ Other

    commenters criticized the costs of the aggregation exemption

    applications, stating that the process would be burdensome for

    participants.\492\

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

    \489\ See e.g. CL-DBCS supra note 247 at 6; CL-Morgan Stanley

    supra note 21 at 8-9; and CL-PIMCO supra note 21 at 4.

    \490\ CL-Willkie supra note 276 at 3-4.

    \491\ See e.g. CL-PIMCO supra note 21 at 4-5; CL-BGA supra note

    35 at 22; CL-FIA I supra note 21 at 24; CL-ICE I supra note 69 at 6;

    and CL-CME I supra note 8 at 16.

    \492\ See e.g. CL-ICE I supra note 69 at 13; CL-CME I supra note

    8 at 17; CL-FIA I supra note 21 at 26-27; and CL-Cargill supra note

    76 at 9.

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

    In addition, commenters objected to the changes to the

    disaggregation exemption as it applies to interests in commodity pools,

    arguing that forcing aggregation of independent traders would increase

    concentration, limit investment opportunities, and thus potentially

    reduce liquidity in the U.S. futures markets.\493\ Commenters also

    objected to the Commission's proposal to aggregate on the basis of

    identical trading strategies, arguing that it would decrease index fund

    participation and reduce liquidity.\494\

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

    \493\ See e.g. CL-MFA supra note 21 at 14-15; and CL-Blackrock

    supra note 21 at 6-7.

    \494\ See e.g. CL-CME I supra note 8 at 18; and CL-Blackrock

    supra note 21 at 14.

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

    The primary rationale for the aggregation of positions or accounts

    is the concern that a single trader, through common ownership or

    control of multiple accounts, may establish positions in excess of the

    position limits--or otherwise attain large concentrated positions--and

    thereby increase the risk of market manipulation or disruption.

    Consistent with this goal, the Commission, in its design of the

    aggregation policy, has strived to ensure the participation of a

    minimum number of traders that are independent of each

    [[Page 71679]]

    other and have different trading objectives and strategies.

    Upon further consideration, and in response to commenters, the

    Commission is retaining the IAC exemption in existing Sec. 150.4,

    recognizing that to the extent that an eligible entity's client

    accounts are traded by independent account controllers,\495\ with

    appropriate safeguards, such trading may enhance market liquidity and

    promote efficient price discovery without increasing the risk of market

    manipulation or disruption.\496\

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

    \495\ The Commission has long recognized that concerns regarding

    large concentrated positions are mitigated in circumstances

    involving client accounts managed under the discretion and control

    of an independent trader, and subject to effective information

    barriers.

    \496\ In retaining the IAC exemption, the Commission has decided

    not to adopt the proposed exemption for owned non-financial

    entities, which addresses commenters' concern that the proposal

    would have resulted in unfair over discriminatory treatment of

    financial entities.

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

    The final rules expressly provide that the Commission's aggregation

    policy will apply to swaps and futures. The extension of the

    aggregation requirement to swaps may force a trader to adjust its

    business model or trading strategies to avoid exceeding the limits. The

    Commission is unable to provide a reliable estimation or quantification

    of the costs (including foregone benefits) of such changes because,

    among other things, the effect of this determination will vary per

    entity and would require information concerning the subject entity's

    underlying business models and strategies, to which the Commission does

    not have access.\497\

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

    \497\ The Commission notes that this cost is directly

    attributable to the congressional mandate that the Commission impose

    limits on economically equivalent swaps. That is to say, unless the

    aggregation policy is extended to swaps on equal basis, the express

    congressional mandate to impose limits on futures (options) and

    economically equivalent swaps would be undermined.

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

    To further respond to concerns from commenters, the Commission is

    establishing an exemption from the aggregation standards in

    circumstances where the aggregation of an account would result in the

    violation of other Federal laws or regulations, and an exemption for

    the temporary ownership or control of accounts related to underwriting

    securities. In addition, in response to commenters' concerns regarding

    potential negative market impacts on liquidity and competitiveness, the

    Commission is not adopting the proposed changes to the standards for

    commodity pool aggregation and is instead retaining the existing

    standards. However, the Commission is retaining the provision that

    requires aggregation for identical trading strategies in order to

    prevent the evasion of speculative position limits.\498\

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

    \498\ The cost to monitor positions in identical trading

    strategies is reflected in the Commission's general estimates to

    track positions on a real-time basis.

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

    In light of the importance of the aggregation standards in an

    effective position limits regime, it is critical that the Commission

    effectively and efficiently monitor the extent to which traders rely on

    any of the disaggregation exemptions. During the period of time that

    the exemptions from aggregation were self-certified, the Commission did

    not have an adequate ability to monitor whether entities were properly

    interpreting the scope of an exemption or whether entities followed the

    conditions applicable for exemptive relief. Accordingly, traders

    seeking to rely on any disaggregation exemption will be required to

    file a notice with the Commission; the disaggregation exemption is no

    longer self-executing. As discussed in the PRA section, the Commission

    estimates costs associated with reporting regulations will affect

    approximately ninety entities resulting in a total burden, across all

    of these entities, of 225,000 annual labor hours and $5.9 million in

    annualized capital and start-up costs and annual total operating and

    maintenance costs.

    a. CEA Section 15(a) Considerations: Aggregation

    The aggregation standards finalized herein largely track the

    Commission's longstanding policy on aggregation, which will now apply

    to futures and swaps transactions. The Commission has added certain

    additional safeguards to ensure the proper aggregation of accounts for

    position limit purposes.

    i. Protection of Market Participants and the Public

    The Commission's general policy on aggregation is derived from CEA

    section 4a(a)(1), which directs the Commission to aggregate based on

    the positions held as well as the trading done by any persons directly

    or indirectly controlled by such person.\499\ The Commission has

    historically interpreted this provision to require aggregation based

    upon ownership or control. The commenters largely supported the

    existing aggregation standards, and as noted above, the Commission has

    largely retained the aggregation policy from part 150 and extended its

    application to positions in swaps.

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

    \499\ Section 4a(a)(1) also directs that the Commission

    aggregate ``trading done 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 trading were done by, a single person.''

    7 U.S.C. 6a(a)(1).

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

    As discussed above, the Commission anticipates that the aggregation

    standards will impose additional costs to various market participants,

    including the monitoring of positions and filing for an applicable

    exemption. However, the benefits derived from a notice filing, which

    ensure proper application of aggregation exemptions, and the general

    monitoring of positions, which are a necessary cost to the imposition

    of position limits, warrant adoption of the final aggregation rules.

    The continued use of existing aggregation standards, which are followed

    at the Commission and DCM level, may mitigate costs for entities to

    continue to aggregate their positions. In addition, the new aggregation

    provision related to identical trading strategies furthers the

    Commission policy on aggregation by preventing evasion of the limits

    through the use of positions in funds that follow the same trading

    strategy. Accordingly, as a necessary component of an effective

    position limit regime, and based on its experience with the current

    aggregation rules, the Commission believes that the provisions relating

    to aggregation in the final rules will promote the protection of market

    participants and the public.

    ii. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    For reasons discussed above, an effective position limits regime

    must include a robust aggregation policy that is designed to prevent a

    trader from attaining market power through ownership or control over

    multiple accounts. To the extent that the aggregation policy under the

    final rules prevent any market participant from holding large positions

    that could cause unwarranted price fluctuations in a particular market,

    facilitate manipulation, or disrupt the price discovery process, the

    aggregation standards finalized herein operate to help ensure the

    efficiency, competitiveness and financial integrity of futures markets.

    In addition to the existing exemptions under part 150, to address

    commenter concerns over forced information sharing in violation of

    Federal law and regarding the underwriting of securities, the

    Commission is providing for limited exemptions to cover such

    circumstances.

    iii. Price Discovery

    For similar reasons, the Commission believes that the aggregation

    requirements will further the price discovery process. An effective

    [[Page 71680]]

    aggregation policy has been a longstanding component of the

    Commission's position limit regime. As a necessary component of an

    effective position limit regime, and based on its experience with the

    current aggregation rules, the Commission believes that the provisions

    relating to aggregation in the final rules will also help protect the

    price discovery process.

    iv. Sound Risk Management

    As a necessary component of an effective position limits regime,

    and based on its experience with the current aggregation rules, the

    Commission believes that the provisions relating to aggregation in the

    final rules will promote sound risk management.

    v. Public Interest Considerations

    The Commission has not identified any other public interest

    considerations related to the costs and benefits of the rules with

    respect to aggregation.

    B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies

    to consider the impact of its rules on ``small entities.'' \500\ A

    regulatory flexibility analysis or certification typically is required

    for ``any rule for which the agency publishes a general notice of

    proposed rulemaking pursuant to'' the notice-and-comment provisions of

    the Administrative Procedure Act, 5 U.S.C. 553(b).\501\ In its

    proposal, the Commission explained that ``[t]he requirements related to

    the proposed amendments fall mainly on [DCMs and SEFs], futures

    commission merchants, swap dealers, clearing members, foreign brokers,

    and large traders.'' \502\

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

    \500\ 5 U.S.C. 601 et seq.

    \501\ 5 U.S.C. sections 601(2), 603, 604 and 605.

    \502\ 76 FR 4765.

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

    In response to the Proposed Rules, the Not-For-Profit Electric End

    User Coalition (``Coalition'') submitted a comment generally

    criticizing the Commission's ``rule-makings [as] an accumulation of

    interrelated regulatory burdens and costs on non-financial small

    entities like the NFP Electric End Users, who seek to transact in

    Energy Commodity Swaps and ``Referenced Contracts'' only to hedge the

    commercial risks of their not-for-profit public service activities.''

    \503\ In addition, the Coalition requested ``that the Commission

    streamline the use of the bona fide hedging exemption for non-financial

    entities, especially for those that engage in CFTC-regulated

    transactions as `end user only/bona fide hedger only' market

    participants.'' \504\ However, such persons necessarily would be large

    traders.

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

    \503\ Not-For-Profit Electric End User Coalition (``EEUC'') on

    March 28, 2011 (``CL-EEUC'') at 29.

    \504\ Id. at 15.

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

    The Commission has determined that this position limits rule will

    not have a significant economic impact on a substantial number of small

    businesses. With regard to the position limits and position visibility

    levels, these would only impact large traders, which the Commission has

    previously determined not to be small entities for RFA purposes.\505\

    The Commission would impose filing requirements under final Sec. Sec.

    151.5(c) and (d) associated with bona fide hedging if a person exceeds

    or anticipates exceeding a position limit. Although regulation Sec.

    151.5(h) of these rules requires counterparties to pass-through swaps

    to keep records supporting the transaction's qualification for an

    enumerated hedge, the marginal burden of this requirement is mitigated

    through overlapping recordkeeping requirements for reportable futures

    traders (Commission regulation 18.05) and reportable swap traders

    (Commission regulation 20.6(b)). Further, the Commission understands

    that entities subject to the recordkeeping requirements for their swaps

    transactions maintain records of these contracts, as they would other

    documents evidencing material financial relationships, in the ordinary

    course of their businesses. Therefore, these rules would not impose a

    significant economic impact even if applied to small entities.

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

    \505\ Policy Statement and Establishment of Definitions of

    ``Small Entities'' for Purposes of the Regulatory Flexibility Act,

    47 FR 18618, Apr. 30, 1982 (FCM, DCM and large trader

    determinations).

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

    The remaining requirements in this final rule generally apply to

    DCMs, SEFs, futures commission merchants, swap dealers, clearing

    members, and foreign brokers. The Commission previously has determined

    that DCMs, futures commission merchants, and foreign brokers are not

    small entities for purposes of the RFA.\506\ Similarly, swap dealers,

    clearing members, and traders would be subject to the regulations only

    if carrying large positions.

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

    \506\ See 47 FR at 18618; 72 FR 34417, Jun. 22, 2007 (foreign

    broker determination).

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

    The Commission has proposed, but not yet determined, that SEFs

    should not be considered to be small entities for purposes of the RFA

    for essentially the same reasons that DCMs have previously been

    determined not to be small entities.\507\ Similarly, the Commission has

    proposed, but not yet determined, that swap dealers should not be

    considered ``small entities'' for essentially the same reasons that

    FCMs have previously been determined not to be small entities.\508\ For

    all of the reasons stated in those previous releases, the Commission

    has determined that SEFs and swap dealers are not ``small entities''

    for purposes of the RFA.

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

    \507\ See 75 FR 63745, Oct. 18, 2010.

    \508\ See 76 FR 6715, Feb. 8, 2011.

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

    The Commission notes that it has not previously determined whether

    clearing members should be considered small entities for purposes of

    the RFA. The Commission does not believe that clearing members who will

    be subject to the requirements of this rulemaking will constitute small

    entities for RFA purposes. First, most clearing members will also be

    registered as FCMs, who as a category have been previously determined

    to not be small entities. Second, any clearing member effected by this

    rule will also, of necessity be a large trader, who as a category has

    also been determined to not be small entities. For all of these

    reasons, the Commission has determined that clearing members are not

    ``small entities'' for purposes of the RFA.

    Accordingly, the Chairman, on behalf of the Commission, certifies,

    pursuant to 5 U.S.C. 605(b), that the actions to be taken herein will

    not have a significant economic impact on a substantial number of small

    entities.

    C. Paperwork Reduction Act

    1. Overview

    The Paperwork Reduction Act (``PRA'') \509\ imposes certain

    requirements on Federal agencies in connection with their conducting or

    sponsoring any collection of information as defined by the PRA. Certain

    provisions of the regulations will result in new collection of

    information requirements within the meaning of the PRA. An agency may

    not conduct or sponsor, and a person is not required to respond to, a

    collection of information unless it displays a currently valid control

    number. The Commission submitted the proposing release to the Office of

    Management and Budget (``OMB'') for review in accordance with 44 U.S.C.

    3507(d) and 5 CFR 1320.11. The Commission requested that OMB approve

    and assign a new control number for the collections of information

    covered by the proposing release.

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

    \509\ 44 U.S.C. 3501 et seq.

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

    The Commission invited 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

    [[Page 71681]]

    Commission solicited 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.

    The Commission received three comments on the burden estimates and

    information collection requirements contained in its proposing release.

    The World Gold Council stated that the recordkeeping and reporting

    costs were not addressed.\510\ MGEX argued that the Commission's

    estimated burden for DCMs to determine deliverable supply levels was

    too low.\511\ Specifically, it commented that the Commission's estimate

    of ``6,000 hours per year for all DCMs at a combined annual cost of

    $50,000 among all DCMs'' would result ``in an hourly wage of less than

    $10'' to comply with the rules.\512\ The combined annual cost estimate

    cited by MGEX appears to be the amount the Commission estimated for

    annualized capital and start-up costs and annual total operating and

    maintenance costs; \513\ this estimate is separate from any calculation

    of labor costs. The Working Group commented that it could not

    meaningfully respond to the costs until it had a complete view of all

    the Dodd-Frank Act rulemakings, that the Commission did not provide

    sufficient explanation for its estimates of the number of market

    participants affected by the final regulations, and that the Commission

    underestimated wage and personnel estimates.\514\ As further discussed

    below, the Commission has carefully reviewed its burden analysis and

    estimates, and it has determined its estimates to be reasonable.

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

    \510\ CL-WGC supra note 21 at 5.

    \511\ CL-MGEX supra note 74 at 4.

    \512\ Id.

    \513\ In this regard the Commission notes that the cost estimate

    for annualized capital and start-up costs and annual total operating

    and maintenance costs was $55,000.

    \514\ CL-WGCEF supra note 35 at 25-26.

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

    Responses to the collections of information contained within these

    final rules are mandatory, and 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.'' \515\ The Commission also is

    required to protect certain information contained in a government

    system of records pursuant to the Privacy Act of 1974.\516\

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

    \515\ 7 U.S.C. 12(a)(1).

    \516\ 5 U.S.C. 552a.

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

    The title for this collection of information is ``Part 151--

    Position Limit Framework for Referenced Contracts.'' OMB has approved

    and assigned OMB control number 3038-[----] to this collection of

    information.

    2. Information Provided and Recordkeeping Duties

    Proposed Sec. 151.4(a)(2) provided for a special conditional spot-

    month limit for traders under certain conditions, including the

    submission of a certification that the trader met the required

    conditions, to be filed within a day after the trader exceeded a

    conditional spot-month limit. The Commission anticipated that

    approximately one hundred traders per year would submit conditional

    spot-month limit certifications and estimated that these one hundred

    entities would incur a total burden of 2,400 annual labor hours,

    resulting in a total of $189,000 in annual labor costs \517\ and $1

    million in annualized capital, start-up,\518\ total operating, and

    maintenance costs. As described above, the Commission has eliminated

    the conditional spot-month limit as described in the Proposed Rules.

    These final rules now provide for a limit on cash-settled Referenced

    Contracts of five times the limit on the physical-delivery Referenced

    Contract. The cash-settled and physical-delivery contracts would also

    be subject to separate class limits, and the Commission would impose an

    aggregate limit set at five times the level of the spot-month limit in

    the relevant Core Referenced Futures Contract that is physically

    delivered. As such, traders need not file a certification to avail

    themselves of the conditional limit for cash-settled contracts.

    Therefore, these capital and labor cost estimates do not apply to the

    final regulations.

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

    \517\ The Commission staff's estimates concerning the wage rates

    are based on salary information for the securities industry compiled

    by the Securities Industry and Financial Markets Association

    (``SIFMA''). The $78.61 per hour is derived from figures from a

    weighted average of salaries and bonuses across different

    professions from the SIFMA Report on Management & Professional

    Earnings in the Securities Industry 2010, modified to account for an

    1800-hour work-year and multiplied by 1.3 to account for overhead

    and other benefits. The wage rate is a weighted national average of

    salary and bonuses for professionals with the following titles (and

    their relative weight): ``programmer (senior)'' (30 percent);

    ``programmer'' (30 percent); ``compliance advisor (intermediate)''

    (20 percent); ``systems analyst'' (10 percent); and ``assistant/

    associate general counsel'' (10 percent).

    \518\ The capital/start-up cost component of ``annualized

    capital/start-up, operating, and maintenance costs'' is based on an

    initial capital/start-up cost that is straight-line depreciated over

    five years.

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

    Section 151.4(c) requires that DCMs submit an estimate of

    deliverable supply for each Referenced Contract that is subject to a

    spot-month position limit and listed or executed pursuant to the rules

    of the DCM. Under the Proposed Rules, the Commission estimated that the

    reporting would affect approximately six entities annually, resulting

    in a total marginal burden, across all of these entities, of 6,000

    annual labor hours and $55,000 in annualized capital, start-up, total

    operating, and maintenance costs. As discussed above, in response to

    comments concerning the process for determining deliverable supply, the

    Commission has determined to update spot-month limits biennially (every

    two years) instead of annually in the case of energy and metal

    contracts, and to stagger the dates on which estimates of deliverable

    supply shall be submitted by DCMs. As a result of these changes, the

    Commission estimates that this reporting will result in a total

    marginal burden, across the six affected entities, of 5,000 annual

    labor hours for a total of $511,000 in annual labor costs and $50,000

    in annualized capital, start-up, total operating, and maintenance

    costs.

    Section 151.5 sets forth the application procedure for bona fide

    hedgers and counterparties to bona fide hedging swap transactions that

    seek an exemption from the Commission-set Federal position limits for

    Referenced Contracts. If a bona fide hedger seeks to claim an exemption

    from position limits because of cash market activities, then the hedger

    would submit a 404 filing pursuant to Sec. 151.5(b). The 404 filing

    would be submitted when the bona fide hedger exceeds the applicable

    position limit and claims an exemption or when its hedging needs

    increase. Similarly, parties to bona fide hedging swap transactions

    would be required to submit a 404S filing to qualify for a hedging

    exemption, which would also be submitted when the bona fide hedger

    exceeds the applicable position limit and claims an exemption or when

    its

    [[Page 71682]]

    hedging needs increase. If a bona fide hedger seeks an exemption for

    anticipated commercial production or anticipatory commercial

    requirements, then the hedger would submit a 404A filing pursuant to

    Sec. 151.5(c).

    Under the Proposed Rules, 404 and 404S filings would have been

    required on a daily basis. In light of comments concerning the burden

    of daily filings to both market participants and the Commission, the

    final regulations require only monthly reporting of 404 and 404S

    filings. These monthly reports would provide information on daily

    positions for the month reporting period.

    The Commission estimated in the Proposed Rules that these bona fide

    hedging-related reporting requirements would affect approximately two

    hundred entities annually and result in a total burden of approximately

    $37.6 million across all of these entities, 168,000 annual labor hours,

    resulting in a total of $13.2 million in annual labor costs and $25.4

    million in annualized capital, start-up, total operating, and

    maintenance costs. As a result of modifications made to the Proposed

    Rules, under the final regulations these bona fide hedging-related

    reporting requirements will affect approximately two hundred entities

    annually and result in a total burden of approximately $28.6 million

    across all of these entities, 29,700 annual labor hours, resulting in a

    total of $2.3 million in annual labor costs and $26.3 million in

    annualized capital, start-up, total operating, and maintenance costs.

    With regard to 404 filings, under the Proposed Rules, the

    Commission estimated that 404 filing requirements would affect

    approximately ninety entities annually, resulting in a total burden,

    across all of these entities, of 108,000 total annual labor hours and

    $11.7 million in annualized capital, start-up, total operating, and

    maintenance costs. Under the final regulations, 404 filing requirements

    will affect approximately ninety entities annually, resulting in a

    total burden, across all of these entities, of 108,000 total annual

    labor hours and $11.7 million in annualized capital, start-up, total

    operating, and maintenance costs.

    With regard to 404A filings, under the Proposed Rules, the

    Commission estimated that 404A filing requirements would affect

    approximately sixty entities annually, resulting in a total burden,

    across all of these entities, of 6,000 total annual labor hours and

    $4.2 million in annualized capital, start-up, total operating, and

    maintenance costs. In addition to adjustments in these estimates

    stemming from the change in the frequency of filings, the estimate of

    entities affected by 404A filing requirements has been modified to

    reflect the fact that the final regulations include certain

    anticipatory hedging exemptions that were absent from the Proposed

    Rules. Thus, under the final regulations, 404A filing requirements will

    affect approximately ninety entities annually, resulting in a total

    burden, across all of these entities, of 2,700 total annual labor hours

    and $6.3 million in annualized capital, start-up, total operating, and

    maintenance costs.

    With regard to 404S filings, under the Proposed Rules the

    Commission estimated that 404S filing requirements would affect

    approximately forty-five entities annually, resulting in a total

    burden, across all of these entities, of 54,000 total annual labor

    hours and $9.5 million in annualized capital, start-up, total

    operating, and maintenance costs. Under the final regulations, 404S

    filing requirements will affect approximately forty-five entities

    annually, resulting in a total burden, across all of these entities, of

    16,200 total annual labor hours and $9.5 million in annualized capital,

    start-up, total operating, and maintenance costs.

