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2013-27339

  • Federal Register, Volume 78 Issue 221 (Friday, November 15, 2013)[Federal Register Volume 78, Number 221 (Friday, November 15, 2013)]

    [Proposed Rules]

    [Pages 68945-68979]

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

    [FR Doc No: 2013-27339]

    [[Page 68945]]

    Vol. 78

    Friday,

    No. 221

    November 15, 2013

    Part III

    Commodity Futures Trading Commission

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    17 CFR Part 150

    Aggregation of Positions; Proposed Rule

    Federal Register / Vol. 78 , No. 221 / Friday, November 15, 2013 /

    Proposed Rules

    [[Page 68946]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 150

    RIN 3038-AD82

    Aggregation of Positions

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: On May 30, 2012, the Commodity Futures Trading Commission

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

    of proposed modifications to part 151 of the Commission's regulations.

    The modifications addressed the policy for aggregation under the

    Commission's 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. In an Order

    dated September 28, 2012, the District Court for the District of

    Columbia vacated part 151 of the Commission's regulations. The

    Commission is now proposing modifications to the aggregation provisions

    of part 150 of the Commission's regulations that are substantially

    similar to the aggregation modifications proposed to part 151, except

    that the modifications address the policy for aggregation under the

    Commission's position limits regime for futures and option contracts on

    nine agricultural commodities set forth in part 150. Separately, the

    Commission is also proposing today to establish speculative position

    limits for the 28 exempt and agricultural commodity futures and options

    contracts and the physical commodity swaps that are economically

    equivalent to such contracts that previously had been covered by part

    151 of its regulations. If both proposals are finalized, the

    modifications proposed here to the aggregation provisions of part 150

    would apply to the position limits regimes for both the futures and

    option contracts on nine agricultural commodities and the 28 exempt and

    agricultural commodity futures and options contracts and the physical

    commodity swaps that are economically equivalent to such contracts.

    However, the Commission may determine to adopt the modifications

    proposed here separately from any other amendment to the position

    limits regime.

    DATES: Comments must be received on or before January 14, 2014.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD82,

    by any of the following methods:

    Agency Web site: http://comments.cftc.gov;

    Mail: Melissa D. Jurgens, Secretary of the Commission,

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

    Street NW., Washington, DC 20581;

    Hand delivery/courier: Same as mail, above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow instructions for submitting comments.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that may be exempt from disclosure under the Freedom of

    Information Act, a petition for confidential treatment of the exempt

    information may be submitted according to the procedures established in

    CFTC regulations at 17 CFR part 145.

    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist,

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

    Spear Adriance, Senior Special Counsel, Division of Market Oversight,

    (202) 418-5494, radriance@cftc.gov; or Mark Fajfar, Assistant General

    Counsel, Office of General Counsel, (202) 418-6636, mfajfar@cftc.gov;

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

    Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. Introduction

    The Commission has long established and enforced speculative

    position limits for futures and options contracts on various

    agricultural commodities as authorized by the Commodity Exchange Act

    (``CEA'').\1\ The part 150 position limits regime,\2\ generally

    includes three components: (1) The level of the limits, which set a

    threshold that restricts the number of speculative positions that a

    person may hold in the spot-month, individual month, and all months

    combined,\3\ (2) exemptions for positions that constitute bona fide

    hedging transactions and certain other types of transactions,\4\ and

    (3) rules to determine which accounts and positions a person must

    aggregate for the purpose of determining compliance with the position

    limit levels.\5\

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

    \2\ See 17 CFR part 150. Part 150 of the Commission's

    regulations establishes federal position limits on certain

    enumerated agricultural contracts; the listed commodities are

    referred to as enumerated agricultural commodities.

    \3\ See 17 CFR 150.2.

    \4\ See 17 CFR 150.3.

    \5\ See 17 CFR 150.4.

