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, [email protected]; B.

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

5198, [email protected], Neal Kumar, Attorney, Office of General

Counsel, at (202) 418-5353, [email protected], 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.

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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

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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.

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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\

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\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).

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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\

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\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.

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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.

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\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.

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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\

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\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.

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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\

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\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.

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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\

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

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

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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\

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\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.

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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\

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\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.

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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\

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\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).

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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.

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\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.

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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\

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\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.

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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\

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\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'').

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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\

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\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.

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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\

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

comply with applicable exchange-set position limits and

accountability levels.

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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.

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

contracts.

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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\

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\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).

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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\

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\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.

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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\

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

Referenced Contract.

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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.

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\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.

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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\

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\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.'')

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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.

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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\

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\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).

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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.

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\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.

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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\

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\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.

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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\

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\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.

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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.

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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\

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\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.

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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\

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\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.

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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.

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\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\

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\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.

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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\

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\104\ See Sec. 151.4(a).

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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\

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\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.

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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\

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\107\ 76 FR at 4752, 4758.

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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.

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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.

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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\

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\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.

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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\

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\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.

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\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.

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\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.

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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.

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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\

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\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.

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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\

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\144\ CL-WGC supra note 21 at 5.

\145\ Encana Marketing (USA) Inc. (``Encana'') on March 28, 2011

(``CL-Encana'') at 2.

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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.

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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.

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\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.

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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.

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\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.

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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.

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\149\ For example, any limits fixed during the month of October

would take effect on January 1.

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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\

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\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.

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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\

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\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/idc/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.

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\158\ 58 FR 18057, April 7, 1993.

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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\

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\159\ For a discussion of the historical approach, see 64 FR

24038, 24039, May 5, 1999.

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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.

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\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.

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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.

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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.

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\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).

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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.

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\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/idc/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).

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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\

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\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.

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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.

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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).

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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\

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\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.

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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\

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\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.

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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).

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\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.

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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.

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\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.

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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.

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\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.

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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.

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\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.

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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.

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\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.

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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.

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\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).

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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.

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\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\

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\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.

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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.

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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\

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\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.

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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\

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\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.

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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\

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\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\

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\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\

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\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.

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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.

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\230\ CL-Morgan Stanley supra note 21 at 16.

\231\ CL-Barclays I supra note 164 at 5.

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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.

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\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.

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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\

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\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.

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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).

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\237\ Commercial Alliance (``Commercial Alliance II'') on July

20, 2011 (``CL-Commercial Alliance II '') at 1.

\238\ Id.

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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.

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\239\ See e.g., CL-ICE I supra note 69 at 12; and CL-WGCEF supra

note 35 at 2-3.

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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.

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\240\ See e.g., CL-WGCEF supra note 35 at 2-3.

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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\

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\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.

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\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.

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\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.

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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\

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\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.

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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\

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\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.

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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.

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\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\

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\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\

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\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.

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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\

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\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.

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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\

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\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.

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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.

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\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.

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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.

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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.

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\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.

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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.

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\308\ CL-CME I supra note 8 at 20.

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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\

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\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.

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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\

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\311\ 75 FR 4752, 4761-62, Jan. 26, 2011.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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\

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\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.

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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.

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\330\ See Principles for the Regulation and Supervision of

Commodity Derivatives Markets, IOSCO Technical Committee (2011).

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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\

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\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\

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\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).

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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.

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\335\ All references to ``SEFs'' below are to SEFs that are

trading facilities.

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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\

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\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.

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\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).

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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.

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\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.

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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.

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\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.

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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\

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\344\ 76 FR at 4752, 4763.

\345\ CL-AIMA supra note 35 at 6.

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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\

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\346\ Proposed Sec. 151.11(a)(2) and Final Sec. 151.11(b)(3).

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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.

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\347\ See Section 1a(19) of the Act, 7 U.S.C. 1a(19).

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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.

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\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.

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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\

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\350\ CL-MFA supra note 21 at 18.

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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.

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\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).

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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\

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\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.

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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.

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\357\ 7 U.S.C. 19(a).

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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\

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\358\ See 76 FR at 4764.

\359\ Id.

\360\ Id.

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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.

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\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.

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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\

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\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.