    Section 151.5(e) specifies recordkeeping requirements for traders

    who claim bona fide hedge exemptions. These recordkeeping requirements

    include complete books and records concerning all of their related

    cash, futures, and swap positions and transactions and make such books

    and records, along with a list of swap counterparties to the

    Commission. Regulations 151.5(g) and 151.5(h) provide procedural

    documentation requirements for those availing themselves of a bona fide

    hedging transaction exemption. These firms would be required to

    document a representation and confirmation by at least one party that

    the swap counterparty is relying on a bona fide hedge exemption, along

    with a confirmation of receipt by the other party to the swap.

    Paragraph (h) of Sec. 151.5 also requires that the written

    representation and confirmation be retained by the parties and

    available to the Commission upon request.\519\ The marginal impact of

    this requirement is limited because of its overlap with existing

    recordkeeping requirements under Sec. 15.03. The Commission estimates,

    as it did under the Proposed Rules, that bona fide hedging-related

    recordkeeping regulations will affect approximately one hundred sixty

    entities, resulting in a total burden, across all of these entities, of

    40,000 total annual labor hours and $10.4 million in annualized

    capital, start-up, total operating, and maintenance costs.

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

    \519\ The Commission notes that entities would have to retain

    such books and records in compliance with Sec. 1.31.

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

    Section 151.6 requires traders with positions exceeding visibility

    levels in Referenced Contracts in metal and energy commodities to

    submit additional information about cash market and derivatives

    activity in substantially the same commodity. Section 151.6(b) requires

    the submission of a 401 filing which would provide basic position

    information on the position exceeding the visibility level.

    Section151.6(c) requires additional information, through a 402S filing,

    on a trader's uncleared swaps in substantially the same commodity. The

    Commission has determined to increase the visibility levels from the

    proposed levels, meaning fewer market participants will be affected by

    the relevant reporting requirements. In addition, the Proposed Rules

    included a requirement to submit 404A filings under proposed Sec.

    151.6, but the Commission has eliminated this requirement in order to

    reduce the compliance burden for firms reporting under Sec. 151.6.

    Requirements under 401 filing reporting regulations in the Proposed

    Rules would have affected approximately one hundred forty entities

    annually, resulting in a total burden, across all of these entities, of

    16,800 total annual labor hours and $15.4 million in annualized

    capital, start-up, total operating, and maintenance costs. In the final

    regulations, these requirements will affect approximately seventy

    entities annually, resulting in a total burden, across all of these

    entities, of 8,400 total annual labor hours and $5.3 million in

    annualized capital, start-up, total operating, and maintenance costs.

    Requirements under 402S filing reporting regulations in the

    Proposed Rules would have affected approximately seventy entities

    annually, resulting in a total burden, across all of these entities, of

    5,600 total annual labor hours and $4.9 million in annualized capital,

    start-up, total operating, and maintenance costs. In the final

    regulations, the Commission has eliminated the 402S filing, thus

    eliminating any burden stemming from such reports.

    Requirements under visibility level-related 404 filing reporting

    regulations \520\ in the Proposed Rules

    [[Page 71683]]

    would have affected approximately sixty entities annually, resulting in

    a total burden, across all of these entities, of 4,800 total annual

    labor hours and $4.2 million in annualized capital, start-up, total

    operating, and maintenance costs. In the final regulations, these

    requirements will affect approximately thirty entities annually,

    resulting in a total burden, across all of these entities, of 2,400

    total annual labor hours and $2.1 million in annualized capital, start-

    up, total operating, and maintenance costs.

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

    \520\ For the visibility level-related 404 filing requirements,

    the estimated burden is based on reporting duties not already

    accounted for in the burden estimate for those submitting 404

    filings pursuant to proposed Sec. 151.5. For many of these firms,

    the experience and infrastructure developed submitting or preparing

    to submit a 404 filing under Sec. 151.5 would reduce the marginal

    burden imposed by having to submit filings under Sec. 151.6.

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

    As noted above, 404A filing requirements under Sec. 151.6 have

    been eliminated in the final regulations. Therefore, the burden

    estimates for this requirement under the Proposed Rules (approximately

    forty entities affected annually, resulting in a total burden, across

    all of these entities, of 3,200 total annual labor hours and $2.8

    million in annualized capital, start-up, total operating, and

    maintenance costs) do not apply to the final regulations.

    As a result of this modification and higher visibility levels,

    estimates for the overall burden of visibility level-related reporting

    regulations have been modified. In the Proposed Rules, the Commission

    estimated that visibility level-related reporting regulations would

    affect approximately one hundred forty entities annually, resulting in

    a total burden, across all of these entities, of 30,400 annual labor

    hours, resulting, a total of $2.4 million in annual labor costs, and

    $27.3 million in annualized capital, start-up, total operating, and

    maintenance costs. Under the final regulations, visibility level-

    related reporting regulations will affect approximately seventy

    entities annually, resulting in a total burden, across all of these

    entities, of 8,160 annual labor hours, resulting in a total of $642,000

    in annual labor costs and $7.4 million in annualized capital, start-up,

    total operating, and maintenance costs.

    Section 151.7 concerns the aggregation of trader accounts. Proposed

    Sec. 151.7(g) provided for a disaggregation exemption for certain

    limited partners in a pool, futures commission merchants that met

    certain independent trading requirements, and independently controlled

    and managed non-financial entities in which another entity had an

    ownership or equity interest of 10 percent or greater. In all three

    cases, the exemption would become effective upon the Commission's

    approval of an application described in proposed Sec. 151.7(g), and

    renewal was required for each year following the initial application

    for exemption.

    As discussed in greater detail above, in the final regulations the

    Commission has made several modifications to account aggregation rules

    and exemptions. The modifications include reinstatement of the IAC

    exemption and exemption for certain interests in commodity pools (both

    of which are part of current Commission account aggregation policy but

    were absent from the Proposed Rules), an exemption from aggregation

    related to the underwriting of securities, and an exemption for

    situations in which aggregation across commonly owned affiliates would

    require the sharing of position information that would result in the

    violation of Federal law. In addition, the final regulations contain a

    modified procedure for exemptive relief under Sec. 151.7. The

    Commission has eliminated the provision in the Proposed Rules requiring

    a trader seeking a disaggregation exemption to file an application for

    exemptive relief as well as annual renewals. Instead, under the final

    regulations the trader must file a notice, effective upon filing,

    setting forth the circumstances that warrant disaggregation and a

    certification that they meet the relevant conditions.

    As a result of these modifications, estimates for the burden of

    reporting regulations related to account aggregation have been

    modified. Under the Proposed Rules, the Commission estimated that these

    reporting regulations would affect approximately sixty entities,

    resulting in a total burden, across all of these entities, of 300,000

    annual labor hours and $9.9 million in annualized capital, start-up,

    total operating, and maintenance costs. Under the final regulations,

    these reporting regulations will affect approximately ninety entities,

    resulting in a total burden, across all of these entities, of 225,000

    annual labor hours and $5.9 million in annualized capital, start-up,

    total operating, and maintenance costs.

    List of Subjects

    17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and

    recordkeeping requirements.

    17 CFR Part 150

    Commodity futures, Cotton, Grains.

    17 CFR Part 151

    Position limits, Bona fide hedging, Referenced Contracts.

    In consideration of the foregoing, pursuant to the authority

    contained in the Commodity Exchange Act, the Commission hereby amends

    chapter I of title 17 of the Code of Federal Regulations as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    0

    1. The authority citation for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

    6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,

    13a-1, 16, 16a, 19, 21, 23, and 24, as amended by Title VII of the

    Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.

    111-203, 124 Stat. 1376 (2010).

    Sec. 1.3 [Revised]

    0

    2. Revise Sec. 1.3 (z) to read as follows:

    (z) Bona fide hedging transactions and positions for excluded

    commodities. (1) General definition. Bona fide hedging transactions and

    positions shall mean any agreement, contract or transaction in an

    excluded commodity on a designated contract market or swap execution

    facility that is a trading facility, 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.

    (iv) 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

    [[Page 71684]]

    the Act, unless the provisions of paragraphs (z)(2) and (3) of this

    section 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 agreement, contract, or transaction in an excluded

    commodity on a designated contract market or swap execution facility

    that is a trading facility 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 agreement, contract or transaction during the five

    last trading days.

    (ii) Purchases of any agreement, contract or transaction in an

    excluded commodity on a designated contract market or swap execution

    facility that is a trading facility 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 agreement, contract or transaction 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 in any agreement, contract or

    transaction in an excluded commodity on a designated contract market or

    swap execution facility that is a trading facility 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 agreement, contract or transaction during the five

    last trading days.

    (iv) Purchases or sales by an agent who does not own or has not

    contracted to sell or purchase the offsetting cash commodity at a fixed

    price, provided that the agent is responsible for the merchandising of

    the cash position that is being offset, and the agent has a contractual

    arrangement with the person who owns the commodity or has the cash

    market commitment being offset.

    (v) Sales and purchases described in paragraphs (z)(2)(i) through

    (iv) of this section may also be offset other than by the same quantity

    of the same cash commodity, provided that the fluctuations in value of

    the position for in any agreement, contract or transaction are

    substantially related to the fluctuations in value of the actual or

    anticipated cash position, and provided that the positions in any

    agreement, contract or transaction shall not be maintained during the

    five last trading days.

    (3) Non-Enumerated cases. A designated contract market or swap

    execution facility that is a trading facility may recognize, consistent

    with the purposes of this section, transactions and positions other

    than those enumerated in paragraph (2) of this section as bona fide

    hedging. Prior to recognizing such non-enumerated transactions and

    positions, the designated contract market or swap execution facility

    that is a trading facility shall submit such rules for Commission

    review under section 5c of the Act and part 40 of this chapter.

    * * * * *

    Sec. 1.47 [Removed and Reserved]

    0

    3. Remove and reserve Sec. 1.47.

    Sec. 1.48 [Removed and Reserved]

    0

    4. Remove and reserve Sec. 1.48.

    PART 150--LIMITS ON POSITIONS

    0

    5. Revise Sec. 150.2 to read as follows:

    Sec. 150.2 Position limits.

    No person may hold or control positions, separately or in

    combination, net long or net short, for the purchase or sale of a

    commodity for future delivery or, on a futures-equivalent basis,

    options thereon, in excess of the following:

    Speculative Position Limits

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

    Limits by number of contracts

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

    Contract Spot month Single month All months

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

    Chicago Board of Trade

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

    Corn and Mini-Corn \1\.................................... 600 33,000 33,000

    Oats...................................................... 600 2,000 2,000

    Soybeans and Mini-Soybeans \1\............................ 600 15,000 15,000

    Wheat and Mini-Wheat \1\.................................. 600 12,000 12,000

    Soybean Oil............................................... 540 8,000 8,000

    Soybean Meal.............................................. 720 6,500 6,500

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

    Minneapolis Grain Exchange

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

    Hard Red Spring Wheat..................................... 600 12,000 12,000

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

    ICE Futures U.S.

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

    Cotton No. 2.............................................. 300 5,000 5,000

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

    Kansas City Board of Trade

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

    Hard Winter Wheat......................................... 600 12,000 12,000

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

    \1\ For purposes of compliance with these limits, positions in the regular sized and mini-sized contracts shall

    be aggregated.

    [[Page 71685]]

    0

    6. Add part 151 to read as follows:

    PART 151--POSITION LIMITS FOR FUTURES AND SWAPS

    Sec.

    151.1 Definitions.

    151.2 Core Referenced Futures Contracts.

    151.3 Spot months for Referenced Contracts.

    151.4 Position limits for Referenced Contracts.

    151.5 Bona fide hedging and other exemptions for Referenced

    Contracts.

    151.6 Position visibility.

    151.7 Aggregation of positions.

    151.8 Foreign boards of trade.

    151.9 Pre-existing positions.

    151.10 Form and manner of reporting and submitting information or

    filings.

    151.11 Designated contract market and swap execution facility

    position limits and accountability rules.

    151.12 Delegation of authority to the Director of the Division of

    Market Oversight.

    151.13 Severability.

    Appendix A to Part 151--Spot-Month Position Limits

    Appendix B to Part 151--Examples of Bona Fide Hedging Transactions

    and Positions

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 6g, 6t, 12a, 19,

    as amended by Title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    Sec. 151.1 Definitions.

    As used in this part--

    Basis contract means an agreement, contract or transaction that is

    cash-settled based on the difference in price of the same commodity (or

    substantially the same commodity) at different delivery locations;

    Calendar spread contract means a cash-settled agreement, contract,

    or transaction that represents the difference between the settlement

    price in one or a series of contract months of an agreement, contract

    or transaction and the settlement price of another contract month or

    another series of contract months' settlement prices for the same

    agreement, contract or transaction.

    Commodity index contract means an agreement, contract, or

    transaction that is not a basis or any type of spread contract, based

    on an index comprised of prices of commodities that are not the same or

    substantially the same; provided that, a commodity index contract used

    to circumvent speculative position limits shall be considered to be a

    Referenced Contract for the purpose of applying the position limits of

    Sec. 151.4.

    Core Referenced Futures Contract means a futures contract that is

    listed in Sec. 151.2.

    Eligible Entity means a commodity pool operator; the operator of a

    trading vehicle which is excluded, or which itself has qualified for

    exclusion from the definition of the term ``pool'' or ``commodity pool

    operator,'' respectively, under Sec. 4.5 of this chapter the limited

    partner or shareholder in a commodity pool the operator of which is

    exempt from registration under Sec. 4.13 of this chapter; a commodity

    trading advisor; a bank or trust company; a savings association; an

    insurance company; or the separately organized affiliates of any of the

    above entities:

    (1) Which authorizes an independent account controller

    independently to control all trading decisions with respect to the

    eligible entity's client positions and accounts that the independent

    account controller holds directly or indirectly, or on the eligible

    entity's behalf, but without the eligible entity's day-to-day

    direction; and

    (2) Which maintains:

    (i) Only such minimum control over the independent account

    controller as is consistent with its fiduciary responsibilities to the

    managed positions and accounts, and necessary to fulfill its duty to

    supervise diligently the trading done on its behalf; or

    (ii) If a limited partner or shareholder of a commodity pool the

    operator of which is exempt from registration under Sec. 4.13 of this

    chapter, only such limited control as is consistent with its status.

    Entity means a ``person'' as defined in section 1a of the Act.

    Excluded commodity means an ``excluded commodity'' as defined in

    section 1a of the Act.

    Independent Account Controller means a person:

    (1) Who specifically is authorized by an eligible entity

    independently to control trading decisions on behalf of, but without

    the day-to-day direction of, the eligible entity;

    (2) Over whose trading the eligible entity maintains only such

    minimum control as is consistent with its fiduciary responsibilities

    for managed positions and accounts to fulfill its duty to supervise

    diligently the trading done on its behalf or as is consistent with such

    other legal rights or obligations which may be incumbent upon the

    eligible entity to fulfill;

    (3) Who trades independently of the eligible entity and of any

    other independent account controller trading for the eligible entity;

    (4) Who has no knowledge of trading decisions by any other

    independent account controller; and

    (5) Who is registered as a futures commission merchant, an

    introducing broker, a commodity trading advisor, or an associated

    person of any such registrant, or is a general partner of a commodity

    pool the operator of which is exempt from registration under Sec. 4.13

    of this chapter.

    Intercommodity spread contract means a cash-settled agreement,

    contract or transaction that represents the difference between the

    settlement price of a Referenced Contract and the settlement price of

    another contract, agreement, or transaction that is based on a

    different commodity.

    Referenced Contract means, on a futures equivalent basis with

    respect to a particular Core Referenced Futures Contract, a Core

    Referenced Futures Contract listed in Sec. 151.2, or a futures

    contract, options contract, swap or swaption, other than a basis

    contract or commodity index contract, that is:

    (1) Directly or indirectly linked, including being partially or

    fully settled on, or priced at a fixed differential to, the price of

    that particular Core Referenced Futures Contract; or

    (2) Directly or indirectly linked, including being partially or

    fully settled on, or priced at a fixed differential to, the price of

    the same commodity underlying that particular Core Referenced Futures

    Contract for delivery at the same location or locations as specified in

    that particular Core Referenced Futures Contract.

    Spot month means, for Referenced Contracts, the spot month defined

    in Sec. 151.3.

    Spot-month, single-month, and all-months-combined position limits

    mean, for Referenced Contracts based on a commodity identified in Sec.

    151.2, the maximum number of contracts a trader may hold as set forth

    in Sec. 151.4.

    Spread contract means either a calendar spread contract or an

    intercommodity spread contract.

    Swap means ``swap'' as defined in section 1a of the Act and as

    further defined by the Commission.

    Swap dealer means ``swap dealer'' as that term is defined in

    section 1a of the Act and as further defined by the Commission.

    Swaption means an option to enter into a swap or a physical

    commodity option.

    Trader means a person that, for its own account or for an account

    that it controls, makes transactions in Referenced Contracts or has

    such transactions made.

    Sec. 151.2 Core Referenced Futures Contracts.

    (a) Agricultural commodities. Core Referenced Futures Contracts in

    agricultural commodities include the following futures contracts and

    options thereon:

    (1) Core Referenced Futures Contracts in legacy agricultural

    commodities:

    [[Page 71686]]

    (i) Chicago Board of Trade Corn (C);

    (ii) Chicago Board of Trade Oats (O);

    (iii) Chicago Board of Trade Soybeans (S);

    (iv) Chicago Board of Trade Soybean Meal (SM);

    (v) Chicago Board of Trade Soybean Oil (BO);

    (vi) Chicago Board of Trade Wheat (W);

    (vii) ICE Futures U.S. Cotton No. 2 (CT);

    (viii) Kansas City Board of Trade Hard Winter Wheat (KW); and

    (ix) Minneapolis Grain Exchange Hard Red Spring Wheat (MWE).

    (2) Core Referenced Futures Contracts in non-legacy agricultural

    commodities:

    (i) Chicago Mercantile Exchange Class III Milk (DA);

    (ii) Chicago Mercantile Exchange Feeder Cattle (FC);

    (iii) Chicago Mercantile Exchange Lean Hog (LH);

    (iv) Chicago Mercantile Exchange Live Cattle (LC);

    (v) Chicago Board of Trade Rough Rice (RR);

    (vi) ICE Futures U.S. Cocoa (CC);

    (vii) ICE Futures U.S. Coffee C (KC);

    (viii) ICE Futures U.S. FCOJ-A(OJ);

    (ix) ICE Futures U.S. Sugar No. 11 (SB); and

    (x) ICE Futures U.S. Sugar No. 16 (SF).

    (b) Metal commodities. Core Referenced Futures Contracts in metal

    commodities include the following futures contracts and options

    thereon:

    (1) Commodity Exchange, Inc. Copper (HG);

    (2) Commodity Exchange, Inc. Gold (GC);

    (3) Commodity Exchange, Inc. Silver (SI);

    (4) New York Mercantile Exchange Palladium (PA); and

    (5) New York Mercantile Exchange Platinum (PL).

    (c) Energy commodities. The Core Referenced Futures Contracts in

    energy commodities include the following futures contracts and options

    thereon:

    (1) New York Mercantile Exchange Henry Hub Natural Gas (NG);

    (2) New York Mercantile Exchange Light Sweet Crude Oil (CL);

    (3) New York Mercantile Exchange New York Harbor Gasoline

    Blendstock (RB); and

    (4) New York Mercantile Exchange New York Harbor Heating Oil (HO).

    Sec. 151.3 Spot months for Referenced Contracts.

    (a) Agricultural commodities. For Referenced Contracts based on

    agricultural commodities, the spot month shall be the period of time

    commencing:

    (1) At the close of business on the business day prior to the first

    notice day for any delivery month and terminating at the end of the

    delivery period in the underlying Core Referenced Futures Contract for

    the following Referenced Contracts:

    (i) ICE Futures U.S. Cocoa (CC) contract;

    (ii) ICE Futures U.S. Coffee C (KC) contract;

    (iii) ICE Futures U.S. Cotton No. 2 (CT) contract;

    (iv) ICE Futures U.S. FCOJ-A (OJ) contract;

    (v) Chicago Board of Trade Corn (C) contract;

    (vi) Chicago Board of Trade Oats (O) contract;

    (vii) Chicago Board of Trade Rough Rice (RR) contract;

    (viii) Chicago Board of Trade Soybeans (S) contract;

    (ix) Chicago Board of Trade Soybean Meal (SM) contract;

    (x) Chicago Board of Trade Soybean Oil (BO) contract;

    (xi) Chicago Board of Trade Wheat (W) contract;

    (xii) Minneapolis Grain Exchange Hard Red Spring Wheat (MW)

    contract; and

    (xiii) Kansas City Board of Trade Hard Winter Wheat (KW) contract;

    (2) At the close of business of the first business day after the

    fifteenth calendar day of the calendar month preceding the delivery

    month if the fifteenth calendar day is a business day, or at the close

    of business of the second business day after the fifteenth day if the

    fifteenth day is a non-business day and terminating at the end of the

    delivery period in the underlying Core Referenced Futures Contract for

    the ICE Futures U.S. Sugar No. 11 (SB) Referenced Contract;

    (3) At the close of business on the sixth business day prior to the

    last trading day and terminating at the end of the delivery period in

    the underlying Core Referenced Futures Contract for the ICE Futures

    U.S. Sugar No. 16 (SF) Referenced Contract;

    (4) At the close of business on the business day immediately

    preceding the last five business days of the contract month and

    terminating at the end of the delivery period in the underlying Core

    Referenced Futures Contract for the Chicago Mercantile Exchange Live

    Cattle (LC) Referenced Contract;

    (5) On the ninth trading day prior to the last trading day and

    terminating on the last trading day for Chicago Mercantile Exchange

    Feeder Cattle (FC) contract;

    (6) On the first trading day of the contract month and terminating

    on the last trading day for the Chicago Mercantile Exchange Class III

    Milk (DA) contract; and

    (7) At the close of business on the fifth business day prior to the

    last trading day and terminating on the last trading day for the

    Chicago Mercantile Exchange Lean Hog (LH) contract.

    (b) Metal commodities. The spot month shall be the period of time

    commencing at the close of business on the business day prior to the

    first notice day for any delivery month and terminating at the end of

    the delivery period in the underlying Core Referenced Futures Contract

    for the following Referenced Contracts:

    (1) Commodity Exchange, Inc. Gold (GC) contract;

    (2) Commodity Exchange, Inc. Silver (SI) contract;

    (3) Commodity Exchange, Inc. Copper (HG) contract;

    (4) New York Mercantile Exchange Palladium (PA) contract; and

    (5) New York Mercantile Exchange Platinum (PL) contract.

    (c) Energy commodities. The spot month shall be the period of time

    commencing at the close of business of the third business day prior to

    the last day of trading in the underlying Core Referenced Futures

    Contract and terminating at the end of the delivery period for the

    following Referenced Contracts:

    (1) New York Mercantile Exchange Light Sweet Crude Oil (CL)

    contract;

    (2) New York Mercantile Exchange New York Harbor No. 2 Heating Oil

    (HO) contract;

    (3) New York Mercantile Exchange New York Harbor Gasoline

    Blendstock (RB) contract; and

    (4) New York Mercantile Exchange Henry Hub Natural Gas (NG)

    contract.