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    The Commission's existing aggregation policy under regulation 150.4

    generally requires that unless a particular exemption applies, a person

    must aggregate all positions for which that person controls the trading

    decisions with all positions for which that person has a 10 percent or

    greater ownership interest in an account or position, as well as the

    positions of two or more persons acting pursuant to an express or

    implied agreement or understanding.\6\ The scope of exemptions from

    aggregation include the ownership interests of limited partners in

    pooled accounts,\7\ discretionary accounts and customer trading

    programs of futures commission merchants (``FCM''),\8\ and eligible

    entities with independent account controllers that manage customer

    positions (``IAC'' or ``IAC exemption'').\9\ Market participants

    claiming one of the exemptions from aggregation are subject to a call

    by the Commission for information demonstrating compliance with the

    conditions applicable to the claimed exemption.\10\

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    \6\ See 17 CFR 150.4(a) and (b).

    \7\ See 17 CFR 150.4(c).

    \8\ See 17 CFR 150.4(d).

    \9\ See 17 CFR 150.3(a)(4).

    \10\ See 17 CFR 150.3(b) and 150.4(e).

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    B. Proposed Modifications to the Policy for Aggregation Under Part 151

    of the Commission's Regulations

    The Commission adopted part 151 of its regulations in November 2011

    under the authority of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act (``Dodd-Frank Act''), which President Obama signed on

    July 21, 2010.\11\ Title VII of the Dodd-Frank

    [[Page 68947]]

    Act \12\ amended the CEA 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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    \11\ 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/DoddFrankAct/index.htm.

    \12\ Pursuant to section 701 of the Dodd-Frank Act, Title VII

    may be cited as the ``Wall Street Transparency and Accountability

    Act of 2010.''

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    As amended by the Dodd-Frank Act, sections 4a(a)(2) and 4a(a)(5) of

    the CEA authorize the Commission to establish limits for futures and

    option contracts traded on a designated contract market (``DCM''), as

    well as swaps that are economically equivalent to such futures or

    options contracts traded on a DCM. In response to this new authority,

    the position limits regime adopted in part 151 would have applied to 28

    physical commodity futures and option contracts and physical commodity

    swaps that are economically equivalent to such contracts.\13\ The

    regulations in the part 151 position limits regime are in three

    components that are generally similar to the three components of part

    150.\14\ With regard to determining which accounts and positions a

    person must aggregate, regulation 151.7 largely adopted the

    Commission's existing aggregation policy under regulation 150.4.\15\

    Regulation 151.7, however, also provided additional exemptions for

    underwriters of securities, and for where the sharing of information

    between persons would cause either person to violate federal law or

    regulations adopted thereunder.\16\ With the exception of the exemption

    for underwriters, regulation 151.7 required market participants to file

    a notice with the Commission demonstrating compliance with the

    conditions applicable to each exemption.\17\

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    \13\ See Position Limits for Futures and Swaps, 76 FR 71626

    (Nov. 18, 2011). In an Order dated September 28, 2012, the District

    Court for the District of Columbia vacated part 151 of the

    Commission's regulations, with the exception of the revised position

    limit levels in amended section 150.2. See International Swaps and

    Derivatives Association v. United States Commodity Futures Trading

    Commission, 887 F. Supp. 2d 259 (D.D.C. 2012).

    In a separate proposal approved on the same date as this

    proposal, the Commission is proposing to establish speculative

    position limits for 28 exempt and agricultural commodity futures and

    option contracts, and physical commodity swaps that are

    ``economically equivalent'' to such contracts (as such term is used

    in section 4a(a)(5) of the CEA). In connection with establishing

    these limits, the Commission is also proposing to update some

    relevant definitions; revise the exemptions from speculative

    position limits, including for bona fide hedging; and extend and

    update reporting requirements for persons claiming exemption from

    these limits. See Position Limits for Derivatives (November 5,

    2013).

    The Commission is proposing these amendments to regulation 150.4

    and certain related regulations separately from its proposed

    amendments to position limits because it believes that these

    proposed amendments regarding aggregation of provisions could be

    appropriate regardless of whether the position limit amendments are

    adopted. The Commission anticipates that it could adopt these

    amendments related to aggregation separately from the amendments to

    the position limits.

    If both proposals are finalized, the modifications proposed here

    to the aggregation provisions of part 150 would apply to the

    position limits regimes for both the futures and option contracts on

    nine agricultural commodities and the 28 exempt and agricultural

    commodity futures and options contracts and the physical commodity

    swaps that are economically equivalent to such contracts.

    \14\ See notes 2 through 5, above, and accompanying text.

    \15\ See notes 6 through 9, above, and accompanying text.