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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\

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\369\ See CL-WGCEF supra note 34 at 25-26.

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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.''

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\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.

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\371\ See Commodity Exchange Act of 1936, Pub L. 74-675, 49

Stat. 1491 (1936).

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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.

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\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.

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\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\

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\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).

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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\

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\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.

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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.

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\384\ See e.g., Wray, Randall, supra.

\385\ See e.g., Medlock, Kenneth and Amy Myers Jaffe, supra.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\393\ The Commission further considers registered entity limits

in section III.A.3.e.

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[[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

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\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\

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\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.

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\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.

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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\

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\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).

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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.

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\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).

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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\

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\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.

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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\

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\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.

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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.

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\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/idc/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).

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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.

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\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.

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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\

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\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.

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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\

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\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.

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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.

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\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.

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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.

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\416\ 64 FR 24038, 24039, May 5, 1999.

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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\

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\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).

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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.

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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.

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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.

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\433\ This observation is based upon Commission staff

discussions with members of industry. See https://www.cftc.gov/LawRegulation/.

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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).

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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.

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\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\

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\453\ As previously noted, the costs to an individual firm of

filing an exemption are estimated at section III.A.3.

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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.

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\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.

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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.

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\455\ 58 FR 18057, April 7, 1993.

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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\

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\456\ For a discussion of the historical approach, see 64 FR

24038, 24039, May 5, 1999.

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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.

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\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.

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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\

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\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.

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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.

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\462\ See section 719 of the Dodd-Frank Act.

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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.

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\463\ See Sec. 151.6.

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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\

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\464\ For example, traders could utilize swaps not traded on a

DCM or SEF.

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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.

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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.

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\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.

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\467\ See section 4a(a)(3)(B) of the CEA, 7 U.S.C. 6a(a)(3)(B).

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\485\ See II.G.1. of this release.

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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.

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\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.

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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.

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\487\ As described in earlier sections and as found in Appendix

B of these rules.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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\

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\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.

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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.

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\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).

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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\

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\500\ 5 U.S.C. 601 et seq.

\501\ 5 U.S.C. sections 601(2), 603, 604 and 605.

\502\ 76 FR 4765.

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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.

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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.

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\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).

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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.

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\506\ See 47 FR at 18618; 72 FR 34417, Jun. 22, 2007 (foreign

broker determination).

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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.

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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.

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\509\ 44 U.S.C. 3501 et seq.

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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.

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\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.

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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\

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\515\ 7 U.S.C. 12(a)(1).

\516\ 5 U.S.C. 552a.

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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.

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\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.

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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

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Referenced

Contract contract spot-

month limit

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Agricultural Referenced Contracts

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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

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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.

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\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/idc/groups/public/@newsroom/documents/file/federalregister101811c.pdf (hereafter, ``Position Limits for Futures

and Swaps'').

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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\

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\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).

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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:

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\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\

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\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

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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\

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\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.

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\533\ 46 FR at 50938, 50940.

\534\ Id.

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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.

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\535\ Position Limits for Futures and Swaps, supra note 1, at

10-11.

\536\ Id.

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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\

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\537\ See section 4a(a)(3)(B) of the CEA.

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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\

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\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.

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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.''

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\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.

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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\

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\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)).

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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.

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\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.).

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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.

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\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.'').

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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.

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\548\ As defined in new Sec. 151.1.

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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.

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\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.'').

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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.

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\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.

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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.

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\553\ Position Limits for Futures and Swaps, supra note 1, at

75.

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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.

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\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).

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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.''

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\557\ See 76 FR at 4752, 4762 and 4774.

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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.

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\558\ See 76 FR at 4752, 4762.

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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.

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\559\ Position Limits for Futures and Swaps, supra note 1, at

83-84.

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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\

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\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.

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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.''

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\561\ 76 FR at 4752, 4762.

\562\ Id.

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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\

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\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))).

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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.

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\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.

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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.

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\565\ Position Limits for Futures and Swaps, supra note 1, at

137.

\566\ Id.

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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.

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\567\ Id. at 144.

\568\ Id.

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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.

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\569\ Position Limits for Futures and Swaps, supra note 1, at

166.

\570\ Id. at 171.

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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.

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\571\ Id.

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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.

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\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