    Sec. 151.4 Position limits for Referenced Contracts.

    (a) Spot-month position limits. In accordance with the procedure in

    paragraph (d) of this section, and except as provided or as otherwise

    authorized by Sec. 151.5, no trader may hold or control a position,

    separately or in combination, net long or net short, in Referenced

    Contracts in the same commodity when such position is in excess of:

    (1) For physical-delivery Referenced Contracts, a spot-month

    position limit that shall be based on one-quarter of the estimated

    spot-month deliverable supply as established by the Commission pursuant

    to paragraphs (d)(1) and (d)(2) of this section; and

    (2) For cash-settled Referenced Contracts:

    (i) A spot-month position limit that shall be based on one-quarter

    of the

    [[Page 71687]]

    estimated spot-month deliverable supply as established by the

    Commission pursuant to paragraphs (d)(1) and (d)(2) of this section.

    Provided, however,

    (ii) For New York Mercantile Exchange Henry Hub Natural Gas

    Referenced Contracts:

    (A) A spot-month position limit equal to five times the spot-month

    position limit established by the Commission for the physical-delivery

    New York Mercantile Exchange Henry Hub Natural Gas Referenced Contract

    pursuant to paragraph (a)(1); and

    (B) An aggregate spot-month position limit for physical-delivery

    and cash-settled New York Mercantile Exchange Henry Hub Natural Gas

    Referenced Contracts equal to five times the spot-month position limit

    established by the Commission for the physical-delivery New York

    Mercantile Exchange Henry Hub Natural Gas Referenced Contract pursuant

    to paragraph (a)(1).

    (b) Non-spot-month position limits. In accordance with the

    procedure in paragraph (d) of this section, and except as otherwise

    authorized in Sec. 151.5, no person may hold or control positions,

    separately or in combination, net long or net short, in the same

    commodity when such positions, in all months combined (including the

    spot month) or in a single month, are in excess of:

    (1) Non-legacy Referenced Contract position limits. All-months-

    combined aggregate and single-month position limits, fixed by the

    Commission based on 10 percent of the first 25,000 contracts of average

    all-months-combined aggregated open interest with a marginal increase

    of 2.5 percent thereafter as established by the Commission pursuant to

    paragraph (d)(3) of this section;

    (2) Aggregate open interest calculations for non-spot-month

    position limits for non-legacy Referenced Contracts. (i) For the

    purpose of fixing the speculative position limits for non-legacy

    Referenced Contracts in paragraph (b)(1) of this section, the

    Commission shall determine:

    (A) The average all-months-combined aggregate open interest, which

    shall be equal to the sum, for 12 or 24 months of values obtained under

    paragraph (B) and (C) of this section for a period of 12 or 24 months

    prior to the fixing date divided by 12 or 24 respectively as of the

    last day of each calendar month;

    (B) The all-months-combined futures open interest of a Referenced

    Contract is equal to the sum of the month-end open interest for all of

    the Referenced Contract's open contract months in futures and option

    contracts (on a delta adjusted basis) across all designated contract

    markets; and

    (C) The all-months-combined swaps open interest is equal to the sum

    of all of a Referenced Contract's month-end open swaps positions,

    considering open positions attributed to both cleared and uncleared

    swaps, where the uncleared all-months-combined swaps open positions

    shall be the absolute sum of swap dealers' net uncleared open swaps

    positions by counterparty and by single Referenced Contract month as

    reported to the Commission pursuant to part 20 of this chapter,

    provided that, other than for the purpose of determining initial non-

    spot-month position limits, open swaps positions attributed to swaps

    with two swap dealer counterparties shall be counted once for the

    purpose of determining uncleared all-months-combined swaps open

    positions, provided further that, upon entry of an order under Sec.

    20.9 of this chapter determining that operating swap data repositories

    are processing positional data that will enable the Commission

    effectively to conduct surveillance in swaps, the Commission shall rely

    on data from such swap data repositories to compute the all-months-

    combined swaps open interest;

    (ii) Notwithstanding the provisions of this section, for the

    purpose of determining initial non-spot-month position limits for non-

    legacy Referenced Contracts, the Commission may estimate uncleared all-

    months-combined swaps open positions based on uncleared open swaps

    positions reported to the Commission pursuant to part 20 of this

    chapter by clearing organizations or clearing members that are swap

    dealers; and

    (3) Legacy agricultural Referenced Contract position limits. All-

    months-combined aggregate and single-month position limits, fixed by

    the Commission at the levels provided below as established by the

    Commission pursuant to paragraph (d)(4) of this section:

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

    Referenced contract Position limits

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

    (i) Chicago Board of Trade Corn (C) contract........ 33,000

    (ii) Chicago Board of Trade Oats (O) contract....... 2,000

    (iii) Chicago Board of Trade Soybeans (S) contract.. 15,000

    (iv) Chicago Board of Trade Wheat (W) contract...... 12,000

    (v) Chicago Board of Trade Soybean Oil (BO) contract 8,000

    (vi) Chicago Board of Trade Soybean Meal (SM) 6,500

    contract...........................................

    (vii) Minneapolis Grain Exchange Hard Red Spring 12,000

    Wheat (MW) contract................................

    (viii) ICE Futures U.S. Cotton No. 2 (CT) contract.. 5,000

    (ix) Kansas City Board of Trade Hard Winter Wheat 12,000

    (KW) contract......................................

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

    (c) Netting of positions. (1) For Referenced Contracts in the spot

    month. (i) For the spot-month position limit in paragraph (a) of this

    section, a trader's positions in the physical-delivery Referenced

    Contract and cash-settled Referenced Contract are calculated

    separately. A trader cannot net any physical-delivery Referenced

    Contract with cash-settled Referenced Contracts towards determining the

    trader's positions in each of the physical-delivery Referenced Contract

    and cash-settled Referenced Contracts in paragraph (a) of this section.

    However, a trader can net positions in cash-settled Referenced

    Contracts in the same commodity.

    (ii) Notwithstanding the netting provision in paragraph (c)(1)(i)

    of this section, for the aggregate spot-month position limit in New

    York Mercantile Exchange Henry Hub Natural Gas Referenced Contracts in

    paragraph (a)(2)(ii) of this section, a trader's positions shall be

    combined and the net resulting position in the physical-delivery

    Referenced Contract and cash-settled Referenced Contracts shall be

    applied towards determining the trader's aggregate position.

    (2) For the purpose of applying non-spot-month position limits, a

    trader's position in a Referenced Contract shall be combined and the

    net resulting position shall be applied towards determining the

    trader's aggregate single-month and all-months-combined position.

    (d) Establishing and effective dates of position limits. (1)

    Initial spot-month position limits for Referenced Contracts. (i) Sixty

    days after the term ``swap'' is

    [[Page 71688]]

    further defined under the Wall Street Transparency and Accountability

    Act of 2010, the spot-month position limits for Referenced Contracts

    referred to in Appendix A shall apply to all the provisions of this

    part.

    (2) Subsequent spot-month position limits for Referenced Contracts.

    (i) Commencing January 1st of the second calendar year after the term

    ``swap'' is further defined under the Wall Street Transparency and

    Accountability Act of 2010, the Commission shall fix position limits by

    Commission order that shall supersede the initial limits established

    under paragraph (d)(1) of this section.

    (ii) In fixing spot-month position limits for Referenced Contracts,

    the Commission shall utilize the estimates of deliverable supply

    provided by a designated contract market under paragraph (d)(2)(iii) of

    this section unless the Commission determines to rely on its own

    estimate of deliverable supply.

    (iii) Each designated contract market shall submit to the

    Commission an estimate of deliverable supply for each Core Referenced

    Futures Contract that is subject to a spot-month position limit and

    listed or executed pursuant to the rules of the designated contract

    market according to the following schedule commencing January 1st of

    the second calendar year after the term ``swap'' is further defined

    under the Wall Street Transparency and Accountability Act of 2010:

    (A) For metal Core Referenced Futures Contracts listed in Sec.

    151.2(b), by the 31st of December and biennially thereafter;

    (B) For energy Core Referenced Futures Contracts listed in Sec.

    151.2(c), by the 31st of March and biennially thereafter;

    (C) For corn, wheat, oat, rough rice, soybean and soybean products,

    livestock, milk, cotton, and frozen concentrated orange juice Core

    Referenced Futures Contracts, by the 31st of July, and annually

    thereafter;

    (D) For coffee, sugar, and cocoa Core Referenced Futures Contracts,

    by the 30th of September, and annually thereafter.

    (iv) For purposes of estimating deliverable supply, a designated

    contract market may use any guidance adopted in the Acceptable

    Practices for Compliance with Core Principle 3 found in part 38 of the

    Commission's regulations.

    (v) The estimate submitted under paragraph (d)(2)(iii) of this

    section shall be accompanied by a description of the methodology used

    to derive the estimate along with any statistical data supporting the

    designated contract market's estimate of deliverable supply.

    (vi) The Commission shall fix and publish pursuant to paragraph (e)

    of this section, the spot-month limits by Commission order, no later

    than:

    (A) For metal Referenced Contracts listed in Sec. 151.2(b), by the

    28th of February following the submission of estimates of deliverable

    supply provided to the Commission under paragraph (d)(2)(iii)(A) of

    this section and biennially thereafter;

    (B) For energy Referenced Contracts listed in Sec. 151.2(c), by

    the 31st of May following the submission of estimates of deliverable

    supply provided to the Commission under paragraph (d)(2)(iii)(B) of

    this section and biennially thereafter;

    (C) For corn, wheat, oat, rough rice, soybean and soybean products,

    livestock, milk, cotton, and frozen concentrated orange juice

    Referenced Contracts, by the 30th of September following the submission

    of estimates of deliverable supply provided to the Commission under

    paragraph (d)(2)(iii)(C) of this section and annually thereafter;

    (D) For coffee, sugar, and cocoa Referenced Contracts, by the 30th

    of November following the submission of estimates of deliverable supply

    provided to the Commission under paragraph (d)(2)(iii)(D) of this

    section and annually thereafter.

    (3) Non-spot-month position limits for non-legacy Referenced

    Contract. (i) Initial non-spot-month limits for non-legacy Referenced

    Contracts shall be fixed and published within one month after the

    Commission has obtained or estimated 12 months of values pursuant to

    paragraphs (b)(2)(i)(B), (b)(2)(i)(C), and (b)(2)(ii) of this section,

    and shall be fixed and made effective as provided in paragraph (b)(2)

    and (e) of this section.

    (ii) Subsequent non-spot-month limits for non-legacy Referenced

    Contracts shall be fixed and published within one month after two years

    following the fixing and publication of initial non-spot-month position

    limits and shall be based on the higher of 12 months average all-

    months-combined aggregate open interest, or 24 months average all-

    months-combined aggregate open interest, as provided for in paragraphs

    (b)(2) and (e) of this section.

    (iii) Initial non-spot-month limits for non-legacy Referenced

    Contracts shall be made effective by Commission order.

    (4) Non-spot-month legacy limits for legacy agricultural Referenced

    Contracts. The non-spot-month position limits for legacy agricultural

    Referenced Contracts shall be effective sixty days after the term

    ``swap'' is further defined under the Wall Street Transparency and

    Accountability Act of 2010, and shall apply to all the provisions of

    this part.

    (e) Publication. The Commission shall publish position limits on

    the Commission's Web site at http://www.cftc.gov prior to making such

    limits effective, other than those limits specified under paragraph

    (b)(3) of this section and appendix A to this part.

    (1) Spot-month position limits shall be effective:

    (i) For metal Referenced Contracts listed in Sec. 151.2(b), on the

    1st of May after the Commission has fixed and published such limits

    under paragraph (d)(2)(vi)(A) of this section;

    (ii) For energy Referenced Contracts listed in Sec. 151.2(c), on

    the 1st of August after the Commission has fixed and published such

    limits under paragraph (d)(2)(vi)(B) of this section;

    (iii) For corn, wheat, oat, rough rice, soybean and soybean

    products, livestock, milk, cotton, and frozen concentrated orange juice

    Referenced Contracts, on the 1st of December after the Commission has

    fixed and published such limits under paragraph (d)(2)(vi)(C) of this

    section; and

    (iv) For coffee, sugar, and cocoa Referenced Contracts, on the 1st

    of February after the Commission has fixed and published such limits

    under paragraph (d)(2)(vi)(D) of this section.

    (2) The Commission shall publish month-end all-months-combined

    futures open interest and all-months-combined swaps open interest

    figures within one month, as practicable, after such data is submitted

    to the Commission.

    (3) Non-spot-month position limits established under paragraph

    (b)(2) of this section shall be effective on the 1st calendar day of

    the third calendar month immediately following publication on the

    Commission's Web site under paragraph (d)(3) of this section.

    (f) Rounding. In determining or calculating all levels and limits

    under this section, a resulting number shall be rounded up to the

    nearest hundred contracts.

    Sec. 151.5 Bona fide hedging and other exemptions for Referenced

    Contracts.

    (a) Bona fide hedging transactions or positions. (1) Any person

    that complies with the requirements of this section may exceed the

    position limits set forth in Sec. 151.4 to the extent that a

    transaction or position in a Referenced Contract:

    (i) Represents a substitute for transactions made or to be made or

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

    channel;

    (ii) Is economically appropriate to the reduction of risks in the

    conduct and management of a commercial enterprise; and

    [[Page 71689]]

    (iii) Arises from the potential change in the value of one or

    several--

    (A) Assets that a person owns, produces, manufactures, processes,

    or merchandises or anticipates owning, producing, manufacturing,

    processing, or merchandising;

    (B) Liabilities that a person owns or anticipates incurring; or

    (C) Services that a person provides, purchases, or anticipates

    providing or purchasing; or

    (iv) Reduces risks attendant to a position resulting from a swap

    that--

    (A) Was executed opposite a counterparty for which the transaction

    would qualify as a bona fide hedging transaction pursuant to paragraph

    (a)(1)(i) through (iii) of this section; or

    (B) Meets the requirements of paragraphs (a)(1)(i) through (iii) of

    this section.

    (v) Notwithstanding the foregoing, no transactions or positions

    shall be classified as bona fide hedging for purposes of Sec. 151.4

    unless such transactions or positions are established and liquidated in

    an orderly manner in accordance with sound commercial practices and the

    provisions of paragraph (a)(2) of this section regarding enumerated

    hedging transactions and positions or paragraphs (a)(3) or (4) of this

    section regarding pass-through swaps of this section have been

    satisfied.

    (2) Enumerated hedging transactions and positions. Bona fide

    hedging transactions and positions for the purposes of this paragraph

    mean any of the following specific transactions and positions:

    (i) Sales of Referenced Contracts that do not exceed in quantity:

    (A) Ownership or fixed-price purchase of the contract's underlying

    cash commodity by the same person; and

    (B) Unsold anticipated production of the same commodity, which may

    not exceed one year of production for an agricultural commodity, by the

    same person provided that no such position is maintained in any

    physical-delivery Referenced Contract during the last five days of

    trading of the Core Referenced Futures Contract in an agricultural or

    metal commodity or during the spot month for other physical-delivery

    contracts.

    (ii) Purchases of Referenced Contracts that do not exceed in

    quantity:

    (A) The fixed-price sale of the contract's underlying cash

    commodity by the same person;

    (B) The quantity equivalent of fixed-price sales of the cash

    products and by-products of such commodity by the same person; and

    (C) Unfilled anticipated requirements of the same cash commodity,

    which may not exceed one year for agricultural Referenced Contracts,

    for processing, manufacturing, or use by the same person, provided that

    no such position is maintained in any physical-delivery Referenced

    Contract during the last five days of trading of the Core Referenced

    Futures Contract in an agricultural or metal commodity or during the

    spot month for other physical-delivery contracts.

    (iii) Offsetting sales and purchases in Referenced Contracts that

    do not exceed in quantity that amount of the same cash commodity that

    has been bought and sold by the same person at unfixed prices basis

    different delivery months, provided that no such position is maintained

    in any physical-delivery Referenced Contract during the last five days

    of trading of the Core Referenced Futures Contract in an agricultural

    or metal commodity or during the spot month for other physical-delivery

    contracts.

    (iv) Purchases or sales by an agent who does not own or has not

    contracted to sell or purchase the offsetting cash commodity at a fixed

    price, provided that the agent is responsible for the merchandising of

    the cash positions that is being offset in Referenced Contracts and the

    agent has a contractual arrangement with the person who owns the

    commodity or holds the cash market commitment being offset.

    (v) Anticipated merchandising hedges. Offsetting sales and

    purchases in Referenced Contracts that do not exceed in quantity the

    amount of the same cash commodity that is anticipated to be

    merchandised, provided that:

    (A) The quantity of offsetting sales and purchases is not larger

    than the current or anticipated unfilled storage capacity owned or

    leased by the same person during the period of anticipated

    merchandising activity, which may not exceed one year;

    (B) The offsetting sales and purchases in Referenced Contracts are

    in different contract months, which settle in not more than one year;

    and

    (C) No such position is maintained in any physical-delivery

    Referenced Contract during the last five days of trading of the Core

    Referenced Futures Contract in an agricultural or metal commodity or

    during the spot month for other physical-delivery contracts.

    (vi) Anticipated royalty hedges. Sales or purchases in Referenced

    Contracts offset by the anticipated change in value of royalty rights

    that are owned by the same person provided that:

    (A) The royalty rights arise out of the production, manufacturing,

    processing, use, or transportation of the commodity underlying the

    Referenced Contract, which may not exceed one year for agricultural

    Referenced Contracts; and

    (B) No such position is maintained in any physical-delivery

    Referenced Contract during the last five days of trading of the Core

    Referenced Futures Contract in an agricultural or metal commodity or

    during the spot month for other physical-delivery contracts.

    (vii) Service hedges. Sales or purchases in Referenced Contracts

    offset by the anticipated change in value of receipts or payments due

    or expected to be due under an executed contract for services held by

    the same person provided that:

    (A) The contract for services arises out of the production,

    manufacturing, processing, use, or transportation of the commodity

    underlying the Referenced Contract, which may not exceed one year for

    agricultural Referenced Contracts;

    (B) The fluctuations in the value of the position in Referenced

    Contracts are substantially related to the fluctuations in value of

    receipts or payments due or expected to be due under a contract for

    services; and

    (C) No such position is maintained in any physical-delivery

    Referenced Contract during the last five days of trading of the Core

    Referenced Futures Contract in an agricultural or metal commodity or

    during the spot month for other physical-delivery contracts.

    (viii) Cross-commodity hedges. Sales or purchases in Referenced

    Contracts described in paragraphs (a)(2)(i) through (vii) of this

    section may also be offset other than by the same quantity of the same

    cash commodity, provided that:

    (A) The fluctuations in value of the position in Referenced

    Contracts are substantially related to the fluctuations in value of the

    actual or anticipated cash position; and

    (B) No such position is maintained in any physical-delivery

    Referenced Contract during the last five days of trading of the Core

    Referenced Futures Contract in an agricultural or metal commodity or

    during the spot month for other physical-delivery contracts.

    (3) Pass-through swaps. Bona fide hedging transactions and

    positions for the purposes of this paragraph include the purchase or

    sales of Referenced Contracts that reduce the risks attendant to a

    position resulting from a swap that was executed opposite a

    counterparty for whom the swap transaction would qualify as a bona fide

    hedging transaction pursuant to paragraph (a)(2) of this section

    (``pass-through swaps''),

    [[Page 71690]]

    provided that no such position is maintained in any physical-delivery

    Referenced Contract during the last five days of trading of the Core

    Referenced Futures Contract in an agricultural or metal commodity or

    during the spot month for other physical-delivery contracts unless such

    pass-through swap position continues to offset the cash market

    commodity price risk of the bona fide hedging counterparty.

    (4) Pass-through swap offsets. For swaps executed opposite a

    counterparty for whom the swap transaction would qualify as a bona fide

    hedging transaction pursuant to paragraph (a)(2) of this section (pass-

    through swaps), such pass-through swaps shall also be classified as a

    bona fide hedging transaction for the counterparty for whom the swap

    would not otherwise qualify as a bona fide hedging transaction pursuant

    to paragraph (a)(2) of this section (``non-hedging counterparty''),

    provided that the non-hedging counterparty purchases or sells

    Referenced Contracts that reduce the risks attendant to such pass-

    through swaps. Provided further, that the pass-through swap shall

    constitute a bona fide hedging transaction only to the extent the non-

    hedging counterparty purchases or sells Referenced Contracts that

    reduce the risks attendant to the pass-through swap.

    (5) Any person engaging in other risk-reducing practices commonly

    used in the market which they believe may not be specifically

    enumerated in Sec. 151.5(a)(2) may request relief from Commission

    staff under Sec. 140.99 of this chapter or the Commission under

    section 4a(a)(7) of the Act concerning the applicability of the bona

    fide hedging transaction exemption.

    (b) Aggregation of accounts. Entities required to aggregate

    accounts or positions under Sec. 151.7 shall be considered the same

    person for the purpose of determining whether a person or persons are

    eligible for a bona fide hedge exemption under Sec. 151.5(a).

    (c) Information on cash market commodity activities. Any person

    with a position that exceeds the position limits set forth in Sec.

    151.4 pursuant to paragraphs (a)(2)(i)(A), (a)(2)(ii)(A),

    (a)(2)(ii)(B), (a)(2)(iii), or (a)(2)(iv) of this section shall submit

    to the Commission a 404 filing, in the form and manner provided for in

    Sec. 151.10.

    (1) The 404 filing shall contain the following information with

    respect to such position for each business day the same person exceeds

    the limits set forth in Sec. 151.4, up to and through the day the

    person's position first falls below the position limits:

    (i) The date of the bona fide hedging position, an indication of

    under which enumerated hedge exemption or exemptions the position

    qualifies for bona fide hedging, the corresponding Core Referenced

    Futures Contract, the cash market commodity hedged, and the units in

    which the cash market commodity is measured;

    (ii) The entire quantity of stocks owned of the cash market

    commodity that is being hedged;

    (iii) The entire quantity of fixed-price purchase commitments of

    the cash market commodity that is being hedged;

    (iv) The sum of the entire quantity of stocks owned of the cash

    market commodity and the entire quantity of fixed-price purchase

    commitments of the cash market commodity that is being hedged;

    (v) The entire quantity of fixed-price sale commitments of the cash

    commodity that is being hedged;

    (vi) The quantity of long and short Referenced Contracts, measured

    on a futures-equivalent basis to the applicable Core Referenced Futures

    Contract, in the nearby contract month that are being used to hedge the

    long and short cash market positions;

    (viii) The total number of long and short Referenced Contracts,

    measured on a futures equivalent basis to the applicable Core

    Referenced Futures Contract, that are being used to hedge the long and

    short cash market positions; and

    (viii) Cross-commodity hedging information as required under

    paragraph (g) of this section.

    (2) Notice filing. Persons seeking an exemption under this

    paragraph shall file a notice with the Commission, which shall be

    effective upon the date of the submission of the notice.