    \16\ See regulations 151.7(g) and (i), respectively.

    \17\ See regulation 151.7(i).

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    On May 30, 2012, the Commission proposed, partially in response to

    a petition for interim relief from part 151's provision for aggregation

    of positions across accounts,\18\ certain modifications to its policy

    for aggregation under the part 151 position limits regime (the ``Part

    151 Aggregation Proposal'').\19\ In brief, the Part 151 Aggregation

    Proposal included the following five elements.

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    \18\ A copy of the petition (the ``aggregation petition'') can

    be found on the Commission's Web site at www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgap011912.pdf. The

    aggregation petition was originally filed by the Working Group of

    Commercial Energy Firms; certain members of the group later

    reconstituted as the Commercial Energy Working Group. Both groups

    (hereinafter, collectively, the ``Working Groups'') presented one

    voice with respect to the aggregation petition.

    \19\ See Aggregation, Position Limits for Futures and Swaps, 77

    FR 31767 (May 30, 2012).

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    First, the Commission proposed to amend regulation 151.7(i) to make

    clear that the exemption from aggregation for situations where the

    sharing of information was restricted under law would include

    circumstances in which the sharing of information would create a

    ``reasonable risk'' of a violation--in addition to an actual

    violation--of federal law or regulations adopted thereunder. The

    Commission also proposed extending the exemption to situations where

    the sharing of information would create a ``reasonable risk'' of a

    violation of state law or the law of a foreign jurisdiction. But the

    Commission did not propose to modify the requirement that market

    participants file an opinion of counsel to rely on the exemption in

    regulation 151.7(i).

    Second, the Commission proposed regulation 151.7(b)(1), which would

    establish a notice filing procedure to permit a person in specified

    circumstances to disaggregate the positions of a separately organized

    entity (``owned entity''), even if such person has a 10 percent or

    greater interest in the owned entity. The notice filing would need to

    demonstrate compliance with certain conditions set forth in proposed

    regulation 151.7(b)(1)(i), and such relief would not be available to

    persons with a greater than 50 percent ownership or equity interest in

    the owned entity. Similar to other exemptions from aggregation, the

    Commission would be able to subsequently call for additional

    information as well as reject, modify or otherwise condition such

    relief. Further, such person would be obligated to amend the notice

    filing in the event of a material change to the circumstances described

    in the filing. The proposed criteria to claim relief in proposed

    regulation 151.7(b)(1)(i) would have required a demonstration that the

    person filing for disaggregation relief and the owned entity do not

    have knowledge of the trading decisions of the other; that they trade

    pursuant to separately developed and independent trading systems; that

    they have, and enforce, written procedures to preclude one entity from

    having knowledge of, gaining access to, or receiving data about, trades

    of the other; that they do not share employees that control trading

    decisions and that employees do not share trading control with respect

    to both entities; and that they do not have risk management systems

    that permit the sharing of trades or trading strategies with the other.

    Third, the Commission proposed regulation 151.7(j), which would

    allow higher-tier entities to rely upon a notice for exemption filed by

    the owned entity, but such reliance would only go to the accounts or

    positions specifically identified in the notice. The proposed

    regulation also would require that a higher-tier entity that wishes to

    rely upon an owned entity's exemption notice must comply with

    conditions of the applicable aggregation exemption other than the

    notice filing requirements.

    Fourth, the Commission proposed an aggregation exemption in

    proposed

    [[Page 68948]]

    regulation 151.7(g) for an ownership interest of a broker-dealer

    registered with the SEC, or similarly registered with a foreign

    regulatory authority, in an entity based on the ownership of securities

    acquired as part of reasonable activity in the normal course of

    business as a dealer. However, the proposed exemption would not have

    applied where a broker-dealer acquires more than a 50 percent ownership

    interest in another entity.

    Fifth, the Commission proposed to expand the definition of

    independent account controller to include the managing member of a

    limited liability company, so that ``regulation 4.13 commodity pools''

    (i.e., a commodity pool, the operator of which is exempt from

    registration under regulation 4.13) established as limited liability

    companies would be accorded the same treatment as such pools formed as

    limited partnerships.

    The Commission received approximately 26 written comments on the

    Part 151 Aggregation Proposal.\20\

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    \20\ The written comments are available on the Commission's Web

    site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1208.