    (d) Information on anticipated cash market commodity activities.

    (1) Initial statement. Any person who intends to exceed the position

    limits set forth in Sec. 151.4 pursuant to paragraph (a)(2)(i)(B),

    (a)(2)(ii)(C), (a)(2)(v), (a)(2)(vi), or (a)(2)(vii) of this section in

    order to hedge anticipated production, requirements, merchandising,

    royalties, or services connected to a commodity underlying a Referenced

    Contract, shall submit to the Commission a 404A filing in the form and

    manner provided in Sec. 151.10. The 404A filing shall contain the

    following information with respect to such activities, by Referenced

    Contract:

    (i) A description of the type of anticipated cash market activity

    to be hedged; how the purchases or sales of Referenced Contracts are

    consistent with the provisions of (a)(1) of this section; and the units

    in which the cash commodity is measured;

    (ii) The time period for which the person claims the anticipatory

    hedge exemption is required, which may not exceed one year for

    agricultural commodities or one year for anticipated merchandising

    activity;

    (iii) The actual use, production, processing, merchandising (bought

    and sold), royalties and service payments and receipts of that cash

    market commodity during each of the three complete fiscal years

    preceding the current fiscal year;

    (iv) The anticipated use production, or commercial or merchandising

    requirements (purchases and sales), anticipated royalties, or service

    contract receipts or payments of that cash market commodity which are

    applicable to the anticipated activity to be hedged for the period

    specified in (d)(1)(ii) of this section;

    (v) The unsold anticipated production or unfilled anticipated

    commercial or merchandising requirements of that cash market commodity

    which are applicable to the anticipated activity to be hedged for the

    period specified in (d)(1)(ii) of this section;

    (vi) The maximum number of Referenced Contracts long and short (on

    an all-months-combined basis) that are expected to be used for each

    anticipatory hedging activity for the period specified in (d)(1)(ii) of

    this section on a futures equivalent basis;

    (vii) If the hedge exemption sought is for anticipated

    merchandising pursuant to (a)(2)(v) of this section, a description of

    the storage capacity related to the anticipated merchandising

    transactions, including:

    (A) The anticipated total storage capacity, the anticipated

    merchandising quantity, and purchase and sales commitments for the

    period specified in (d)(1)(ii) of this section;

    (B) Current inventory; and

    (C) The total storage capacity and quantity of commodity moved

    through the storage capacity for each of the three complete fiscal

    years preceding the current fiscal year; and

    (viii) Cross-commodity hedging information as required under

    paragraph (g) of this section.

    (2) Notice filing. Persons seeking an exemption under this

    paragraph shall file a notice with the Commission. Such a notice shall

    be filed at least ten days in advance of a date the person expects to

    exceed the position limits established under this part, and shall be

    effective after that ten day period unless otherwise notified by the

    Commission.

    (3) Supplemental reports for 404A filings. Whenever a person

    intends to

    [[Page 71691]]

    exceed the amounts determined by the Commission to constitute a bona

    fide hedge for anticipated activity in the most recent statement or

    filing, such person shall file with the Commission a statement that

    updates the information provided in the person's most recent filing at

    least ten days in advance of the date that person wishes to exceed

    those amounts.

    (e) Review of notice filings. (1) The Commission may require

    persons submitting notice filings provided for under paragraphs (c)(2)

    and (d)(2) of this section to submit such other information, before or

    after the effective date of a notice, which is necessary to enable the

    Commission to make a determination whether the transactions or

    positions under the notice filing fall within the scope of bona fide

    hedging transactions or positions described under paragraph (a) of this

    section.

    (2) The transactions and positions described in the notice filing

    shall not be considered, in part or in whole, as bona fide hedging

    transactions or positions if such person is so notified by the

    Commission.

    (f) Additional information from swap counterparties to bona fide

    hedging transactions. All persons that maintain positions in excess of

    the limits set forth in Sec. 151.4 in reliance upon the exemptions set

    forth in paragraphs (a)(3) and (4) of this section shall submit to the

    Commission a 404S filing, in the form and manner provided for in Sec.

    151.10. Such 404S filing shall contain the following information with

    respect to such position for each business day that the same person

    exceeds the limits set forth in Sec. 151.4, up to and through the day

    the person's position first falls below the position limit that was

    exceeded:

    (1) By Referenced Contract;

    (2) By commodity reference price and units of measurement used for

    the swaps that would qualify as a bona fide hedging transaction or

    position gross long and gross short positions; and

    (3) Cross-commodity hedging information as required under paragraph

    (g) of this section.

    (g) Conversion methodology for cross-commodity hedges. In addition

    to the information required under this section, persons who avail

    themselves of cross-commodity hedges pursuant to (a)(2)(viii) of this

    section shall submit to the Commission a form 404, 404A, or 404S

    filing, as appropriate. The first time such a form is filed where a

    cross-commodity hedge is claimed, it should contain a description of

    the conversion methodology. That description should explain the

    conversion from the actual commodity used in the person's normal course

    of business to the Referenced Contract that is being used for hedging,

    including an explanation of the methodology used for determining the

    ratio of conversion between the actual or anticipated cash positions

    and the person's positions in the Referenced Contract.

    (h) Recordkeeping. Persons who avail themselves of bona fide hedge

    exemptions shall keep and maintain complete books and records

    concerning all of their related cash, futures, and swap positions and

    transactions and make such books and records, along with a list of

    pass-through swap counterparties for pass-through swap exemptions under

    (a)(3) of this section, available to the Commission upon request.

    (i) Additional requirements for pass-through swap counterparties. A

    party seeking to rely upon Sec. 151.5(a)(3) to exceed the position

    limits of Sec. 151.4 with respect to such a swap may only do so if its

    counterparty provides a written representation (e.g., in the form of a

    field or other representation contained in a mutually executed trade

    confirmation) that, as to such counterparty, the swap qualifies in good

    faith as a bona fide hedging transaction under paragraph (a)(3) of this

    section at the time the swap was executed. That written representation

    shall be retained by the parties to the swap for a period of at least

    two years following the expiration of the swap and furnished to the

    Commission upon request. Any person that represents to another person

    that the swap qualifies as a pass-through swap under paragraph (a)(3)

    of this section shall keep and make available to the Commission upon

    request all relevant books and records supporting such a representation

    for a period of at least two years following the expiration of the

    swap.

    (j) Financial distress exemption. Upon specific request made to the

    Commission, the Commission may exempt a person or related persons under

    financial distress circumstances for a time certain from any of the

    requirements of this part. Financial distress circumstances are

    situations involving the potential default or bankruptcy of a customer

    of the requesting person or persons, affiliate of the requesting person

    or persons, or potential acquisition target of the requesting person or

    persons. Such exemptions shall be granted by Commission order.

    Sec. 151.6 Position visibility.

    (a) Visibility levels. A person holding or controlling positions,

    separately or in combination, net long or net short, in Referenced

    Contracts that equal or exceed the following levels in all months or in

    any single month (including the spot month), shall comply with the

    reporting requirements of paragraphs (b) and (c) of this section:

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

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

    (1) Visibility Levels for Metal Referenced Contracts

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

    (i) Commodity Exchange, Inc. Copper (HG)............ 8,500

    (ii) Commodity Exchange, Inc. Gold (GC)............. 30,000

    (iv) Commodity Exchange, Inc. Silver (SI)........... 8,500

    (v) New York Mercantile Exchange Palladium (PA)..... 1,500

    (vi) New York Mercantile Exchange Platinum (PL)..... 2,000

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

    (2) Visibility Levels for Energy Referenced Contracts

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

    (i) New York Mercantile Exchange Light Sweet Crude 50,000

    Oil (CL)...........................................

    (ii) New York Mercantile Exchange Henry Hub Natural 50,000

    Gas (NG)...........................................

    (iii) New York Mercantile Exchange New York Harbor 10,000

    Gasoline Blendstock (RB)...........................

    (iv) New York Mercantile Exchange New York Harbor 16,000

    No. 2 Heating Oil (HO).............................

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

    (b) Statement of person exceeding visibility level. Persons

    meeting the provisions of paragraph (a) of this section, shall submit

    to the Commission a 401 filing in the form and manner provided for in

    Sec. 151.10. The 401 filing shall contain the following information,

    by Referenced Contract:

    (1) A list of dates, within the applicable calendar quarter, on

    which the person held or controlled a position

    [[Page 71692]]

    that equaled or exceeded such visibility levels; and

    (2) As of the first business Tuesday following the applicable

    calendar quarter and as of the day, within the applicable calendar

    quarter, in which the person held the largest net position (on an all

    months combined basis) in excess of the level in paragraph (a) of this

    section:

    (i) Separately by futures, options and swaps, gross long and gross

    short futures equivalent positions in all months in the applicable

    Referenced Contract(s) (using economically reasonable and analytically

    supported deltas) on a futures-equivalent basis; and

    (ii) If applicable, by commodity referenced price, gross long and

    gross short uncleared swap positions in all months basis in the

    applicable Referenced Contract(s) futures-equivalent basis (using

    economically reasonable and analytically supported deltas).

    (c) 404 filing. A person that holds a position in a Referenced

    Contract that equals or exceeds a visibility level in a calendar

    quarter shall submit to the Commission a 404 filing in the form and

    manner provided for in Sec. 151.10, and it shall contain the

    information regarding such positions as described in Sec. 151.5(c) as

    of the first business Tuesday following the applicable calendar quarter

    and as of the day, within the applicable calendar quarter, in which the

    person held the largest net position in excess of the level in all

    months.

    (d) Alternative filing. With the express written permission of the

    Commission or its designees, the submission of a swaps or physical

    commodity portfolio summary statement spreadsheet in digital format,

    only insofar as the spreadsheet provides at least the same data as that

    required by paragraphs (b) or (c) of this section respectively may be

    substituted for the 401 or 404 filing respectively.

    (e) Precedence of other reporting obligations. Reporting

    obligations imposed by regulations other than those contained in this

    section shall supersede the reporting requirements of paragraphs (b)

    and (c) of this section but only insofar as other reporting obligations

    provide at least the same data and are submitted to the Commission or

    its designees at least as often as the reporting requirements of

    paragraphs (b) and (c) of this section.

    (f) Compliance date. The compliance date of this section shall be

    sixty days after the term ``swap'' is further defined under the Wall

    Street Transparency and Accountability Act of 2010. A document will be

    published in the Federal Register establishing the compliance date.

    Sec. 151.7 Aggregation of positions.

    (a) Positions to be aggregated. The position limits set forth in

    Sec. 151.4 shall apply to all positions in accounts for which any

    person by power of attorney or otherwise directly or indirectly holds

    positions or controls trading and to 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 position were done by, a single individual.

    (b) Ownership of accounts generally. For the purpose of applying

    the position limits set forth in Sec. 151.4, except for the ownership

    interest of limited partners, shareholders, members of a limited

    liability company, beneficiaries of a trust or similar type of pool

    participant in a commodity pool subject to the provisos set forth in

    paragraph (c) of this section or in accounts or positions in multiple

    pools as set forth in paragraph (d) of this section, any person holding

    positions in more than one account, or holding accounts or positions in

    which the person by power of attorney or otherwise directly or

    indirectly has a 10 percent or greater ownership or equity interest,

    must aggregate all such accounts or positions.

    (c) Ownership by limited partners, shareholders or other pool

    participants. (1) Except as provided in paragraphs (c)(2) and (3) of

    this section, a person that is a limited partner, shareholder or other

    similar type of pool participant with an ownership or equity interest

    of 10 percent or greater in a pooled account or positions who is also a

    principal or affiliate of the operator of the pooled account must

    aggregate the pooled account or positions with all other accounts or

    positions owned or controlled by that person, unless:

    (i) The pool operator has, and enforces, written procedures to

    preclude the person from having knowledge of, gaining access to, or

    receiving data about the trading or positions of the pool;

    (ii) The person does not have direct, day-to-day supervisory

    authority or control over the pool's trading decisions; and

    (iii) The pool operator has complied with the requirements of

    paragraph (h) of this section on behalf of the person or class of

    persons.

    (2) A commodity pool operator having ownership or equity interest

    of 10 percent or greater in an account or positions as a limited

    partner, shareholder or other similar type of pool participant must

    aggregate those accounts or positions with all other accounts or

    positions owned or controlled by the commodity pool operator.

    (3) Each limited partner, shareholder, or other similar type of

    pool participant having an ownership or equity interest of 25 percent

    or greater in a commodity pool the operator of which is exempt from

    registration under Sec. 4.13 of this chapter must aggregate the pooled

    account or positions with all other accounts or positions owned or

    controlled by that person.

    (d) Identical trading. Notwithstanding any other provision of this

    section, for the purpose of applying the position limits set forth in

    Sec. 151.4, any person that holds or controls the trading of

    positions, by power of attorney or otherwise, in more than one account,

    or that holds or controls trading of accounts or positions in multiple

    pools with identical trading strategies must aggregate all such

    accounts or positions that a person holds or controls.

    (e) Trading control by futures commission merchants. The position

    limits set forth in Sec. 151.4 shall be construed to apply to all

    positions held by a futures commission merchant or its separately

    organized affiliates in a discretionary account, or in an account which

    is part of, or participates in, or receives trading advice from a

    customer trading program of a futures commission merchant or any of the

    officers, partners, or employees of such futures commission merchant or

    its separately organized affiliates, unless:

    (1) A trader other than the futures commission merchant or the

    affiliate directs trading in such an account;

    (2) The futures commission merchant or the affiliate maintains only

    such minimum control over the trading in such an account as is

    necessary to fulfill its duty to supervise diligently trading in the

    account; and

    (3) Each trading decision of the discretionary account or the

    customer trading program is determined independently of all trading

    decisions in other accounts which the futures commission merchant or

    the affiliate holds, has a financial interest of 10 percent or more in,

    or controls.

    (f) Independent Account Controller. An eligible entity need not

    aggregate its positions with the eligible entity's client positions or

    accounts carried by an authorized independent account controller, as

    defined in Sec. 151.1, except for the spot month provided in physical-

    delivery Referenced Contracts, provided, however, that the eligible

    entity has complied with the requirements of paragraph (h) of this

    section, and that the overall positions

    [[Page 71693]]

    held or controlled by such independent account controller may not

    exceed the limits specified in Sec. 151.4.

    (1) Additional requirements for exemption of Affiliated Entities.

    If the independent account controller is affiliated with the eligible

    entity or another independent account controller, each of the

    affiliated entities must:

    (i) Have, and enforce, written procedures to preclude the

    affiliated entities from having knowledge of, gaining access to, or

    receiving data about, trades of the other. Such procedures must include

    document routing and other procedures or security arrangements,

    including separate physical locations, which would maintain the

    independence of their activities; provided, however, that such

    procedures may provide for the disclosure of information which is

    reasonably necessary for an eligible entity to maintain the level of

    control consistent with its fiduciary responsibilities and necessary to

    fulfill its duty to supervise diligently the trading done on its

    behalf;

    (ii) Trade such accounts pursuant to separately developed and

    independent trading systems;

    (iii) Market such trading systems separately; and

    (iv) Solicit funds for such trading by separate disclosure

    documents that meet the standards of Sec. 4.24 or Sec. 4.34 of this

    chapter, as applicable where such disclosure documents are required

    under part 4 of this chapter.

    (g) Exemption for underwriting. Notwithstanding any of the

    provisions of this section, a person need not aggregate the positions

    or accounts of an owned entity if the ownership interest is based on

    the ownership of securities constituting the whole or a part of an

    unsold allotment to or subscription by such person as a participant in

    the distribution of such securities by the issuer or by or through an

    underwriter.

    (h) Notice filing for exemption. (1) Persons seeking an aggregation

    exemption under paragraph (c), (e), (f), or (i) of this section shall

    file a notice with the Commission, which shall be effective upon

    submission of the notice, and shall include:

    (i) A description of the relevant circumstances that warrant

    disaggregation; and

    (ii) A statement certifying that the conditions set forth in the

    applicable aggregation exemption provision has been met.

    (2) Upon call by the Commission, any person claiming an aggregation

    exemption under this section shall provide to the Commission such

    information concerning the person's claim for exemption. Upon notice

    and opportunity for the affected person to respond, the Commission may

    amend, suspend, terminate, or otherwise modify a person's aggregation

    exemption for failure to comply with the provisions of this section.

    (3) In the event of a material change to the information provided

    in the notice filed under this paragraph, an updated or amended notice

    shall promptly be filed detailing the material change.

    (4) A notice shall be submitted in the form and manner provided for

    in Sec. 151.10.

    (i) Exemption for federal law information sharing restriction.

    Notwithstanding any provision of this section, a person is not subject

    to the aggregation requirements of this section if the sharing of

    information associated with such aggregation would cause either person

    to violate Federal law or regulations adopted thereunder and provided

    that such a person does not have actual knowledge of information

    associated with such aggregation. Provided, however, that such person

    file a prior notice with the Commission detailing the circumstances of

    the exemption and an opinion of counsel that the sharing of information

    would cause a violation of Federal law or regulations adopted

    thereunder.

    Sec. 151.8 Foreign boards of trade.

    The aggregate position limits in Sec. 151.4 shall apply to a

    trader with positions in Referenced Contracts executed on, or pursuant

    to the rules of a foreign board of trade, provided that:

    (a) Such Referenced Contracts settle against any price (including

    the daily or final settlement price) of one or more contracts listed

    for trading on a designated contract market or swap execution facility

    that is a trading facility; and

    (b) The foreign board of trade makes available such Referenced

    Contracts to its members or other participants located in the United

    States through direct access to its electronic trading and order

    matching system.

    Sec. 151.9 Pre-existing positions.

    (a) Non-spot-month position limits. The position limits set forth

    in Sec. 151.4(b) of this chapter may be exceeded to the extent that

    positions in Referenced Contracts remain open and were entered into in

    good faith prior to the effective date of any rule, regulation, or

    order that specifies a position limit under this part.

    (b) Spot-month position limits. Notwithstanding the pre-existing

    exemption in non-spot months, a person must comply with spot month

    limits.

    (c) Pre-Dodd-Frank and transition period swaps. The initial

    position limits established under Sec. 151.4 shall not apply to any

    swap positions entered into in good faith prior to the effective date

    of such initial limits. Swap positions in Referenced Contracts entered

    into in good faith prior to the effective date of such initial limits

    may be netted with post-effective date swap and swaptions for the

    purpose of applying any position limit.

    (d) Exemptions. Exemptions granted by the Commission under Sec.

    1.47 for swap risk management shall not apply to swap positions entered

    into after the effective date of initial position limits established

    under Sec. 151.4.

    Sec. 151.10 Form and manner of reporting and submitting information

    or filings.

    Unless otherwise instructed by the Commission or its designees, any

    person submitting reports under this section shall submit the

    corresponding required filings and any other information required under

    this part to the Commission as follows:

    (a) Using the format, coding structure, and electronic data

    transmission procedures approved in writing by the Commission; and

    (b) Not later than 9 a.m. Eastern Time on the next business day

    following the reporting or filing obligation is incurred unless:

    (1) A 404A filing is submitted pursuant Sec. 151.5(d), in which

    case the filing must be submitted at least ten business days in advance

    of the date that transactions and positions would be established that

    would exceed a position limit set forth in Sec. 151.4;

    (2) A 404 filing is submitted pursuant to Sec. 151.5(c) or a 404S

    is submitted pursuant to Sec. 151.5(f), the filing must be submitted

    not later than 9 a.m. on the third business day after a position has

    exceeded the level in a Referenced Contract for the first time and not

    later than the third business day following each calendar month in

    which the person exceeded such levels;

    (3) The filing is submitted pursuant to Sec. 151.6, then the 401

    or 404, or their respective alternatives as provided for under Sec.

    151.6(d), shall be submitted within ten business days following the

    quarter in which the person holds a position in excess in the

    visibility levels provided in Sec. 151.6(a); or

    (4) A notice of disaggregation is filed pursuant to Sec. 151.7(h),

    in which case the notice shall be submitted within five business days

    of when the person claims a disaggregation exemption.

    [[Page 71694]]

    (e) When the reporting entity discovers errors or omissions to past

    reports, the entity so notifies the Commission and files corrected

    information in a form and manner and at a time as may be instructed by

    the Commission or its designee.

    Sec. 151.11 Designated contract market and swap execution facility

    position limits and accountability rules.

    (a) Spot-month limits. (1) For all Referenced Contracts executed

    pursuant to their rules, swap execution facilities that are trading

    facilities and designated contract markets shall adopt, enforce, and,

    establish rules and procedures for monitoring and enforcing spot-month

    position limits set at levels no greater than those established by the

    Commission under Sec. 151.4.

    (2) For all agreements, contracts, or transactions executed

    pursuant to their rules that are not subject to the limits set forth in

    paragraph (a)(1) of this section, it shall be an acceptable practice

    for swap execution facilities that are trading facilities and

    designated contract markets to adopt, enforce, and establish rules and

    procedures for monitoring and enforcing spot-month position limits set

    at levels no greater than 25 percent of estimated deliverable supply,

    consistent with Commission guidance set forth in this title.

    (b) Non-spot-month limits. (1) Referenced Contracts. For Referenced

    Contracts executed pursuant to their rules, swap execution facilities

    that are trading facilities and designated contract markets shall adopt

    enforce, and establish rules and procedures for monitoring and

    enforcing single month and all-months limits at levels no greater than

    the position limits established by the Commission under Sec.

    151.4(d)(3) or (4).

    (2) Non-referenced contracts. For all other agreements, contracts,

    or transactions executed pursuant to their rules that are not subject

    to the limits set forth in Sec. 151.4, except as provided in Sec.

    151.11(b)(3) and (c), it shall be an acceptable practice for swap

    execution facilities that are trading facilities and designated

    contract markets to adopt, enforce, and establish rules and procedures

    for monitoring and enforcing single-month and all-months-combined

    position limits at levels no greater than ten percent of the average

    delta-adjusted futures, swaps, and options month-end all months open

    interest in the same contract or economically equivalent contracts

    executed pursuant to the rules of the designated contract market or

    swap execution facility that is a trading facility for the greater of

    the most recent one or two calendar years up to 25,000 contracts with a

    marginal increase of 2.5 percent thereafter.

    (3) Levels at designation or initial listing. Other than in

    Referenced Contracts, at the time of its initial designation or upon

    offering a new contract, agreement, or transaction to be executed

    pursuant to its rules, it shall be an acceptable practice for a

    designated contract market or swap execution facility that is a trading

    facility to provide for speculative limits for an individual single-

    month or in all-months-combined at no greater than 1,000 contracts for

    physical commodities other than energy commodities and 5,000 contracts

    for other commodities, provided that the notional quantity for such

    contracts, agreements, or transactions, corresponds to a notional

    quantity per contract that is no larger than a typical cash market

    transaction in the underlying commodity.

    (4) For purposes of this paragraph, it shall be an acceptable

    practice for open interest to be calculated by combining the all months

    month-end open interest in the same contract or economically equivalent

    contracts executed pursuant to the rules of the designated contract

    market or swap execution facility that is a trading facility (on a

    delta-adjusted basis, as appropriate) for all months listed during the

    most recent one or two calendar years.

    (c) Alternatives. In lieu of the limits provided for under Sec.

    151.11(a)(2) or (b)(2), it shall be an acceptable practice for swap

    execution facilities that are trading facilities and designated

    contract markets to adopt, enforce, and establish rules and procedures

    for monitoring and enforcing position accountability rules with respect

    to any agreement, contract, or transaction executed pursuant to their

    rules requiring traders to provide information about their position

    upon request by the exchange and to consent to halt increasing further

    a trader's position upon request by the exchange as follows:

    (1) On an agricultural or exempt commodity that is not subject to

    the limits set forth in Sec. 151.4, 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, provided, however, such swap

    execution facilities that are trading facilities and designated

    contract markets are not exempt from the requirement set forth in

    paragraph (a)(2) that they adopt a spot-month position limit with a

    level no greater than 25 percent of estimated deliverable supply; or

    (2) On a major foreign currency, for which there is no legal

    impediment to delivery and for which there exists a highly liquid cash

    market; or

    (3) On an excluded commodity that is an index or measure of

    inflation, or other macroeconomic index or measure; or

    (4) On an excluded commodity that meets the definition of section

    1a(19)(ii), (iii), or (iv) of the Act.

    (d) Securities futures products. Position limits for securities

    futures products are specified in 17 CFR part 41.

    (e) Aggregation. Position limits or accountability rules

    established under this section shall be subject to the aggregation

    standards of Sec. 151.7.

    (f) Exemptions. (1) Hedge exemptions. (i) For purposes of exempt

    and agricultural commodities, no designated contract market or swap

    execution facility that is a trading facility bylaw, rule, regulation,

    or resolution adopted pursuant to this section shall apply to any

    position that would otherwise be exempt from the applicable Federal

    speculative position limits as determined by Sec. 151.5; provided,

    however, that the designated contract market or swap execution facility

    that is a trading facility may limit bona fide hedging positions or any

    other positions which have been exempted pursuant to Sec. 151.5 which

    it determines are not in accord with sound commercial practices or

    exceed an amount which may be established and liquidated in an orderly

    fashion.

    (ii) For purposes of excluded commodities, no designated contract

    market or swap execution facility that is a trading facility by law,

    rule, regulation, or resolution adopted pursuant to this section shall

    apply to any transaction or position defined under Sec. 1.3(z) of this

    chapter; provided, however, that the designated contract market or swap

    execution facility that is a trading facility may limit bona fide

    hedging positions that it determines are not in accord with sound

    commercial practices or exceed an amount which may be established and

    liquidated in an orderly fashion.

    (2) Procedure. Persons seeking to establish eligibility for an

    exemption must comply with the procedures of the designated contract

    market or swap execution facility that is a trading facility for

    granting exemptions from its speculative position limit rules. In

    considering whether to permit or grant an exemption, a designated

    contract market or swap execution facility that is a trading facility

    must take into account sound commercial practices and

    [[Page 71695]]

    paragraph (d)(1) of this section and apply principles consistent with

    Sec. 151.5.

    (g) Other exemptions. Speculative position limits adopted pursuant

    to this section shall not apply to:

    (1) Any position acquired in good faith prior to the effective date

    of any bylaw, rule, regulation, or resolution which specifies such

    limit;

    (2) Spread or arbitrage positions either in positions in related

    Referenced Contracts or, for contracts that are not Referenced

    Contracts, economically equivalent contracts provided that such

    positions are outside of the spot month for physical-delivery

    contracts; or

    (3) Any person that is registered as a futures commission merchant

    or floor broker under authority of the Act, except to the extent that

    transactions made by such person are made on behalf of or for the

    account or benefit of such person.

    (h) Ongoing responsibilities. Nothing in this part shall be

    construed to affect any provisions of the Act relating to manipulation

    or corners or to relieve any designated contract market, swap execution

    facility that is a trading facility, or governing board of a designated

    contract market or swap execution facility that is a trading facility

    from its responsibility under other provisions of the Act and

    regulations.

    (i) Compliance date. The compliance date of this section shall be

    60 days after the term ``swap'' is further defined under the Wall

    Street Transparency and Accountability Act of 2010. A document will be

    published in the Federal Register establishing the compliance date.

    (j) Notwithstanding paragraph (i) of this section, the compliance

    date of provisions of paragraph (b)(1) of this section as it applies to

    non-legacy Referenced Contracts shall be upon the establishment of any

    non-spot-month position limits pursuant to Sec. 151.4(d)(3). In the

    period prior to the establishment of any non-spot-month position limits

    pursuant to Sec. 151.4(d)(3) it shall be an acceptable practice for a

    designated contract market or swap execution facility to either:

    (1) Retain existing non-spot-month position limits or

    accountability rules; or

    (2) Establish non-spot-month position limits or accountability

    levels pursuant to the acceptable practice described in Sec.

    151.11(b)(2) and (c)(1) based on open interest in the same contract or

    economically equivalent contracts executed pursuant to the rules of the

    designated contract market or swap execution facility that is a trading

    facility.

    Sec. 151.12 Delegation of authority to the Director of the Division

    of Market Oversight.

    (a) The Commission hereby delegates, until it orders otherwise, to

    the Director of the Division of Market Oversight or such other employee

    or employees as the Director may designate from time to time, the

    authority:

    (1) In Sec. 151.4(b) for determining levels of open interest, in

    Sec. 151.4(d)(2)(ii) to estimate deliverable supply, in Sec.

    151.4(d)(3)(ii) to fix non-spot-month limits, and in Sec. 151.4(e) to

    publish position limit levels.

    (2) In Sec. 151.5 requesting additional information or determining

    whether a filing should not be considered as bona fide hedging;

    (3) In Sec. 151.6 for accepting alternative position visibility

    filings under paragraphs (c)(2) and (d) therein;

    (4) In Sec. 151.7(h)(2) to call for additional information from a

    trader claiming an aggregation exemption;

    (5) In Sec. 151.10 for providing instructions or determining the

    format, coding structure, and electronic data transmission procedures

    for submitting data records and any other information required under

    this part.

    (b) The Director of the Division of Market Oversight may submit to

    the Commission for its consideration any matter which has been

    delegated in this section.

    (c) Nothing in this section prohibits the Commission, at its

    election, from exercising the authority delegated in this section.

    Sec. 151.13 Severability.

    If any provision of this part, or the application thereof to any

    person or circumstances, is held invalid, such invalidity shall not

    affect other provisions or application of such provision to other

    persons or circumstances which can be given effect without the invalid

    provision or application.

    Appendix A to Part 151--Spot-Month Position Limits

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

    Referenced

    Contract contract spot-

    month limit

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

    Agricultural Referenced Contracts

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

    ICE Futures U.S. Cocoa............................... 1,000

    ICE Futures U.S. Coffee C............................ 500

    Chicago Board of Trade Corn.......................... 600

    ICE Futures U.S. Cotton No. 2........................ 300

    ICE Futures U.S. FCOJ-A.............................. 300

    Chicago Mercantile Exchange Class III Milk........... 1,500

    Chicago Mercantile Exchange Feeder Cattle............ 300

    Chicago Mercantile Exchange Lean Hog................. 950

    Chicago Mercantile Exchange Live Cattle.............. 450

    Chicago Board of Trade Oats.......................... 600

    Chicago Board of Trade Rough Rice.................... 600

    Chicago Board of Trade Soybeans...................... 600

    Chicago Board of Trade Soybean Meal.................. 720

    Chicago Board of Trade Soybean Oil................... 540

    ICE Futures U.S. Sugar No. 11........................ 5,000

    ICE Futures U.S. Sugar No. 16........................ 1,000

    Chicago Board of Trade Wheat......................... 600

    Minneapolis Grain Exchange Hard Red Spring Wheat..... 600

    Kansas City Board of Trade Hard Winter Wheat......... 600

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

    Metal Referenced Contracts

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

    Commodity Exchange, Inc. Copper...................... 1,200

    New York Mercantile Exchange Palladium............... 650

    [[Page 71696]]

    New York Mercantile Exchange Platinum................ 500

    Commodity Exchange, Inc. Gold........................ 3,000

    Commodity Exchange, Inc. Silver...................... 1,500

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

    Energy Referenced Contracts

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

    New York Mercantile Exchange Light Sweet Crude Oil... 3,000

    New York Mercantile Exchange New York Harbor Gasoline 1,000

    Blendstock..........................................

    New York Mercantile Exchange Henry Hub Natural Gas... 1,000

    New York Mercantile Exchange New York Harbor Heating 1,000

    Oil.................................................

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

    Appendix B to Part 151--Examples of Bona Fide Hedging Transactions and

    Positions

    A non-exhaustive list of examples of bona fide hedging

    transactions or positions under Sec. 151.5 is presented below. A

    transaction or position qualifies as a bona fide hedging transaction

    or position when it meets the requirements under Sec. 151.5(a)(1)

    and one of the enumerated provisions under Sec. 151.5(a)(2). With

    respect to a transaction or position that does not fall within an

    example in this Appendix, a person seeking to rely on a bona fide

    hedging exemption under Sec. 151.5 may seek guidance from the

    Division of Market Oversight.

    1. Royalty Payments

    a. Fact Pattern: In order to develop an oil field, Company A

    approaches Bank B for financing. To facilitate the loan, Bank B

    first establishes an independent legal entity commonly known as a

    special purpose vehicle (SPV). Bank B then provides a loan to the

    SPV. Payments of principal and interest from the SPV to the Bank are

    based on a fixed price for crude oil. The SPV in turn makes a

    production loan to Company A. The terms of the production loan

    require Company A to provide the SPV with volumetric production

    payments (VPPs) based on the SPV's share of the production and the

    prevailing price of crude oil. Because the price of crude may fall,

    the SPV reduces that risk by entering into a NYMEX Light Sweet Crude

    Oil crude oil swap with Swap Dealer C. The swap requires the SPV to

    pay Swap Dealer C the floating price of crude oil and for Swap

    Dealer C to pay a fixed price. The notional quantity for the swap is

    equal to the expected production underlying the VPPs to the SPV.

    Analysis: The swap between Swap Dealer C and the SPV meets the

    general requirements for bona fide hedging transactions (Sec.

    151.5(a)(1)(i)-(iii)) and the specific requirements for royalty

    payments (Sec. 151.5(a)(2)(vi)). The VPPs that the SPV receives

    represent anticipated royalty payments from the oil field's

    production. The swap represents a substitute for transactions to be

    made in the physical marketing channel. The SPV's swap position

    qualifies as a hedge because it is economically appropriate to the

    reduction of risk. The SPV is reasonably certain that the notional

    quantity of the swap is equal to the expected production underlying

    the VPPs. The swap reduces the risk associated with a change in

    value of a royalty asset. The fluctuations in value of the SPV's

    anticipated royalties are substantially related to the fluctuations

    in value of the NYMEX Light Sweet Crude Oil Referenced Contract swap

    with Swap Dealer C. The risk-reducing position will not qualify as a

    bona fide hedge in a physical-delivery Referenced Contract during

    the spot month.

    b. Continuation of Fact Pattern: Swap Dealer C offsets the risk

    associated with the swap to the SPV by selling Referenced Contracts.

    The notional quantity of the Referenced Contracts sold by Swap

    Dealer C exactly matches the notional quantity of the swap with the

    SPV.

    Analysis: Because the SPV enters the swap as a bona fide hedger

    under Sec. 151.5(a)(2)(vi), the offset of the risk of the swap in a

    Referenced Contract by Swap Dealer C qualifies as a bona fide

    hedging transaction under Sec. 151.5(a)(3). As provided in Sec.

    151.5(a)(3), the risk reducing position of Swap Dealer C does not

    qualify as a bona fide hedge in a physical-delivery Referenced

    Contract during the spot month.

    2. Sovereigns

    a. Fact Pattern: A Sovereign induces a farmer to sell his

    anticipated production of 100,000 bushels of corn forward to User A

    at a fixed price for delivery during the expected harvest. In return

    for the farmer entering into the fixed-price forward sale, the

    Sovereign agrees to pay the farmer the difference between the market

    price at the time of harvest and the price of the fixed-price

    forward, in the event that the market price is above the price of

    the forward. The fixed-price forward sale of 100,000 bushels of corn

    reduces the farmer's downside price risk associated with his

    anticipated agricultural production. The Sovereign faces commodity

    price risk as it stands ready to pay the farmer the difference

    between the market price and the price of the fixed-price contract.

    To reduce that risk, the Sovereign purchases 100,000 bushels of

    Chicago Board of Trade (``CBOT'') Corn Referenced Contract call

    options.

    Analysis: Because the Sovereign and the farmer are acting

    together pursuant to an express agreement, the aggregation

    provisions of Sec. 151.7 and Sec. 151.5(b) apply and they are

    treated as a single person. Taking the positions of the Sovereign

    and farmer jointly, the risk profile of the combination of the

    forward sale and the long call is approximately equivalent to the

    risk profile of a synthetic long put.\521\ A synthetic long put may

    be a bona fide hedge for anticipated production. Thus, that single

    person satisfies the general requirements for bona fide hedging

    transactions (Sec. 151.5(a)(1)(i)-(iii)) and specific requirements

    for anticipated agricultural production (Sec. 151.5(a)(2)(i)(B)).

    The synthetic long put is a substitute for transactions that the

    farmer will make at a later time in the physical marketing channel

    after the crop is harvested. The synthetic long put reduces the

    price risk associated with anticipated agricultural production. The

    size of the hedge is equivalent to the size of the Sovereign's risk

    exposure. As provided under Sec. 151.5(a)(2)(i)(B), the Sovereign's

    risk-reducing position will not qualify as a bona fide hedge in a

    physical-delivery Referenced Contract during the last five trading

    days.

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

    \521\ Put-call parity describes the mathematical relationship

    between price of a put and call with identical strike prices and

    expiry.

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

    3. Services

    a. Fact Pattern: Company A enters into a risk service agreement

    to drill an oil well with Company B. The risk service agreement

    provides that a portion of the revenue receipts to Company A depends

    on the value of the oil produced. Company A is concerned that the

    price of oil may fall resulting in lower anticipated revenues from

    the risk service agreement. To reduce that risk, Company A sells

    5,000 NYMEX Light Sweet Crude Oil Referenced Contracts, which is

    equivalent to the firm's anticipated share of the oil produced.

    Analysis: Company A's hedge of a portion of its revenue stream

    from the risk service agreement meets the general requirements for

    bona fide hedging (Sec. 151.5(a)(1)(i)-(iii)) and the specific

    provisions for services (Sec. 151.5(a)(2)(vii)). Selling NYMEX

    Light Sweet Crude Oil Referenced Contracts is a substitute for

    transactions to be taken at a later time in the physical marketing

    channel once the oil is produced. The Referenced Contracts sold by

    Company A are economically appropriate to the reduction of risk

    because the total notional quantity of the Referenced Contracts sold

    by Company A equals its share of the expected quantity of future

    production under the risk service agreement. Because the price of

    oil may fall, the transactions in Referenced Contracts arise from a

    potential reduction in the value of the service that Company A is

    providing to Company B. The contract for services

    [[Page 71697]]

    involves the production of a commodity underlying the NYMEX Exchange

    Light Sweet Crude Oil Referenced Contract. As provided under Sec.

    151.5(a)(2)(vii), the risk reducing position will not qualify as a

    bona fide hedge during the spot month of the physical-delivery

    Referenced Contract.

    b. Fact Pattern: A City contracts with Firm A to provide waste

    management services. The contract requires that the trucks used to

    transport the solid waste use natural gas as a power source.

    According to the contract, the City will pay for the cost of the

    natural gas used to transport the solid waste by Firm A. In the

    event that natural gas prices rise, the City's waste transport

    expenses rise. To mitigate this risk, the City establishes a long

    position in NYMEX Natural Gas Referenced Contracts that is

    equivalent to the expected use of natural gas over the life of the

    service contract.

    Analysis: This transaction meets the general requirements for

    bona fide hedging transaction (Sec. 151.5(a)(1)(i)-(iii)) and the

    specific provisions for services (Sec. 151.5(a)(2)(vii)). Because

    the City is responsible for paying the cash price for the natural

    gas used to power the trucks that transport the solid waste under

    the services agreement, the long hedge is a substitute for

    transactions to be taken at a later time in the physical marketing

    channel. The transaction is economically appropriate to the

    reduction of risk because the total notional quantity of the

    positions Referenced Contracts purchased equals the expected use of

    natural gas over the life of the contract. The positions in

    Referenced Contracts reduce the risk associated with an increase in

    anticipated liabilities that the City may incur in the event that

    the price of natural gas increases. The service contract involves

    the use of a commodity underlying a Referenced Contract. As provided

    under Sec. 151.5(a)(2)(vii), the risk reducing position will not

    qualify as a bona fide hedge during the spot month of the physical-

    delivery Referenced Contract.

    c. Fact Pattern: Natural Gas Producer A induces Pipeline

    Operator B to build a pipeline between Producer A's natural gas

    wells and the Henry Hub pipeline interconnection by entering into a

    fixed-price contract for natural gas transportation that guarantees

    a specified quantity of gas to be transported over the pipeline.

    With the construction of the new pipeline, Producer A plans to

    deliver natural gas to Henry Hub at a price differential between his

    gas wells and Henry Hub that is higher than its transportation cost.

    Producer A is concerned, however, that the price differential may

    decline. To lock in the price differential, Producer A decides to

    sell outright NYMEX Henry Hub Natural Gas Referenced Contract cash-

    settled futures contracts and buy an outright swap that NYMEX Henry

    Hub Natural Gas at his gas wells.

    Analysis: This transaction satisfies the general requirements

    for a bona fide hedge exemption (Sec. Sec. 151.5(a)(1)(i)-(iii))

    and specific provisions for services (Sec. 151.5(a)(2)(vii)).\522\

    The hedge represents a substitute for transactions to be taken in

    the future (e.g., selling natural gas at Henry Hub). The hedge is

    economically appropriate to the reduction of risk that the location

    differential will decline, provided the hedge is not larger than the

    quantity equivalent of the cash market commodity to be produced and

    transported. As provided under Sec. 151.5(a)(2)(vii), the risk

    reducing position will not qualify as a bona fide hedge during the

    spot month of the physical-delivery Referenced Contract.

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

    \522\ Note that in addition to the use of Referenced Contracts,

    Producer A could have hedged this risk by using a basis contract,

    which is excluded from the definition of Referenced Contracts.

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

    4. Lending a Commodity

    a. Fact Pattern: Bank B lends 1,000 ounces of gold to Jewelry

    Fabricator J at LIBOR plus a differential. Under the terms of the

    loan, Jewelry Fabricator J may later purchase the gold at a

    differential to the prevailing price of Commodity Exchange, Inc.

    (``COMEX'') Gold (i.e., an open-price purchase agreement embedded in

    the terms of the loan). Jewelry Fabricator J intends to use the gold

    to make jewelry and reimburse Bank B for the loan using the proceeds

    from jewelry sales. Because Bank B is concerned about its potential

    loss if the price of gold drops, it reduces the risk of a potential

    loss in the value of the gold by selling COMEX Gold Referenced

    Contracts with an equivalent notional quantity of 1,000 ounces of

    gold.

    Analysis: This transaction meets the general bona fide hedge

    exemption requirements (Sec. Sec. 151.5(a)(1)(i)-(iii)) and the

    specific requirements associated with owing a cash commodity (Sec.

    151.5(a)(2)(i)). Bank B's short hedge of the gold represents a

    substitute for a transaction to be made in the physical marketing

    channel. Because the total notional quantity of the amount of gold

    contracts sold is equal to the amount of gold that Bank B owns, the

    hedge is economically appropriate to the reduction of risk. Finally,

    the transactions in Referenced Contracts arise from a potential

    change in the value of the gold owned by Bank B.

    b. Fact Pattern: Silver Processor A agrees to purchase scrap

    metal from a Scrap Yard that will be processed into 5,000 ounces of

    silver. To finance the purchase, Silver Processor A borrows 5,000

    ounces of silver from Bank B and sells the silver in the cash

    market. Using the proceeds from the sale of silver in the cash

    market, Silver Processor A pays the Scrap Yard for the scrap metal

    containing 5,000 ounces of silver at a negotiated discount from the

    current spot price. To repay Bank B, Silver Processor A may either:

    Provide Bank B with 5,000 ounces of silver and an interest payment

    based on a differential to LIBOR; or repay the Bank at the current

    COMEX Silver settlement price plus an interest payment based on a

    differential to LIBOR (i.e., an open-price purchase agreement).

    Silver Processor A processes and refines the scrap to repay Bank B.

    Although Bank B has lent the silver, it is still exposed to a

    reduction in value if the price of silver falls. Bank B reduces the

    risk of a possible decline in the value of their silver asset over

    the loan period by selling COMEX Silver Referenced Contracts with a

    total notional quantity equal to 5,000 ounces.

    Analysis: This transaction meets the general requirements for a

    bona fide hedging transaction (Sec. Sec. 151.5(a)(1)(i)-(iii)) and

    specific provisions for owning a commodity (Sec. 151.5(a)(2)(i)).

    Bank B's hedge of the silver that it owns represents a substitute

    for a transaction in the physical marketing channel. The hedge is

    economically appropriate to the reduction of risk because the bank

    owns 5,000 ounces of silver. The hedge reduces the risk of a

    potential change in the value of the silver that it owns.

    5. Processor Margins

    a. Fact Pattern: Soybean Processor A has a total throughput

    capacity of 100 million tons of soybeans per year. Soybean Processor

    A ``crushes'' soybeans into products (soybean oil and meal). It

    currently has 20 million tons of soybeans in storage and has offset

    that risk through fixed-price forward sales of the amount of

    products expected to be produced from crushing 20 million tons of

    soybeans, thus locking in the crushing margin on 20 million tons of

    soybeans. Because it has consistently operated its plant at full

    capacity over the last three years, it anticipates purchasing

    another 80 million tons of soybeans over the next year. It has not

    sold the crushed products forward. Processor A faces the risk that

    the difference in price between soybeans and the crushed products

    could change such that crush products (i.e., the crush spread) will

    be insufficient to cover its operating margins. To lock in the crush

    spread, Processor A purchases 80 million tons of CBOT Soybean

    Referenced Contracts and sells CBOT Soybean Meal and Soybean Oil

    Referenced Contracts, such that the total notional quantity of

    soybean meal and oil Referenced Contracts equals the expected

    production from crushing soybeans into soybean meal and oil

    respectively.

    Analysis: These hedging transactions meet the general

    requirements for bona fide hedging transactions (Sec. Sec.