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    II. Proposed Rules

    The Commission is now proposing to amend regulation 150.4, and

    certain related regulations, to include rules to determine which

    accounts and positions a person must aggregate that are substantially

    similar to the corresponding rules in part 151, as it was proposed to

    be amended in May 2012. In addition, the amendments now being proposed

    to regulation 150.4 reflect the Commission's consideration of the

    comments that were received on the Part 151 Aggregation Proposal. Thus,

    the discussion below covers the amendments in the Part 151 Aggregation

    Proposal, the comments on those proposed amendments, and the amendments

    that the Commission is now proposing.\21\

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    \21\ For additional background on part 150 and part 151 and the

    existing provisions for aggregation, see the Part 151 Aggregation

    Proposal.

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    A. Proposed Rules on the Information Sharing Restriction

    B.1. Part 151 Proposed Approach--Amendment to Regulation 151.7(i)

    As noted above, regulation 151.7(i) provided exemptions from

    aggregation under certain conditions where the sharing of information

    would cause a violation of Federal law or regulation. These exemptions

    had not previously been available. In the Part 151 Aggregation

    Proposal, the Commission proposed to amend regulation 151.7(i) to make

    clear that the exemption to the aggregation requirement would include

    circumstances in which the sharing of information would create a

    ``reasonable risk'' of a violation--in addition to an actual

    violation--of federal law or regulations adopted thereunder. The

    Commission noted that whether a reasonable risk exists would depend on

    the interconnection of the applicable statute and regulatory guidance,

    as well as the particular facts and circumstances as applied to the

    statute and guidance.

    The proposed amendments to part 151 retained the requirement that

    market participants file an opinion of counsel to rely on the exemption

    in regulation 151.7(i). The Commission explained that requiring an

    opinion would allow Commission staff to review the legal basis for the

    asserted regulatory impediment to the sharing of information, and would

    be particularly helpful where the asserted impediment arises from laws

    or regulations that the Commission does not directly administer.

    Further, Commission staff would have the ability to consult with other

    federal regulators as to the accuracy of the opinion, and to coordinate

    the development of rules surrounding information sharing and

    aggregation across accounts. The Commission also noted that the

    proposed clarification regarding a ``reasonable risk'' of violation

    should address the concerns that obtaining an opinion of counsel could

    be difficult if the Commission read the existing standard to include

    only per se violations.

    The Commission also noted that, notwithstanding the Commission's

    facts and circumstances review of potentially conflicting federal laws

    or regulations, the exemption in regulation 151.7(i) would be effective

    upon filing of the notice required in regulation 151.7(h) and opinion

    of counsel. Further, these provisions authorized the Commission to

    request additional information beyond that contained in the notice

    filing, and the Commission may amend, suspend, terminate or otherwise

    modify a person's aggregation exemption upon further review. Last, the

    Commission noted that as it gained further experience with the

    exemption for federal law information sharing restriction in regulation

    151.7(i), it anticipated providing further guidance to market

    participants.

    a. Part 151 Proposed Rules for Information Sharing Restriction--Foreign

    Law

    For the same reasons the Commission adopted the exemption for

    federal information sharing restrictions, the Commission proposed

    extending the exemption to the law of a foreign jurisdiction. In

    addition, similar to the clarification for the exemption for federal

    law information sharing restriction, the Commission also proposed an

    exemption where the sharing of information creates a ``reasonable

    risk'' of violating the law of a foreign jurisdiction. However, the

    Commission remained concerned that certain market participants could

    potentially use the existing and proposed expansion of the exemption in

    regulation 151.7(i) to evade the requirements for the aggregation of

    accounts. In this regard, the proposed amendment to part 151,

    consistent with the exemption for federal law information sharing

    restriction, included the requirement to file an opinion of counsel

    specifically identifying the particular law and facts requiring a

    market participant to claim the exemption.