    151.5(a)(1)(i)-(iii)) and the specific provisions for unfilled

    anticipated requirements and unsold anticipated agricultural

    production (Sec. Sec. 151.5(a)(2)(i)-(ii)). Purchases of soybean

    Referenced Contracts qualify as bona fide hedging transaction

    provided they do not exceed the unfilled anticipated requirements of

    the cash commodity for one year (in this case 80 million tons). Such

    transactions are a substitute for purchases to be made at a later

    time in the physical marketing channel and are economically

    appropriate to the reduction of risk. The transactions in Referenced

    Contracts arise from a potential change in the value of soybeans

    that the processor anticipates owning. The size of the permissible

    hedge position in soybeans must be reduced by any inventories and

    fixed-price purchases because they are no longer unfilled

    requirements. As provided under Sec. 151.5(a)(2)(ii)(C), the risk

    reduction position that is not in excess of the anticipated

    requirements for soybeans for that month and the next succeeding

    month qualifies as a bona fide hedge during the last five trading

    days provided it is not in a physical-delivery Referenced Contract.

    Given that Soybean Processor A has purchased 80 million tons

    worth of CBOT Soybean Referenced Contracts, it can reduce

    [[Page 71698]]

    its processing risk by selling soybean meal and oil Referenced

    Contracts equivalent to the expected production. The sale of CBOT

    Soybean, Soybean Meal, and Soybean Oil contracts represents a

    substitute for transactions to be taken at a later time in the

    physical marketing channel by the soybean processor. Because the

    amount of soybean meal and oil Referenced Contracts sold forward by

    the soybean processor corresponds to expected production from 80

    million tons of soybeans, the hedging transactions are economically

    appropriate to the reduction of risk in the conduct and management

    of the commercial enterprise. These transactions arise from a

    potential change in the value of soybean meal and oil that is

    expected to be produced. The size of the permissible hedge position

    in the products must be reduced by any fixed-price sales because

    they are no longer unsold production. As provided under Sec.

    151.5(a)(2)(i)(B), the risk reducing position does not qualify as a

    bona fide hedge in a physical-delivery Referenced Contract during

    the last five trading days in the event the anticipated crushed

    products have not been produced.

    6. Portfolio Hedging

    a. Fact Pattern: It is currently January and Participant A owns

    five million bushels of corn located in its warehouses. Participant

    A has entered into fixed-price forward sale contracts with several

    processors for a total of five million bushels of corn that will be

    delivered in May of this year. Participant A has separately entered

    into fixed-price purchase contracts with several merchandisers for a

    total of two million bushels of corn to be delivered in March of

    this year. Participant A's gross long cash position is equal to

    seven million bushels of corn. Because Participant A has sold

    forward five million bushels of corn, its net cash position is equal

    to long two million bushels of corn. To reduce its price risk,

    Participant A chooses to sell the quantity equivalent of two million

    bushels of CBOT Corn Referenced Contracts.

    Analysis: The cash position and the fixed-price forward sale and

    purchases are all in the same crop year. Participant A currently

    owns five million bushels of corn and has effectively sold that

    amount forward. The firm is concerned that the remaining amount--two

    million bushels worth of fixed-price purchase contracts--will fall

    in value. Because the firm's net cash position is equal to long two

    million bushels of corn, the firm is exposed to price risk. Selling

    the quantity equivalent of two million bushels of CBOT Corn

    Referenced Contracts satisfies the general requirements for bona

    fide hedging transactions (Sec. Sec. 151.5(a)(1)(i)-(iii)) and the

    specific provisions associated with owning a commodity (Sec.

    151.5(a)(2)(i)).\523\ Participant A's hedge of the two million

    bushels represents a substitute to a fixed-price forward sale at a

    later time in the physical marketing channel. The transaction is

    economically appropriate to the reduction of risk because the amount

    of Referenced Contracts sold does not exceed the quantity equivalent

    risk exposure (on a net basis) in the cash commodity in the current

    crop year. Lastly, the hedge arises from a potential change in the

    value of corn owned by Participant A.

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

    \523\ Participant A could also choose to hedge on a gross basis.

    In that event, Participant A would sell the quantity equivalent of

    seven million bushels of March Chicago Board of Trade Corn

    Referenced Contracts, and separately purchase the quantity

    equivalent of five million bushels of May Chicago Board of Trade

    Corn Referenced Contracts.

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

    7. Anticipated Merchandising

    a. Fact Pattern: Elevator A, a grain merchandiser, owns a 31

    million bushel storage facility. The facility currently has 1

    million bushels of corn in storage. Based upon its historical

    purchasing and selling patterns for the last three years, Elevator A

    expects that in September it will enter into fixed-price forward

    purchase contracts for 30 million bushels of corn that it expects to

    sell in December. Currently the December corn futures price is

    substantially higher than the September corn futures price. In order

    to reduce the risk that its unfilled storage capacity will not be

    utilized over this period and in turn reduce Elevator A's

    profitability, Elevator A purchases the quantity equivalent of 30

    million bushels of September CBOT Corn Referenced Contracts and

    sells 30 million bushels of December CBOT Corn Referenced Contracts.

    Analysis: This hedging transaction meets the general

    requirements for bona fide hedging transactions (Sec. Sec.

    151.5(a)(1)(i)-(iii)) and specific provisions associated with

    anticipated merchandising (Sec. 151.5(a)(2)(v)). The hedging

    transaction is a substitute for transactions to be taken at a later

    time in the physical marketing channel. The hedge is economically

    appropriate to the reduction of risk associated with the firm's

    unfilled storage capacity because: (1) The December CBOT Corn

    futures price is substantially above the September CBOT Corn futures

    price; and (2) Elevator A reasonably expects to engage in the

    anticipated merchandising activity based on a review of its

    historical purchasing and selling patterns at that time of the year.

    The risk arises from a change in the value of an asset that the firm

    owns. As provided by Sec. 151.5(a)(2)(v), the size of the hedge is

    equal to the firm's unfilled storage capacity relating to its

    anticipated merchandising activity. The purchase and sale of

    offsetting Referenced Contracts are in different months, which

    settle in not more than twelve months. As provided under Sec.

    151.5(a)(2)(v), the risk reducing position will not qualify as a

    bona fide hedge in a physical-delivery Referenced Contract during

    the last 5 trading days of the September contract.

    8. Aggregation of Persons

    a. Fact Pattern: Company A owns 100 percent of Company B.

    Company B buys and sells a variety of agricultural products, such as

    wheat and cotton. Company B currently owns 1 million bushels of

    wheat. To reduce some of its price risk, Company B decides to sell

    the quantity equivalent of 600,000 bushels of CBOT Wheat Referenced

    Contracts. After communicating with Company B, Company A decides to

    sell the quantity equivalent of 400,000 bushels of CBOT Wheat

    Referenced Contracts.

    Analysis: Because Company A owns more than 10 percent of Company

    B, Company A and B are aggregated together as one person under Sec.

    151.7. Under Sec. 151.5(b), entities required to aggregate accounts

    or positions under Sec. 151.7 shall be considered the same person

    for the purpose of determining whether a person or persons are

    eligible for a bona fide hedge exemption under paragraph Sec.

    151.5(a). The sale of wheat Referenced Contracts by Company A and B

    meets the general requirements for bona fide hedging transactions

    (Sec. Sec. 151.5(a)(1)(i)-(iii)) and the specific provisions for

    owning a cash commodity (Sec. 151.5(a)(2)(i)). The transactions in

    Referenced Contracts by Company A and B represent a substitute for

    transactions to be taken at a later time in the physical marketing

    channel. The transactions in Referenced Contracts by Company A and B

    are economically appropriate to the reduction of risk because the

    combined total of 1,000,000 bushels of CBOT Wheat Referenced

    Contracts sold by Company A and Company B does not exceed the

    1,000,000 bushels of wheat that is owned by Company A. The risk

    exposure for Company A and B results from a potential change in the

    value of wheat.

    9. Repurchase Agreements

    a. Fact Pattern: When Elevator A purchased 500,000 bushels of

    wheat in April it decided to reduce its price risk by selling the

    quantity equivalent of 500,000 bushels of CBOT Wheat Referenced

    Contracts. Because the price of wheat has steadily risen since

    April, Elevator A has had to make substantial maintenance margin

    payments. To alleviate its concern about further margin payments,

    Elevator A decides to enter into a repurchase agreement with Bank B.

    The repurchase agreement involves two separate contracts: A fixed-

    price sale from Elevator A to Bank B at today's spot price; and an

    open-priced purchase agreement that will allow Elevator A to

    repurchase the wheat from Bank B at the prevailing spot price three

    months from now. Because Bank B obtains title to the wheat under the

    fixed-price purchase agreement, it is exposed to price risk should

    the price of wheat drop. It therefore decides to sell the quantity

    equivalent of 500,000 bushels of CBOT Wheat Referenced Contracts.

    Analysis: Bank B's hedging transaction meets the general

    requirements for bona fide hedging transactions (Sec. Sec.

    151.5(a)(1)(i)-(iii)) and the specific provisions for owning the

    cash commodity (Sec. 151.5(a)(2)(i)). The sale of Referenced

    Contracts by Bank B is a substitute for a transaction to be taken at

    a later time in the physical marketing channel either to Elevator A

    or to another commercial party. The transaction is economically

    appropriate to the reduction of risk in the conduct and management

    of the commercial enterprise of Bank B because the notional quantity

    of Referenced Contracts sold by Bank B is not larger than the

    quantity of cash wheat purchased by Bank B. Finally, the purchase of

    CBOT Wheat Referenced Contracts reduces the risk associated with

    owning cash wheat.

    10. Inventory

    a. Fact Pattern: Copper Wire Fabricator A is concerned about

    possible reductions in the

    [[Page 71699]]

    price of copper. Currently it is November and it owns inventory of

    100,000 pounds of copper and 50,000 pounds of finished copper wire.

    Currently, deferred futures prices are lower than the nearby futures

    price. Copper Wire Fabricator A expects to sell 150,000 pounds of

    finished copper wire in February. To reduce its price risk, Copper

    Wire Fabricator A sells 150,000 pounds of February COMEX Copper

    Referenced Contracts.

    Analysis: The Copper Wire Fabricator A's hedging transaction

    meets the general requirements for bona fide hedging transactions

    (Sec. Sec. 151.5(a)(1)(i)-(iii)) and the provisions for owning a

    commodity (Sec. 151.5(a)(2)(i)(A)). The sale of Referenced

    Contracts represents a substitute for transactions to be taken at a

    later time. The transactions are economically appropriate to the

    reduction of risk in the conduct and management of the commercial

    enterprise because the price of copper could drop further. The

    transactions in Referenced Contracts arise from a possible reduction

    in the value of the inventory that it owns.

    Issued by the Commission this 18th day of October 2011, in

    Washington, DC.

    David Stawick,

    Secretary of the Commission.

    Appendices to Position Limits for Futures and Swaps--Commission Voting

    Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn and

    Chilton voted in the affirmative; Commissioners Sommers and O'Malia

    voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final rulemaking to establish position limits for

    physical commodity derivatives. The CFTC does not set or regulate

    prices. Rather, the Commission is charged with a significant

    responsibility to ensure the fair, open and efficient functioning of

    derivatives markets. Our duty is to protect both market participants

    and the American public from fraud, manipulation and other abuses.

    Position limits have served since the Commodity Exchange Act

    passed in 1936 as a tool to curb or prevent excessive speculation

    that may burden interstate commerce. 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 no one

    speculator having an outsize position. At the core of our

    obligations is promoting market integrity, which the agency has

    historically interpreted to include ensuring that 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.''

    In the Dodd-Frank Act, Congress mandated that the CFTC set

    aggregate position limits for certain physical commodity

    derivatives. The Dodd-Frank Act broadened the CFTC's position limits

    authority to include aggregate position limits on certain swaps and

    certain linked contracts traded on foreign boards of trade in

    addition to U.S. futures and options on futures. Congress also

    narrowed the exemptions traditionally available from position limits

    by modifying the definition of bona fide hedge transaction, which

    particularly would affect swap dealers.

    Today's final rule implements these important new provisions.

    The final rule fulfills the Congressional mandate that we set

    aggregate position limits that, for the first time, apply to both

    futures and economically equivalent swaps, as well as linked

    contracts on foreign boards of trade. The final rule establishes

    federal position limits in 28 referenced commodities in

    agricultural, energy and metals markets.

    Per Congress's direction, the rule implements one position

    limits regime for the spot month and another for single-month and

    all-months combined limits. It implements spot-month limits, which

    are currently set in agriculture, energy and metals markets, sooner

    than the single-month or all-months-combined limits. Spot-month

    limits are set for futures contracts that can by physically settled

    as well as those swaps and futures that can only be cash-settled. We

    are seeking additional comment as part of an interim final rule on

    these spot month limits with regard to cash-settled contracts.

    Single-month and all-months-combined limits, which currently are

    only set for certain agricultural contracts, will be re-established

    in the energy and metals markets and be extended to certain swaps.

    These limits will be set using a formula that is consistent with

    that which the CFTC has used to set position limits for decades. The

    limits will be set by a Commission order based upon data on the

    total size of the swaps and futures market collected through the

    position reporting rule the Commission finalized in July. It is only

    with the passage and implementation of the Dodd-Frank Act that the

    Commission now has broad authority to collect data in the swaps

    market.

    The final rule also implements Congress's direction to narrow

    exemptions while also ensuring that bona fide hedge exemptions are

    available for producers and merchants. The final position limits

    rulemaking builds on more than two years of significant public

    input. The Commission benefited from more than 15,100 comments

    received in response to the January 2011proposal. We first held

    three public meetings on this issue in the summer of 2009 and got a

    great deal of input from market participants and the broader public.

    We also benefited from the more than 8,200 comments we received in

    response to the January 2010 proposed rulemaking to re-establish

    position limits in the energy markets. We further benefited from

    input received from the public after a March 2010 meeting on the

    metals markets.

    Appendix 3--Statement of Commissioner Jill Sommers

    I respectfully dissent from the action taken today by the

    Commission to issue final rules establishing position limits for

    futures and swaps.

    It has been nearly two years since the Commission issued its

    January 2010 proposal to impose position limits on a small group of

    energy contracts. Since then, Commission staff and the Commission

    have spent an enormous amount of time and energy on the issue of

    imposing speculative position limits, time that could have been much

    better spent implementing the specific Dodd-Frank regulatory reforms

    that will actually reduce systemic risk and prevent another

    financial crisis.

    This vote today on position limits is no doubt the single most

    significant vote I have taken since becoming a Commissioner. It is

    not because imposing position limits will fundamentally change the

    way the U.S. markets operate, but because I believe this agency is

    setting itself up for an enormous failure.

    As I have said in the past, position limits can be an important

    tool for regulators. I have been clear that I am not philosophically

    opposed to limits. After all, this agency has set limits in certain

    markets for many years. However, I have had concerns all along about

    the particular application of the limits in this rule, compounded by

    the unnecessary narrowing of the bona-fide hedging exemptions,

    beyond what was required by the Dodd-Frank Act.

    Over the last four years, many have argued for position limits

    with such fervor and zeal, believing them to be a panacea for

    everything. Just this past week, the Commission has been bombarded

    by a letter-writing campaign suggesting that the five of us have the

    power to end world hunger by imposing position limits on

    agricultural commodities. This latest campaign exemplifies my

    ongoing concern and may result in damaging the credibility of this

    agency. I do not believe position limits will control prices or

    market volatility, and I fear that this Commission will be blamed

    when this final rule does not lower food and energy costs. I am

    disappointed at this unfortunate circumstance because, while the

    Commission's mission is to protect market users and the public from

    fraud, manipulation, abusive practices and systemic risk related to

    derivatives that are subject to the Commodity Exchange Act, and to

    foster open, competitive, and financially sound markets, nowhere in

    our mission is the responsibility or mandate to control prices.

    When analyzing the potential impact this final rule will have on

    market participants, I am most concerned that rules designed to

    ``reign in speculators'' have the real potential to inflict the

    greatest harm on bona fide hedgers--that is, the producers,

    processers, manufacturers, handlers and users of physical

    commodities. This rule will make hedging more difficult, more

    costly, and less efficient, all of which, ironically, can result in

    increased food and energy costs for consumers.

    [[Page 71700]]

    Currently, the Commission sets and administers position limits

    and exemptions for contracts on nine agricultural commodities. For

    contracts of the remaining commodities, the exchanges set and

    administer position limits and exemptions. Pursuant to the final

    rule the Commission issued today, the Commission will set and

    administer position limits and exemptions for 28 reference

    contracts. This will amount to a substantial transfer of

    responsibility from the exchanges to the Commission. As a result of

    taking on this responsibility for 19 new reference contracts, the

    Commission is significantly increasing its front-line oversight of

    the granting and monitoring of bona-fide hedging exemptions for the

    transactions of massive, global corporate conglomerates that on a

    daily basis produce, process, handle, store, transport, and use

    physical commodities in their extremely complex logistical

    operations.

    At the very time the Commission is taking on this new

    responsibility, the Commission is eliminating a valuable source of

    flexibility that has been a part of regulation 1.3(z) for decades--

    that is, the ability to recognize non-enumerated hedge transactions

    and positions. This final rule abandons important and long-standing

    Commission precedent without justification or reasoned explanation,

    by merely stating ``the Commission has * * * expanded the list of

    enumerated hedges.'' The Commission also seems to be saying that we

    no longer need the flexibility to allow for non-enumerated hedge

    transactions and positions because one can seek interpretative

    guidance pursuant to Commission Regulation 140.99 on whether a

    transaction or class of transactions qualifies as a bona-fide hedge,

    or can petition the Commission to amend the list of enumerated

    transactions. The Commission also recognizes that CEA Section

    4a(a)(7) grants it the broad exemptive authority is issue an order,

    rule, or regulation, but offers no guidance on when it may do so,

    and what factors it may consider or criteria it may use to make a

    determination.

    These processes are cold comfort. There is no way to tell how

    long interpretative guidance or a Commission Order will take.

    Moreover, if a market participant petitions the Commission to amend

    the list of enumerated transactions, if the Commission chooses to do

    so, it must formally propose the amendment pursuant to APA notice

    and comment. As we know all too well, issuing new rules and

    regulations is a time consuming process fraught with delay and

    uncertainty. In the end, none of these processes is flexible or

    useful to the needs of hedgers in a complex global marketplace.

    When the Commission first recognized the need to allow for non-

    enumerated hedges in 1977, the Commission stated ``The purpose of

    the proposed provision was to provide flexibility in application of

    the general definition and to avoid an extensive specialized listing

    of enumerated bona fide hedging transactions and positions. * * *''

    Today the global marketplace and commercial firms' hedging

    strategies are much more complex than in 1977. Yet, we are content

    to abandon decades of precedent that provided flexibility in favor

    of specifying a specialized list of enumerated bona fide hedging

    transactions and positions. I am not comfortable with notion that a

    list of eight bona-fide hedging transactions in this rule is

    sufficiently extensive and specialized to cover the complex needs of

    today's bona-fide hedgers. Repealing the ability to recognize non-

    enumerated hedge transactions and positions is a mistake and the

    statute does not require it. The Commission should have remained

    true to its precedent and utilized the broad authority contained in

    CEA Section 4a(a)(7) to include within Regulation 151.5(a)(2) a

    ninth enumerated hedging transaction and position, with the same

    conditions as the previous eight, as follows: ``Other risk-reducing

    practices commonly used in the market that are not enumerated above,

    upon specific request made in accordance with Regulation section

    1.47.''

    In addition to abandoning decades of flexibility to recognize

    non-enumerated hedging transactions and positions, the final rules

    today do not fully effect the authority the Commission has had for

    decades to define bona-fide hedging transactions and positions ``to

    permit producers, purchasers, sellers, middlemen, and users of a

    commodity or a product derived therefrom to hedge their legitimate

    anticipated business needs. * * *'' This authority is found in CEA

    Section 4a(c)(1). In addition, Section 4a(c)(2) clearly recognizes

    the need for anticipatory hedging by using the word ``anticipates''

    in three places. Nonetheless, without defining what constitutes

    ``merchandising'' the Commission has limited ``Anticipated

    Merchandising Hedging'' in Regulation 151.5(a)(2)(v) to transactions

    not larger than ``current or anticipated unfilled storage

    capacity.'' It appears then that merchandising does not include the

    varying activities of ``producers, purchasers, sellers, middlemen,

    and users of a commodity'' as contemplated by Section 4a(c)(1), but

    merely consists of storing a commodity. This limited approach is

    needlessly at odds with the statute and with the legitimate needs of

    hedgers.

    I have always believed that there was a right way and a wrong

    way for us to move forward on position limits. Unfortunately I

    believe we have chosen to go way beyond what is in the statute and

    have created a very complicated regulation that has the potential to

    irreparably harm these vital markets.

    Appendix 4--Statement of Commissioner Scott O'Malia

    I respectfully dissent from the action taken today by the

    Commission to issue final rules relating to position limits for

    futures and swaps. While I have a number of serious concerns with

    this final rule, my principal disagreement is with the Commission's

    restrictive interpretation of the statutory mandate under Section 4a

    of the Commodity Exchange Act (``CEA'' or ``Act'') to establish

    position limits without making a determination that such limits are

    necessary and effective in relation to the identifiable burdens of

    excessive speculation on interstate commerce.

    While I agree that the Commission has been directed to establish

    position limits applicable to futures, options, and swaps that are

    economically equivalent to such futures and options (for exempt and

    agricultural commodities as defined by the Act), I disagree that our

    mandate provides for so little discretion in the manner of its

    execution. Throughout the preamble, the Commission uses, ``Congress

    did not give the Commission a choice'' \524\ as a rationale in

    adopting burdensome and unmanageable rules of questionable

    effectiveness. This statement, in all of its iterations in this

    rule, is nothing more than hyperbole used tactfully to support a

    politically-driven overstatement as to the threat of ``excessive

    speculation'' in our commodity markets. In aggrandizing a market

    condition that it has never defined through quantitative or

    qualitative criteria in order to justify draconian rules, the

    Commission not only fails to comply with Congressional intent, but

    misses an opportunity to determine and define the type and extent of

    speculation that is likely to cause sudden, unreasonable and/or

    unwarranted commodity price movements so that it can respond with

    rules that are reasonable and appropriate.

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

    \524\ Position Limits for Futures and Swaps (to be codified at

    17 CFR pts. 1, 150 and 151) at 11, available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister101811c.pdf (hereafter, ``Position Limits for Futures

    and Swaps'').

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

    In relevant part, section 4a(a)(1) of the Act states:

    ``Excessive speculation in any commodity under contracts of sale of

    such commodity for future delivery * * * or swaps * * * 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.'' Section 4a(a)(1) further

    defines the Commission's duties with regard to preventing such price

    fluctuations through position limits, clearly stating: ``For the

    purpose of diminishing, eliminating, or preventing such burden, the

    Commission shall, from time to time, after due notice and

    opportunity for hearing, by rule, regulation, or order, proclaim and

    fix such limits * * * as the Commission finds are necessary to

    diminish, eliminate, or prevent such burden.'' Congress could not be

    more clear in its directive to the Commission to utilize not only

    its expertise, but the public rulemaking process, each and every

    time it determines to establish position limits to ensure that such

    limits are essential and suitable to combat the actual or potential

    threats to commodity prices due to excessive speculation.