    The Commission noted that the aggregation petition references

    information sharing restrictions that arise from ``international'' law,

    and the Commission sought comment on the types of ``international''

    law, if any, which could create information sharing restrictions other

    than the law of a foreign jurisdiction. The Commission asked if the

    regulation 151.7(i) exemption should include ``international'' law or

    whether it was sufficient to refer to the ``law of a foreign

    jurisdiction.''

    b. Part 151 Proposed Rules for Information Sharing Restriction--State

    Law

    The Commission also proposed to establish an exemption for

    situations where information sharing restrictions could trigger state

    law violations. In addition, similar to the clarification related to

    information sharing restrictions under federal law, the Commission also

    proposed that the state law information sharing restriction apply where

    the sharing of information creates a ``reasonable risk'' of violating

    the state law. However, as noted above, the Commission remained

    concerned about the potential for evasion within the context of this

    exemption. In this regard, the Part 151 Aggregation Proposal,

    consistent with the federal law information sharing restriction,

    included the requirement to file an opinion of counsel specifically

    identifying the restriction of law and facts particular to the market

    participant claiming the exemption.

    The clarification and expansion of the violation of law exemption

    in the Part 151 Aggregation Proposal addressed

    [[Page 68949]]

    concerns raised in the aggregation petition. First, the clarification

    and extension of the violation of law exemption responded to concerns

    that market participants could face increased liability under state,

    federal and foreign law. While the aggregation petition and other

    commenters argued that an owned non-financial entity exemption would

    reduce the risk of liability under antitrust and other laws, the

    clarification and expansion in the Part 151 Aggregation Proposal would

    also reduce risk of liability under antitrust or other laws by allowing

    market participants to avail themselves of the violation of law

    exemption in those circumstances where the sharing of information

    created a reasonable risk of violating the above mentioned bodies of

    law.

    The Commission solicited comments as to the appropriateness of

    extending the information sharing exemption to state law. The

    Commission also considered, as an alternative, a case-by-case approach,

    through petitions submitted pursuant to CEA section 4a(a)(7), where the

    Commission would otherwise rely upon the preemption of state law in

    administering its aggregation policy.

    The Commission noted that the aggregation petition cites to Texas

    Public Utility Code Substantive Rule 25.503, which provides that ``a

    market participant shall not collude with other market participants to

    manipulate the price or supply of power.'' \22\ That provision applies

    to intra-state transactions and resembles regulations of the Federal

    Energy Regulatory Commission.\23\ In this regard, the Commission asked

    if it should limit application of the proposed exemption for state law

    information sharing restrictions to laws that have a comparable

    provision at the federal level, and what criteria it should use in

    identifying state laws that a person may rely upon for an exemption

    from aggregation. The Commission also solicited additional comment as

    to the types of state laws, including specific laws, which could create

    an information sharing restriction in conflict with the Commission's

    aggregation policy.

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    \22\ Aggregation petition at 24.

    \23\ See, e.g., 18 CFR 1c.1 and 1c.2.

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    The Commission further noted that the aggregation petition seeks to

    extend the exemption to information sharing restrictions that arise

    from ``local'' law.\24\ However, the aggregation petition did not

    provide examples of local laws that could create restrictions on

    information sharing, and the Commission was concerned that an exemption

    for local law would be difficult to implement due to the large number

    of such laws and/or regulations that would need to be considered and

    the vast numbers of localities that might issue such laws and/or

    regulations.

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    \24\ Aggregation petition at 24.

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    The Commission solicited comment as to the appropriateness of

    extending the information sharing exemption to ``local'' law.

    Commenters were asked to provide the scope of local law and identify

    any specific laws that create information sharing restrictions that

    would conflict with the Commission's aggregation policy. The Commission

    also asked what criteria it could use in identifying local laws that a

    person may rely upon for an exemption from aggregation, and if the

    Commission should adopt a case-by-case approach through petitions

    submitted pursuant to CEA section 4a(a)(7) and otherwise rely upon the

    preemption of local law in administering its aggregation policy.

    2. Commenters' Views

    One commenter said that the information sharing exemption should

    not be expanded, but should instead be limited to violations of federal

    law.\25\ This commenter also said that the exemption from aggregation

    for potential violations should not be included, because it is

    impractical to determine if potential violations actually justify

    disaggregation, and that if the exemption is expanded, only ``foreign

    law,'' not ``international law,'' should be a basis for the exemption

    since international law (such as a treaty) is not directly applicable

    to information sharing.\26\

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    \25\ Institute for Agriculture and Trade Policy on June 29, 2012

    (``CL-IATP'').

    \26\ CL-IATP.