    An Ambiguously Worded Mandate Does Not Relieve the Commission of Its

    Duties Under the Act

    Historically, the Commission has taken a much more disciplined

    and fact-based approach in considering the question of position

    limits; a process that is lacking from the current proposal. The

    general authority for the Commission to establish ``limits on the

    amounts of trading which may be done or positions which may be held

    * * * as the Commission finds are necessary to diminish, eliminate,

    or prevent'' the ``undue burdens'' associated with excessive

    speculation found in section 4a of the Act has remained unchanged

    since its original enactment in 1936 and through subsequent

    amendments,

    [[Page 71701]]

    including the Dodd-Frank Act.\525\ Over thirty years ago, on

    December 2, 1980, the Commission, pursuant in part to its authority

    under section 4a (1) of the Act, issued a proposal to implement

    rules requiring exchanges to impose position limits on contracts

    that were not currently subject to Commission imposed limits.\526\

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

    \525\ Position Limits for Futures and Swaps, supra note 1, at 5.

    \526\ Speculative Position Limits, 45 FR 79831 (proposed Dec. 2,

    1980) (to be codified at 17 CFR pt. 1).

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

    In support of its proposal, the Commission relied on a June 1977

    report on speculative limits prepared by the Office of the Chief

    Economist (the ``Staff Report''). The Staff Report addressed three

    major policy questions: (1) whether there should be limits and for

    what groups of commodities; (2) what guidelines are appropriate in

    setting the level of limits; and (3) whether the Commission or the

    exchange should set the limits.527 528 In considering

    these questions, the Staff Report noted, ``Although the Commission

    is authorized to establish speculative limits, it is not required to

    do so.'' \529\ In its Interpretation of the above language in

    section 4a, the Staff Report at the outset provided the legal

    context for its study as follows:

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

    \527\ Id. at 79832; Speculative Limits: a staff paper prepared

    for Commission discussion by the Office of the Chief Economist at 1,

    June 24, 1977.

    \528\ The Staff Report ultimately made four general

    recommendations. First, the Commission ought to adopt a policy of

    establishing speculative limits only in those markets where the

    characteristics of the commodity, its marketing system, and the

    contract lend themselves to undue influence from large scale

    speculative positions. Second, that in markets where limits are

    deemed to be necessary, such limits should only be established to

    curtail extraordinary speculative positions which are not offset by

    comparable commercial positions. Third, there ought to be no limits

    on daily trading except to the extent that the limits would prevent

    the accumulation of large intraday positions. Fourth, in markets

    where limits are deemed necessary, the exchange should set and

    review the limits subject to Commission approval. Office of Chief

    Economist, supra note 4, at 5-6.

    \529\ Office of Chief Economist, supra note 4, at 7.

    [T]he Commission need not establish speculative limits if it

    does not find that excessive speculation exists in the trading of a

    particular commodity. Furthermore, apparently, the Commission does

    not have to establish limits if it finds that such limits will not

    effectively curb excessive speculation.\530\

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

    \530\ Id. at 7-8.

    While not directly linked to the statutory language of section

    4a or an interpretation of such language, the Staff Report utilized

    its findings to formulate a policy for the Commission to move

    forward, which, based on comments to the Commission's January 2011

    proposal,\531\ is clearly embodied in the purpose and spirit of the

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

    Act:

    \531\ See, e.g., Comment letter from Futures Industry

    Association on Position Limits for Derivatives (RIN 2028-AD15 and

    3038-AD16) at 6-7 (Mar. 25, 2011), available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=34054&SearchText=futures%20industry%20association

    ; Comment letter from CME Group on Position Limits for Derivatives

    at 1-7 (Mar. 28, 2011), available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=33920&SearchText=cme; and Comment

    Letter of International Swaps and Derivatives Association, Inc. and

    Securities Industry and Financial Markets Association on Notice of

    Proposed Rulemaking--Position Limits for Derivatives (RIN 3038-AD15

    and 3038-AD16) at 3-6 (Mar. 28, 2011), available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=33568&SearchText=isda.

    Perhaps the most important feature brought out in the study is that,

    prior to the adoption of speculative position limits for any

    commodity in which limits are not now imposed by CFTC, the

    Commission should carefully consider the need for and effectiveness

    of such limits for that commodity and the resources necessary to

    enforce such limits.\532\

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

    \532\ Office of Chief Economist, supra note 7, at 5.

    In its final rule, published in the Federal Register on October

    16, 1981--almost exactly thirty years ago today--the Commission

    chose to base its determination on Congressional findings embodied

    in section 4a(1) of the Act that excessive speculation is harmful to

    the market, and a finding that speculative limits are an effective

    prophylactic measure. The Commission did not do so because it found

    that more specific determinations regarding the necessity and

    effectiveness of position limits were not required. Rather, the

    Commission was fashioning a rule ``to assure that the exchanges

    would have an opportunity to employ their knowledge of their

    individual contract markets to propose the position limits they

    believe most appropriate.'' \533\ Moreover, none of the commenters

    opposing the adoption of limits for all markets demonstrated to the

    Commission that its findings as to the prophylactic nature of the

    proposal before them were unsubstantiated.\534\ Therefore, the

    Commission did not eschew a requirement to demonstrate whether

    position limits were necessary and would be effective--it delegated

    these determinations to the exchanges.

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

    \533\ 46 FR at 50938, 50940.

    \534\ Id.

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

    Today, the Commission reaffirms its proposed interpretation of

    amended section 4a that in setting position limits pursuant to

    directives in sections 4a(a)(2)(A), 4a(a)(3) and 4a(a)(5), it need

    not first determine that position limits are necessary before

    imposing them or that it may set limits only after conducting a

    complete study of the swaps market.\535\ Relying on the various

    directives following ``shall,'' the Commission has bluntly stated

    that ``Congress did not give the Commission a choice.'' \536\ This

    interpretation ignores the plain language in the statute that the

    ``shalls'' in sections 4a(a)(2)(A), 4a(a)(3) and 4a(a)(5) are

    connected to the modifying phrase, ``as appropriate.'' Although the

    Commission correctly construes the ``as appropriate'' language in

    the context of the provisions as a whole to direct the Commission to

    exercise its discretion in determining the extent of the limits that

    Congress ``required'' it to impose, the Commission ignores the fact

    that in the context of the Act, such discretion is broad enough to

    permit the Commission to not impose limits if they are not

    appropriate. Though a permissible interpretation, the Commission's

    narrow view of its authority permeates the final rules today and

    provides a convenient rationale for many otherwise unsustainable

    conclusions, especially with regard to the cost-benefit analysis of

    the rule.

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

    \535\ Position Limits for Futures and Swaps, supra note 1, at

    10-11.

    \536\ Id.

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

    Section 4a(a)(2)(A), in relevant part, states that the

    Commission ``shall by rule, regulation, or order establish limits on

    the amount of positions, as appropriate'' that may be held by any

    person in physical commodity futures and options contracts traded on

    a designated contract market (DCM). In section 4a(a)(5), Congress

    directed that the Commission ``shall establish limits on the amount

    of positions, including aggregate position limits, as appropriate''

    that may be held by any person with respect to swaps. Section

    4a(a)(3) qualifies the Commission's authority by directing it so set

    such limits ``required'' by section 4a(a)(2), ``as appropriate * * *

    [and] to the maximum extent practicable, in its discretion'' (1) to

    diminish, eliminate, or prevent excessive speculation as described

    under this section (section 4a of the Act), (2) to deter and prevent

    market manipulation, squeezes, and corners, (3) to ensure sufficient

    market liquidity for bona fide hedgers, and (4) to ensure that the

    price discovery function of the underlying market is not

    disrupted.\537\

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

    \537\ See section 4a(a)(3)(B) of the CEA.

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

    Congress, in repeatedly qualifying its mandates with the phrase

    ``as appropriate'' and by specifically referring back to the

    Commission's authority to set position limits as proscribed in

    section 4a(a)(1), clearly did not relieve the Commission of any

    requirement to exercise its expertise and set position limits only

    to the extent that it can provide factual support that such limits

    will diminish, eliminate or prevent excessive speculation.\538\

    Instead, by directing the Commission to establish limits ``as

    appropriate,'' \539\ Congress intended to

    [[Page 71702]]

    provide the Commission with the discretion necessary to establish a

    position limit regime in a manner that will not only protect the

    markets from undue burdens due to excessive speculation and

    manipulation, but that will also provide for market liquidity and

    price discovery in a level playing field while preventing regulatory

    arbitrage.\540\

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

    \538\ See, e.g., Comment letter from BG Americas & Global LNG on

    Proposed Rule Regarding Position Limits for Derivatives (RIN 2028-

    AD15 and 3038-AD16) at 4 (Mar. 28, 2011), available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=965

    (``Notwithstanding the Commission's argument that it has authority

    to use position limits absent a specific finding that an undue

    burden on interstate commerce had actually resulted, the language

    and intent of CEA Section 4a(a)(1) remains unchanged by the Dodd-

    Frank Act. As a consequence, the Commission has not been relieved of

    the obligation under Section 4a(a)(1) to show that the proposed

    position limits for the Referenced Contracts are necessary to

    prevent excessive speculation.'').

    \539\ See La Union Del Pueblo Entero v. FEMA, No. B-08-487, slip

    op., 2009 WL 1346030 at *4 (S.D. Tex. May 13, 2009) (``[W]hen

    `shall' is modified by a discretionary phrase such as `as may be

    necessary' or `as appropriate' an agency has some discretion when

    complying with the mandate.'' (citing Consumer Fed'n of America v.

    U.S. Dep't of Health and Human Servs., 83 F.3d 1497, 1503 (DC Cir.

    1996) (indicating that where Congress in mandating administrative

    action modifies the word ``shall'' with the phrase ``as

    appropriate'' an agency has discretion to evaluate the circumstances

    and determine when and how to act)).

    \540\ Section 4a(a)(6) mandates through an unqualified

    ``shall,'' that the Commission set aggregate limits across trading

    venues including foreign boards of trade.

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

    I agree with commenters who argued that the Commission is

    directed under its new authority to set position limits ``as

    appropriate,'' or in other words meaning that whatever limits the

    Commission sets are supported by empirical evidence demonstrating

    that those would diminish, eliminate, or prevent excessive

    speculation.\541\ In the absence of such evidence, I also agree with

    commenters that we are unable, at this time, to fulfill the mandate

    and assure Congress and market participants that any such limits we

    do establish will comply with the statutory objectives of section

    4a(a)(3). And, to be clear, without empirical data, we cannot assure

    Congress that the limits we set will not adversely affect the

    liquidity and price discovery functions of affected markets. The

    Commission will have significant additional data about the over-the-

    counter (OTC) swaps markets in the next year, and at a minimum, I

    believe it would be appropriate for the Commission to defer any

    decisions about the nature and extent of position limits for months

    outside of the spot-month, including any determinations as to

    appropriate formulas, until such time as we have had a meaningful

    opportunity to review and assess the new data and its relevance to

    any determinations regarding excessive speculation. At a future

    date, when the Commission applies the second phase of the position

    limits regime and sets the non-spot-month limits (single and all-

    months combined limits), I will work to ensure that the position

    formulas and applicable limits are validated by Commission data to

    be both appropriate and effective so that those limits truly

    ``diminish, eliminate, or prevent excessive speculation.''

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

    \541\ See, e.g., Comment letter from Futures Industry

    Association on Position Limits for Derivatives (RIN 2028-AD15 and

    3038-AD16) at 6-8; Comment Letter of International Swaps and

    Derivatives Association, Inc. and Securities Industry and Financial

    Markets Association on Notice of Proposed Rulemaking--Position

    Limits for Derivatives (RIN 3038-AD15 and 3038-AD16) at 3-4.

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

    An Absence of Justification

    Today the Commission voted to move forward on a rule that (1)

    establishes hard federal position limits and position limit formulas

    for 28 physical commodity futures and options contracts and physical

    commodity swaps that are economically equivalent to such contracts

    in the spot-month, for single months, and for all-months combined;

    (2) establishes aggregate position limits that apply across

    different trading venues to contracts based on the same underlying

    commodity; (3) implements a new, more limited statutory definition

    of bona fide hedging transactions; (4) revises account aggregation

    standards; (5) establishes federal position visibility reporting

    requirements; and (6) establishes standards for position limits and

    position accountability rules for registered entities. The

    Commission voted on this multifaceted rule package without the

    benefit of performing an objective factual analysis based on the

    necessary data to determine whether these particular limits and

    limit formulas will effectively prevent or deter excessive

    speculation. The Commission did not even provide for public comment

    a determination as to what criteria it utilized to determine whether

    or not excessive speculation is present or will potentially threaten

    prices in any of the commodity markets affected by the new position

    limits.

    Moreover, while it engaged in a public rulemaking, the

    Commission's Notice of Proposed Rulemaking,\542\ in its complexity

    and lack of empirical data and legal rationale for several new

    mandates and changes to existing policies--in spite of the fact that

    we largely rely on our historical experiences in setting such

    limits--tainted the entire process. By failing to put forward data

    evidencing that commodity prices are threatened by the negative

    influence of a defined level of speculation that we can define as

    ``excessive speculation,'' and that today's measures are appropriate

    (i.e. necessary and effective) in light of such findings, I believe

    that we have failed under the Administrative Procedure Act to

    provide a meaningful and informed opportunity for public

    comment.\543\

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

    \542\ Position Limits for Derivatives, 76 FR 4752 (proposed Jan.

    26, 2011) (to be codified at 17 CFR pts. 1, 150 and 151).

    \543\ See Am. Med. Ass'n v. Reno, 57 F.3d 1129, 1132-3 (DC Cir.

    1995) (``Notice of a proposed rule must include sufficient detail on

    its content and basis in law and evidence to allow for meaningful

    and informed comment: `the Administrative Procedure Act requires the

    agency to make available to the public in a form that allows for

    meaningful comment, the data the agency used to develop the proposed

    rule.''') (quoting Engine Mfrs. Ass'n v. EPA, 20 F.3d 1177, 1181 (DC

    Cir. 1994)).

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

    Substantive comment letters, of which there were approximately

    100,\544\ devoted at times substantial text to expressions of

    confusion and requests for clarification of vague descriptions and

    processes. In more than one instance, preamble text did not reflect

    proposed rule text and vice versa.\545\ Indeed, the entire

    rulemaking process has been plagued by internal and public debates

    as to what the Commission's motives are and to what extent they are

    based on empirical evidence, in policy, or are simply without

    reason.

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

    \544\ Position Limits for Futures and Swaps, supra note 1, at 4.

    \545\ See, e.g., 76 FR at 4752, 4763 and 4775 (In its discussion

    of registered entity position limits, the preamble makes no mention

    of proposed Sec. 151.11(a)(2) which would remove a registered

    entity's discretion under CEA Sec. 5(d)(5)(A) for designated

    contract markets (DCMs) and under CEA Sec. 5h(f)(6)(A) for swap

    execution facilities (SEFs) that are trading facilities to set

    position accountability in lieu of position limits for physical

    commodity contracts for which the Commission has not set Federal

    limits.).

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

    Implementing an Appropriate Program for Position Management

    This rule, like several proposed before it, fails to make a

    compelling argument that the proposed position limits, which only

    target large concentrated positions,\546\ will dampen price

    distortions or curb excessive speculation--especially when those

    position limits are identified by the overall participation of

    speculators as an increased percentage of the market. What the rule

    argues is that there is a Congressional mandate to set position

    limits, and therefore, there is no duty on the Commission to

    determine that excessive speculation exists (and is causing price

    distortions), or to ``prove that position limits are an effective

    regulatory tool.'' \547\ This argument is incredibly convenient

    given that the proposed position limits are modeled on the

    agricultural commodities position limits, and despite those federal

    position limits, contracts such as wheat, corn, soybeans, and cotton

    contracts were not spared record-setting price increases in 2007 and

    2008. Indeed, the cotton No. 2 futures contract has hit sixteen

    ``record-setting'' prices since December 1, 2010. The most recent

    high was set on March 4, 2011 when the March 2011 future traded at a

    price of $215.15.

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

    \546\ Today's final rule does not hide the fact that the

    position limits regime is aimed at ``prevent[ing] a large trader

    from acquiring excessively large positions and thereby would help

    prevent excessive speculation and deter and prevent market

    manipulations, squeezes, and corners.'' See Position Limits for

    Futures and Swaps, supra note 1, at 47. See also Comment letter from

    Better Markets on Position Limits for Derivatives (RIN 2028-AD15 and

    3038-AD16) at 62 (Mar. 28, 2011) available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=34010&SearchText=better%20markets (``[T]here are

    critical differences between a commodities market position limit

    regime focused just on manipulation, and one focusing on a very

    different concept of excessive speculation.'').

    \547\ Position Limits for Futures and Swaps, supra note 1, at

    137 (``In light of the congressional mandate to impose position

    limits, the Commission disagrees with comments asserting that the

    Commission must first determine that excessive speculation exists or

    prove that position limits are an effective tool.'').

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

    To be clear, I am not opposed to position or other trading

    limits in all circumstances. I remain convinced that position

    limits, whether enforced at the exchange level or by the Commission,

    are effective only to the extent that they mitigate potential

    congestion during delivery periods and trigger reporting obligations

    that provide regulators with the complete picture of an entity's

    trading. I therefore believe that accountability levels and

    visibility levels provide a more refined regulatory tool to

    identify, deter, and respond in advance to threats of manipulation

    and other non-legitimate price movements and distortions. I would

    have supported a rule that would impose position limits in the spot-

    month for physical commodities, i.e. the referenced contracts,\548\

    and would establish an accountability level. The Commission's

    ability to monitor such accountability levels

    [[Page 71703]]

    would rely on a technology based, real-time surveillance program

    that the Commission must be committed to deploying if it is to take

    its market oversight mission seriously.

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

    \548\ As defined in new Sec. 151.1.

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

    And to be absolutely clear, ``speculation'' in the world of

    commodities is a technical term ascribed to any trading that does

    not qualify as ``bona fide hedging.'' Congress has not outlawed

    speculation, even when that speculation reaches some unspecified

    tipping point where it becomes ``excessive.'' What Congress has

    stated, for over seventy years until the passage of the Dodd-Frank

    Act, is that excessive speculation that causes sudden or

    unreasonable fluctuations or unwarranted changes in the price of a

    commodity is a burden on interstate commerce, and the Commission has

    authority to utilize its expertise to establish limits on trading or

    positions that will be effective in diminishing, eliminating, or

    preventing such burden.\549\ The Commission, however, is not, and

    has never been, without other tools to detect and deter those who

    engage in abusive practices.\550\ What the Dodd-Frank Act did do is

    direct the Commission to exercise its authority at a time when there

    is simply a lack of empirical data to support doing so, in a

    universe of legal uncertainty. However, the Dodd-Frank Act did not

    leave us without a choice, as contended by today's rule. Rather,

    against the current backdrop of market uncertainty, and Congress's

    longstanding deference to the expertise of the Commission, the most

    reasonable interpretation of Dodd-Frank's mandate is that while we

    must take action and establish position limits, we must only do so

    to the extent they are appropriate.

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

    \549\ See section 4a(a)(1) of the CEA.

    \550\ See Establishment of Speculative Position Limits, 46 FR

    50938, 50939 (Oct. 16, 1981) (to be codified at 17 CFR pt. 1) (``The

    Commission wishes to emphasize, that while Congress gave the

    Commission discretionary authority to impose federal speculative

    limits in section 4a(1), the development of an alternate procedure

    was not foreclosed, and section 4a(1) should not be read in a

    vacuum.'').

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

    Today I write to not only reiterate my concerns with regard to

    the effectiveness of position limits generally, but to highlight

    some of the regulatory provisions that I believe pose the greatest

    fundamental problems and/or challenges to the implementation of the

    rule passed today. In addition to disagreeing with the Commission's

    interpretation of its statutory mandate, I believe the Commission

    has so severely restricted the permitted activities allowed under

    the bona fide hedging rules that the pursuit by industry of

    legitimate and appropriate risk management is now made unduly

    onerous. These limitations, including a veritable ban on

    anticipatory hedging for merchandisers, are inconsistent with the

    statutory directive and the very purpose of the markets to, among

    other things, provide for a means for managing and assuming price

    risks. I also believe that the rules put into place overly broad

    aggregation standards, fail to substantiate claims that they

    adequately protect against international regulatory arbitrage, and

    do not include an adequate cost-benefit analysis.

    Bona Fide Hedging: Guilty Until Proven Innocent

    The Commission's regulatory definition of bona fide hedging

    transactions in Sec. 151.5 of the rules, as directed by new section

    4a(c)(1) of the Act, generally restricts bona fide hedge exemptions

    from the application of federally-set position limits to those

    transactions or positions which represent a substitute for an actual

    cash market transaction taken or to be taken later, or those trading

    as the counterparty to an entity that it engaged in such

    transaction. This definition is narrower than current Commission

    regulation 1.3(z)(1), which allows for an exemption for transactions

    or positions that normally represent a substitute for a physical

    market transaction.

    When combined with the remaining provisions of Sec. 151.5,

    which provide for a closed universe of enumerated hedges and

    ultimately re-characterize longstanding acceptable bona fide hedging

    practices as speculative, it is evident that the Commission has used

    its authority to further narrow the availability of bona fide

    hedging transactions in a manner that will negatively impact the

    cash commodity markets and the physical commodity marketplace by

    eliminating certain legitimate derivatives risk management

    strategies, most notably anticipatory hedging. Among other things, I

    believe the Commission should have defined bona fide hedging

    transactions and positions more broadly so that they encompass long-

    standing risk management practices and should have preserved a

    process by which bona fide hedgers could expeditiously seek

    exemptions for non-enumerated hedging transactions.

    In this instance, Congress was particularly clear in its mandate

    under section 4a(c)(2) that the Commission must limit the definition

    of bona fide hedging transactions/positions to those that represent

    actual substitutes for cash market transactions, but Congress did

    not so limit the Commission in any other manner with regard to the

    new regulatory provisions addressing anticipatory hedging and the

    availability of non-enumerated hedges.\551\ Moreover, inasmuch as

    the bona fide hedging definition is restrictive, section 4a(a)(7)

    provides the Commission broad exemptive authority which it could

    have utilized to create a process for expeditious adjudication of

    petitions from entities relying on a broader set of legitimate

    trading strategies than those that fit the confines of section

    4a(c)(1). In addition, given the complex, multi-faceted nature of

    hedging for commodity-related risks, the Commission could have, as

    suggested by one commenter, engaged in a separate and distinct

    informal rulemaking process to develop a workable, commercially

    practicable definition of bona fide hedging.\552\ Given the

    commercial interests at stake, this would have been a welcome

    approach. Instead, the Commission chose form over function so that

    it could ``check the box'' on its mandate.

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

    \551\ To the contrary, Congress specifically indicated that in

    defining bona fide hedging transactions or positions, the Commission

    may do so in such a manner as ``to permit producers, sellers,

    middlemen, and users of a commodity or a product derived therefrom

    to hedge their legitimate anticipated business needs for that period

    of time into the future for which an appropriate futures contract is

    open and available on an exchange.'' See section 4a(c)(1) of the

    CEA.