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    Other commenters said that the proposed exemptions for information

    sharing requirements under state or foreign law are appropriate, and

    that a ``reasonable risk'' of violation is the right standard for the

    exemptions.\27\ Commenters also said that requirements under state law

    should be a valid basis for an exemption regardless of whether a

    comparable federal law exists, and even if federal law pre-empts state

    law.\28\ These commenters cited state utility regulations and state

    regulation of local gas distribution companies as examples of the types

    of state laws that could prohibit information sharing. Without citing

    any examples of such laws that may restrict information sharing, two

    commenters said that local law should also be a valid basis for an

    exemption.\29\

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    \27\ EEI on June 29, 2012 (``CL-EEI''), FIA on June 29, 2012

    (``CL-FIA''), International Swaps and Derivatives Association and

    Securities Industry and Financial Markets Association, jointly on

    June 29, 2012 (``CL-ISDA/SIFMA'').

    \28\ American Gas Association on June 29, 2012 (``CL-AGA''),

    American Petroleum Institute on June 29, 2012 (``CL-API''), Atmos

    Energy Holdings on June 29, 2012 (erroneously dated July 29, 2012)

    (``CL-Atmos''), CL-EEI, CL-FIA, Coalition of Physical Energy

    Companies on June 29, 2012 (``CL-COPE'').

    \29\ CL-API, Working Group of Commercial Energy Firms and

    Sutherland Asbill & Brennan LLP, on behalf of The Commercial Energy

    Working Group, jointly on June 29, 2012 (``CL-WGCEF'').

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

    Regarding which types of legal provisions should be treated as

    ``state law,'' commenters said it should include state statutes,

    regulations and common law (including, e.g., fiduciary duties under

    common law),\30\ and rules, regulations, administrative rulings and

    court orders imposed by state commissions or other governmental

    authorities with jurisdiction.\31\

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    \30\ CL-FIA, Private Equity Growth Capital Council on June 29,

    2012 (``CL-PEGCC'').

    \31\ CL-AGA, Alternative Investment Management Association

    Limited on July 6, 2012 (``CL-AIMA''), CL-Atmos.

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

    Addressing the requirement of an opinion of counsel, some

    commenters said that the requirement in the existing rule should not be

    changed.\32\ These commenters reasoned that the presumption should be

    that aggregation is required in all but the most clear-cut cases, and

    for those cases an opinion would be available.\33\

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

    \32\ Better Markets, Inc. on June 29, 2012 (``CL-Better

    Markets''), CL-IATP.

    \33\ CL-Better Markets, CL-IATP.

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    Other commenters said that a memorandum of law prepared by internal

    or external counsel should suffice if it sets out a legal basis for the

    exemption.\34\ These commenters generally pointed out that formal legal

    opinions can be expensive to obtain, typically contain many

    qualifications, and otherwise are not a practical means of advancing

    the goals mentioned in the Part 151 Aggregation Proposal.\35\ One

    commenter said that as an alternative to a memorandum of law, a person

    claiming the exemption should be allowed simply to provide a copy of

    the court order, administrative ruling or other document showing the

    prohibition of information sharing.\36\

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    \34\ CL-API, CL-EEI, CL-FIA, CL-ISDA/SIFMA, CL-PEGCC, CL-WGCEF.

    \35\ CL-API, CL-EEI, CL-FIA, CL-ISDA/SIFMA, CL-PEGCC, CL-WGCEF.

    Commenters also said that persons should be able to rely on a

    general legal opinion (as compared to a legal opinion or memorandum

    prepared specifically for that person) with respect to laws that

    impose a broadly applicable prohibition of information sharing.

    \36\ CL-AIMA.

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    3. Proposed Rule

    The Commission is proposing to adopt rule 150.4(b)(8), which is

    largely

    [[Page 68950]]

    similar to rule 151.7(i) as it was proposed to be amended. The

    Commission notes that many of the commenters agreed that the proposed

    amendment to part 151 appropriately required that the sharing of

    information create ``a reasonable risk that either person could violate

    state or federal law or the law of a foreign jurisdiction, or

    regulations adopted thereunder.'' Based on the comments received and

    further consideration, the Commission does not believe it is necessary

    that the person show that a comparable federal law exists in order for

    a state law to be the basis for an exemption.