    \552\ See, e.g., Comment letter from BG Americas & Global LNG on

    Proposed Rule Regarding Position Limits for Derivatives (RIN 2028-

    AD15 and 3038-AD16) at 13.

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

    In order to qualify as a bona fide hedging transaction or

    position, a transaction must meet both the requirements under Sec.

    151.5(a)(1) and qualify as one of eight specific and enumerated

    hedging transactions described in Sec. 151.5(a)(2). While the list

    of enumerated hedging transactions is an improvement from the

    proposed rules, and responds to several comments, especially with

    regard to the addition of an Appendix B to the final rule describing

    examples of bona fide hedging transactions, it remains inflexible.

    In response to commenters, the Commission has decided--at the last

    minute--to permit entities engaging in practices that reduce risk

    but that may not qualify as one of the enumerated hedging

    transactions under Sec. 151.5(a)(2) to seek relief from Commission

    staff under Sec. 140.99 or the Commission under section 4a(a)(7) of

    the CEA. Whereas this change to the preamble and the rule text is

    helpful, neither of these alternatives provides for an expeditious

    determination, nor do they provide for a predictable or certain

    outcome. In its refusal to accommodate traders seeking legitimate

    bona fide hedging exemptions in compliance with the Act with an

    expeditious and straightforward process, the Commission is being

    short-sighted in light of the dynamic (and in the case of the OTC

    markets, uncertain) nature of the commodity markets and with respect

    to the appropriate use of Commission resources.

    One particularly glaring example of the Commission's decision to

    pursue form over function is found in the enumerated exemption for

    anticipated merchandising found at Sec. 151.5(2)(v). The new

    statutory provision in section 4a(c)(d)(A)(ii) is included to

    assuage unsubstantiated concerns about unintended consequences such

    as creating a potential loophole for clearly speculative

    activity.\553\ The Commission has so narrowly defined the

    anticipated merchandising that only the most elementary operations

    will be able to utilize it.

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

    \553\ Position Limits for Futures and Swaps, supra note 1, at

    75.

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

    For example, in order to qualify an anticipatory merchandising

    transaction as a bona fide hedge, a hedger must (i) own or lease

    storage capacity and demonstrate that the hedge is no greater than

    the amount of current or anticipated unfilled storage capacity owned

    or leased by the same person during the period of anticipated

    merchandising activity, which may not exceed one year, (ii) execute

    the hedge in the form of a calendar spread that meets the

    ``appropriateness'' test found in Sec. 151.5(a)(1), and (iii) exit

    the position prior to the last five days of trading if the Core

    Referenced Futures Contract is for agricultural or metal contracts

    or the spot month for other physical-delivery commodities. In

    addition,

    [[Page 71704]]

    (iv) an anticipatory merchandiser must meet specific filing

    requirements under Sec. 151.5(d), which among other things, (v)

    requires that the person who intends on exceeding position limits

    complete the filing at least ten days prior to the date of expected

    overage.

    Putting the burdens associated with the Sec. 151.5(d) filings

    aside, the anticipatory merchandising exemption and its limitations

    on capacity, the requirement to ``own or lease'' such capacity, and

    one-year limitation for agricultural commodities does not comport

    with the economic realities of commercial operations. In recent

    testimony, Todd Thul, Risk Manager for Cargill AgHorizons, commented

    on its understanding of this provision. He said that by limiting the

    exemption to unfilled storage capacities through calendar spread

    positions for one year, the CFTC will reduce the industry's ability

    to continue offering the same suite of marketing tools to farmers

    that they are accustomed to using.\554\ Mr. Thul offered a more

    reasonable and appropriate limitation on anticipatory hedging based

    on annual throughput actually handled on a historic basis by the

    company in question. It is unclear from today's rule as to whether

    the Commission considered such an alternative, but according to Mr.

    Thul, by going forward with the exemption as-is, we will ``severely

    limit the ability of grain handlers to participate in the market and

    impede the ability to offer competitive bids to farmers, manage

    risk, provide liquidity and move agriculture products from origin to

    destination.'' 555 556 Limiting commercial participation,

    Mr. Thul points out, increases volatility--and that is clearly not

    what Congress intended. I agree. I cannot help but think that the

    Commission is waging war on commercial hedging by employing a

    ``government knows best'' mandate to direct companies to employ only

    those hedging strategies that we give our blessing to and can

    conceive of at this point in time. Imagine the absurdity that we

    could prevent a company such as a cotton merchandiser from hedging

    forward a portion of his expected cotton purchase. Or, if they meet

    the complicated prerequisites, the commercial firm must get approval

    from the Commission before deploying a legitimate commercial

    strategy that exchanges have allowed for years.

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

    \554\ Testimony of Todd Thul, Risk Manager, Cargill AgHorizons

    before the House Committee on Agriculture, Oct. 12, 2011, available

    at http://agriculture.house.gov/pdf/hearings/Thul111012.pdf.

    \555\ Id.

    \556\ Though I rely upon the example of agricultural operations

    to illustrate my point, the limitations on the anticipated

    merchandising hedge are equally harmful to other industries that

    operate in relatively volatile environments that are subject to

    unpredictable supply and demand swings due to economic factors, most

    notably energy. See, e.g., Comment letter from ISDA on Notice of

    Proposed Rulemaking--Position Limits for Derivatives at 3-5 (Oct. 3,

    2011).

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

    Aggregation Disparity

    In another attack on commercial hedging the Commission has

    developed a flawed aggregation rule that singles out owned-non

    financial firms for unique and unfair treatment under the rule.

    These commercial firms, which, among others, could be energy

    producers or merchandisers, are not provided the same protections

    under the independent controller rules as financial entities such as

    hedge funds or index funds. I believe that the aggregation

    provisions of the final rule would have benefited from a more

    thorough consideration of additional options and possible re-

    proposal of at least two provisions: the general aggregation

    provision found in Sec. 151.7(b) and the proposed aggregation for

    exemption found in Sec. 151.7(f) of the proposed rule,\557\ now

    commonly referred to at the Commission as the owned non-financial

    exemption or ``ONF.''

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

    \557\ See 76 FR at 4752, 4762 and 4774.

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

    Under Sec. 151.7(b), absent the applicability of a specific

    exemption found elsewhere in Sec. 151.7, a direct or indirect

    ownership interest of ten percent or greater by any entity in

    another entity triggers a 100% aggregation of the ``owned'' entity's

    positions with that of the owner. While commenters agreed that an

    ownership interest of ten percent or greater has been the historical

    basis for requiring aggregation of positions under Commission

    regulation Sec. 150.5(b), absent applicable exemptions,

    historically, aggregation has not been required in the absence of

    indicia of control over the ``owned'' entity's trading activities,

    consistent with the independent account controller exemption (the

    ``IAC'') under Commission regulation Sec. 150.3(a)(4). While the

    final rule preserves the IAC exemption, it only does so in response

    to overwhelming comments arguing against its proposed elimination,

    which was without any legal rationale.\558\ And, to be clear, the

    IAC is only available to ``eligible entities'' defined in Sec.

    151.1, namely financial entities, and only with respect to client

    positions.

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

    \558\ See 76 FR at 4752, 4762.

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

    The practical effect of this requirement is that non-eligible

    entities, such as holding companies who do not meet any of the other

    limited specified exemptions will be forced to aggregate on a 100%

    basis the positions of any operating company in which it holds a ten

    percent or greater equity interest in order to determine compliance

    with position limits. While the Commission concedes that the holding

    company could conceivably enter into bona fide hedging transactions

    relating to the operating company's cash market activities, provided

    that the operating company itself has not entered into such

    hedges,\559\ this is an inadequate, operationally-impracticable

    solution to the problem of imparting ownership absent control.

    Moreover, by requiring 100% aggregation based on a ten percent

    ownership interest, the Commission has determined that it would

    prefer to risk double-counting of positions over a rational

    disaggregation provision based on a concept of ownership that does

    not clearly attach to actual control of trading of the positions in

    question.

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

    \559\ Position Limits for Futures and Swaps, supra note 1, at

    83-84.

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

    Exemptions like those found in Sec. Sec. 151.7(g) and (i) that

    provide for disaggregation when ownership above the ten percent

    threshold is specifically associated with the underwriting of

    securities or where aggregation across commonly-owned affiliates

    would require information sharing that would result in a violation

    of federal law, are useful and no doubt appreciated. However, the

    Commission has failed to apply a consistent standard supporting the

    principles of ownership and control across all entities in this

    rulemaking.

    Tiered Aggregation--A Viable and Fair Solution

    Also, the Commission did not address in the final rules a

    proposal put forth by Barclays Capital for the Commission to clarify

    that when aggregation is triggered, and no exemption is available,

    only an entity's pro rata share of the position that is actually

    controlled by it, or in which it has an ownership interest will be

    aggregated. This proposal included a suggestion that the Commission

    consider positions in tiers of ownership, attributing a percentage

    of the positions to each tier. While Barclays acknowledged that the

    monitoring would still be imperfect, the measures would be more

    accurate than an attribution of a full 100% ownership and would

    decrease the percentage of duplicative counting of positions.\560\

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

    \560\ Comment letter from Barclays Capital on Position Limits

    for Derivatives (RIN 3038-AD15 and 3038-AD16) at 3 (Mar. 28, 2011),

    available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=965.

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

    I believe that a tiered approach to aggregation should have been

    considered in these rules, and not be entirely removed from

    consideration as we move forward with these final rules. Barclays

    (and perhaps others) has made a compelling case and staff has not

    persuaded me that there is any legal rationale for not further

    exploring this option. While I understand that it may be more

    administratively burdensome for the Commission to monitor tiered

    aggregation, I would presume that we could engage in a cost-benefit

    analysis to more fully explore such burdens in light of the

    potential costs to industry associated with the implementation of

    100% aggregation.

    Owned Non-Financial--No Justification

    The best example of the Commission's imbalanced treatment of

    market participants is manifest in the aggregation rules applied to

    owned non-financial firms. The Commission has shifted its

    aggregation proposal from the draft proposal to this final version.

    The final rule does not ultimately adopt the proposed owned-non-

    financial entity exemption which was proposed in lieu of the IAC to

    allow disaggregation primarily in the case of a conglomerate or

    holding company that ``merely has a passive ownership interest in

    one or more non-financial companies.'' \561\ The rationale was that,

    in such cases, operating companies would likely have complete

    trading and management independence and operate at such a distance

    that is would simply be inappropriate to aggregate positions.\562\

    While several commenters argued that the ONF was too narrow and

    discriminated against financial entities without a proper basis, the

    Commission provided no

    [[Page 71705]]

    substantive rationale for its decision to fully drop the ONF

    exemption from consideration. Instead, the Commission relied upon

    its determination to retain the IAC exemption and add the additional

    exemptions under Sec. Sec. 151.7(g) and (i) described above to find

    that it ``may not be appropriate, at this time, to expand further

    the scope of disaggregation exemptions to owned-non financial

    entities.''

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

    \561\ 76 FR at 4752, 4762.

    \562\ Id.

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

    In failing to articulate a basis for its decision to drop

    outright from consideration the ONF exemption, the Commission places

    itself in the same improvident position it was in when it proposed

    eliminating the IAC exemption, and now has given no reasoned

    explanation for discriminating against non-financial entities. This

    is especially disconcerting since at least one commenter has pointed

    out that baseless decision-making of this kind creates a risk that a

    court will strike down our action as arbitrary and capricious.\563\

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

    \563\ See Comment letter from CME Group on Position Limits for

    Derivatives at 16 (Mar. 28, 2011), available at http://

    comments.cftc.gov/PublicComments/

    ViewComment.aspx?id=33920&SearchText=CME (``Where agencies do not

    articulate a basis for treating similarly situated entities

    differently, as the Commission fails to do here, courts will strike

    down their actions as arbitrary and capricious. See, e.g., Indep.

    Petroleum Ass'n of America v. Babbitt, 92 F.3d 1248 (D.D. Cir. 1996)

    (``An Agency must treat similar cases in a similar manner unless it

    can provide a legitimate reason for failing to do so.'' (citing

    Nat'l Ass'n of Broadcasters v. FCC, 740 F.2d 1190, 1201 (DC Cir.

    1984))).

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

    Since I first learned of the Commission's change of course, I

    have requested that the Commission re-propose the ONF exemption in a

    manner that establishes an appropriate legal basis and provides for

    additional public comment pursuant to the Administrative Procedure

    Act. The Commission has outright refused to entertain my request to

    even include in the preamble of the final rules a commitment to

    further consider a version of the ONF exemption that would be more

    appropriate in terms of its breadth. The Commission's decision puts

    the rule at risk of being overturned by the courts and exemplifies

    the pains at which this rule has been drafted to put form over

    function.

    The Great Unknown: International Regulatory Arbitrage

    In addressing concerns relating to the opportunities for

    regulatory arbitrage that may arise as a result of the Commission

    imposing these position limits, the Commission points out that is

    has worked to achieve the goal of avoiding such regulatory arbitrage

    through participation in the International Organization of

    Securities Commissions (``IOSCO'') and summarily rejects commenters

    who believe it is a foregone conclusion that the existence of

    international differences in position limit policies will result in

    such arbitrage in reliance on prior experience. While I don't

    disagree that the Commission's work within IOSCO is beneficial in

    that it increases the likelihood that we will reach international

    consensus with regard to the use of position limits, the Commission

    ought to be more forthcoming as to principles as a whole.

    In particular, while the IOSCO Final Report on Principles for

    the Regulation and Supervision of Commodity Derivatives Markets

    \564\ does, for the first time, call on market authorities to make

    use of intervention powers, including the power to set ex-ante

    position limits, this is only one of many such recommendations that

    international market authorities are not required to implement. The

    IOSCO Report includes the power to set position limits, including

    less restrictive measures under the more general term ``position

    management.'' Position Management encompasses the retention of

    various discretionary powers to respond to identified large

    concentrations. It would have been preferable for the Commission to

    have explored some of these other discretionary powers as options in

    this rulemaking, thereby putting us in the right place to put our

    findings into more of a practice.

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

    \564\ Principles for Regulation and Supervision of Commodity

    Derivatives Markets, IOSCO Technical Committee (Sept. 2011),

    available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD358.pdf.

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

    As to the Commission's stance that today's rules will not, by

    their very passage, drive trading abroad, I am concerned that the

    Commission's prior experience in determining the competitive effects

    of regulatory policies is inadequate. Today's rules by far represent

    the most expansive exercise of the Commission's authority both with

    regard to the setting of position limits and with regard to its

    jurisdiction in the OTC markets. The Commission's past studies

    regarding the effects of having a different regulatory regime than

    our international counterparts, conducted in 1994 and 1999, cannot

    possibly provide even a baseline comparison. Since 2000, the volume

    of actively traded futures and option contracts on U.S. exchanges

    alone has increased almost tenfold. Electronic trading now

    represents 83% of that volume, and it is not too difficult to

    imagine how easy it would be to take that volume global.

    I recognize that we cannot dictate how our fellow market

    authorities choose to structure their rules and that in any action

    we take, we must do so with the knowledge that as with any rules, we

    risk triggering a regulatory race to the bottom. However, I believe

    that we ought not to deliver to Congress, or the public, an

    unsubstantiated sense of security in these rules.

    Cost-Benefit Analysis: Hedgers Bear the Brunt of an Undue and Unknown

    Burden

    With every final rule, the Commission has attempted to conduct a

    more rigorous cost-benefit analysis. There is most certainly an

    uncertainty as to what the Commission must do in order to justify

    proposals aimed at regulating the heretofore unregulated. These

    analyses demonstrate that the Commission is taking great pains to

    provide quantifiable justifications for its actions, but only when

    reasonably feasible. The baseline for reasonability was especially

    low in this case because, in spite of the availability of enough

    data to determine that this rule will have an annual effect on the

    economy of more than $100 million, and the citation of at least

    fifty-two empirical studies in the official comment record debating

    all sides of the excessive speculation debate, the Commission is not

    convinced that it must ``determine that excessive speculation exists

    or prove that position limits are an effective regulatory tool.''

    \565\ I suppose this also means that the Commission did not have to

    consider the costs of alternative means by which it could have

    complied with the statutory mandates. It is utterly astounding that

    the Commission has designed a rule to combat the unknown threat of

    ``excessive speculation'' that will likely cost market participants

    $100 million dollars annually and yet, ``[T]he Commission need not

    prove that such limits will in fact prevent such burdens.'' \566\ A

    flip remark such as this undermines the entire rule, and invites

    legal challenge.

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

    \565\ Position Limits for Futures and Swaps, supra note 1, at

    137.

    \566\ Id.

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

    I respect that the Commission has been forthcoming in that the

    overall costs of this final rule will be widespread throughout the

    markets and that swap dealers and traditional hedgers alike will be

    forced to change their trading strategies in order to comply with

    the position limits. However, I am unimpressed by the Commission's

    glib rationale for not fully quantifying them. The Commission does

    not believe it is reasonably feasible to quantify or even estimate

    the costs from changes in trading strategies because doing so would

    necessitate having access to and an understanding of entities'

    business models, operating models, hedging strategies, and

    evaluations of potential alternative hedging or business strategies

    that would be adopted in light of such position limits.\567\ The

    Commission believed it impractical to develop a generic or

    representative calculation of the economic consequences of a firm

    altering its trading strategies.\568\ It seems that the numerous

    swap dealers and commercial entities who provided comments as to

    what kind of choices they would be forced to make if they were to

    find themselves faced with hard position limits, the loss of

    exchange-granted bona fide hedge exemptions for risk management and

    anticipatory hedging, and forced aggregation of trading accounts

    over which they may not even have current access to trading

    strategies or position information, more likely than not thought

    they were being pretty clear as to the economic costs.

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

    \567\ Id. at 144.

    \568\ Id.

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

    In choosing to make hardline judgments with regard to setting

    position limits, limiting bona fide hedging, and picking clear

    winners and losers with regard to account aggregation, the

    Commission was perhaps attempting to limit the universe of trading

    strategies. Indeed, as one runs through the examples in the preamble

    and the new Appendix B to the final rules, one cannot help but

    conclude that how you choose to get your exposure will affect the

    application of position limits. And the Commission will help you

    make that choice even if you aren't asking for it.

    I have numerous lingering questions and concerns with the cost-

    benefit analysis, but I will focus on the impact of these rules on

    the costs of claiming a bona fide hedge exemption.

    [[Page 71706]]

    In addition to incorporating the new, narrower statutory

    definition of bona fide hedging for futures contracts into the final

    rules, the Commission also extended the definition of bona fide

    hedging transactions to swaps and established a reporting and

    recordkeeping regime for bona fide hedging exemptions. In the

    section of the cost-benefit analysis dedicated to a discussion of

    the bona fide hedging exemptions, the Commission ``estimates that

    there may be significant costs (or foregone benefits)'' and that

    firms ``may need to adjust their trading and hedging strategies''

    (emphasis added).\569\ Based on the comments of record and public

    contention over these rules, that may be the understatement of the

    year. To be clear, however, there is no quantification or even

    qualification of this potentially tectonic shift in how commercial

    firms and liquidity providers conduct their business because the

    Commission is unable to estimate these kinds of costs, and the

    commenters did not provide any quantitative data for them to work

    with.\570\ I think this part of the cost-benefit analysis may be

    susceptible to legal challenge.

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

    \569\ Position Limits for Futures and Swaps, supra note 1, at

    166.

    \570\ Id. at 171.

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

    The Commission does attempt a strong comeback in estimating the

    costs of bona fide hedging-related reporting requirements. The

    Commission estimates that these requirements, even after all of the

    commenter-friendly changes to the final rule, will affect

    approximately 200 entities annually and result in a total burden of

    approximately $29.8 million. These costs, it argues, are necessary

    in that they provide the benefit of ensuring that the Commission has

    access to information to determine whether positions in excess of a

    position limit relate to bona fide hedging or speculative

    activity.\571\ This $29.8 million represents almost thirty percent

    of the overall estimated costs at this time, and it only covers

    reporting for entities seeking to hedge their legitimate commercial

    risk. I find it difficult to believe that the Commission cannot come

    up with a more cost-effective and less burdensome alternative,

    especially in light of the current reporting regimes and development

    of universal entity, commodity, and transaction identifiers. I was

    not presented with any other options. I will, however, continue to

    encourage the rulemaking teams to communicate with one another in

    regard to progress in these areas and ensure that the Commission's

    new Office of Data and Technology is tasked with the permanent

    objective of exploring better, less burdensome, and more cost-

    efficient ways of ensuring that the Commission receives the data it

    needs.

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

    \571\ Id.

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

    We Have Done What Congress Asked--But, What Have We Actually Done?

    The consequence is that in its final iteration, the position

    limits rule represents the Commission's desire to ``check the box''

    as to position limits. Unfortunately, in its exuberance and attempt

    to justify doing so, the Commission has overreached in interpreting

    its statutory mandate to set position limits. While I do not

    disagree that the Commission has been directed to impose position

    limits, as appropriate, this rule fails to provide a legally sound,

    comprehensible rationale based on empirical evidence. I cannot

    support passing our responsibilities on to the judicial system to

    pick apart this rule in a multitude of legal challenges, especially

    when our action could negatively affect the liquidity and price

    discovery function of our markets, or cause them to shift to foreign

    markets. I also have serious reservations regarding the excessive

    regulatory burden imposed on commercial firms seeking completely

    legitimate and historically provided relief under the bona fide

    hedge exemption. These firms will spend excessive amounts to remain

    within the strict limitations set by this rule. Congress clearly

    conceived of a much more workable and flexible solution that this

    Commission has ignored.

    In its comment letter of March 25, 2011, the Futures Industry

    Association (FIA) stated, ``The price discovery and risk-shifting

    functions of the U.S. derivatives markets are too important to U.S.

    and international commerce to be the subject of a position limits

    experiment based on unsupported claims about price volatility caused

    by excessive speculative positions.'' \572\ Their summation of our

    proposal as an experiment is apt. Today's final rule is based on a

    hypothesis that historical practice and approach, which has not been

    proven effective in recognized markets, will be appropriate for this

    new integrated futures and swaps market that is facing uncertainty

    from all directions largely due to the other rules we are in the

    process of promulgating. I do not believe the Commission has done

    its research and assessed the impacts of testing this hypothesis,

    and that is why I cannot support the rule. As the Commission begins

    to analyze the results of its experiment, it remains my sincerest

    hope that our miscalculations ultimately do not lead to more harm

    than good. I will take no comfort if being proven correct means that

    the agency has failed in its mission.

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

    \572\ Comment letter from Futures Industry Association on

    Position Limits for Derivatives (RIN 2028-AD15 and 3038-AD16) at 3

    (Mar. 25, 2011), available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=34054&SearchText=futures%20industry%20association

    .

    [FR Doc. 2011-28809 Filed 11-10-11; 11:15 am]

    BILLING CODE P

    Last Updated: November 18, 2011



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