    The Commission has carefully considered the comments asserting that

    local law and international law should be a basis for the exemption.

    However, the Commission does not believe that this would be

    appropriate. First, the Commission notes that the commenters were

    divided on this point, and only some supported incorporating local law

    and international law into the exemption. With regard to local law, the

    Commission continues to believe, as stated in the Part 151 Aggregation

    Proposal, that an exemption for local law would be difficult to

    implement due to the number of laws and regulations that would need to

    be considered and the number of localities that might issue them. Also,

    even though the number of such laws and regulations may be large, the

    Commission is not persuaded that there would be a significant number of

    instances where these laws and regulations would prohibit information

    sharing that would otherwise be permitted under federal and state

    law.\37\ In this respect, the Commission notes that even commenters

    supportive of including exceptions for local law did not cite any local

    laws that restrict the information sharing necessary to comply with the

    Commission's aggregation policy. Furthermore, the Commission is

    concerned that reviewing notices of exemptions based on local laws

    would create a substantial administrative burden for the Commission.

    That is, balancing the possibility that including local law as a basis

    for the exemption would be helpful to market participants against the

    possibility that doing so would lead to confusion or inappropriate

    results, the Commission preliminarily concludes that the better course

    is not to provide for local law to be a basis for the exemption.

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

    \37\ In addition, in those instances where local law would

    impose an information sharing restriction that is not present under

    state or federal law, the Commission believes that it could be

    inappropriate to favor the local law serving a local purpose to the

    detriment of the position limits under federal law that serve a

    national purpose.

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

    With regard to international law, the Commission is persuaded by

    the commenter who pointed out that the sources of international law,

    such as treaties and international court decisions, would be unlikely

    to include information sharing prohibitions that would not otherwise

    apply under foreign or federal law, and that therefore including

    international law as a basis for the exemption is unnecessary.

    The Commission's proposed rule 150.4(b)(8) differs from the

    proposed amendment to rule 151.7, in that instead of requiring a person

    to provide an opinion of counsel regarding the reasonable risk of a

    violation of law, the proposed rule would require the person to provide

    a written memorandum of law (which may be prepared by an employee of

    the person or its affiliates) which explains the legal basis for

    determining that information sharing creates a reasonable risk that

    either person could violate federal, state or foreign law. The

    Commission is persuaded by the commenters saying that requiring a

    formal opinion of counsel may be expensive and may not provide

    benefits, in terms of the purposes of this requirement, as compared to

    a memorandum of law. As noted in the Part 151 Aggregation Proposal, the

    purpose of this requirement is to allow Commission staff to review the

    legal basis for the asserted regulatory impediment to the sharing of

    information (which should be particularly helpful when the asserted

    impediment arises from laws that the Commission does not directly

    administer), to consult with other regulators as to the accuracy of the

    assertion, and to coordinate the development of rules surrounding

    information sharing and aggregation. The Commission expects that a

    written memorandum of law would, at a minimum, contain information

    sufficient to serve these purposes.

    The Commission preliminarily believes that if there is a reasonable

    risk that persons in general could violate a provision of federal,

    state or foreign law of general applicability by sharing information

    associated with position aggregation, then the written memorandum of

    law may be prepared in a general manner (i.e., not specifically for the

    person providing the memorandum) and may be provided by more than one

    person in satisfaction of the requirement. For example, the Commission

    is aware that trade associations commission law firms to provide

    memoranda on various legal issues of concern to their members. Under

    the proposed rule, such a memorandum (i.e., one that sets out in detail

    the basis for concluding that a certain provision of federal, state or

    foreign law of general applicability creates a reasonable risk of

    violation arising from information sharing) could be provided by

    various persons to satisfy the requirement, so long as it is clear from

    the memorandum how the risk applies to the person providing the

    memorandum.

    On the other hand, the Commission is not persuaded that, as

    suggested by some commenters, simply providing a copy of the law or

    other legal authority would be sufficient, because this would not set

    out the basis for a conclusion that the law creates a reasonable risk

    of violation if the particular person providing the document shared

    information associated with position aggregation. If the effect of the

    law is clear, the written memorandum of law need not be complex, so

    long as it explains in detail the effect of the law on the person's

    information sharing.

    Proposed rule 150.4(b)(8) also reflects the addition of a

    parenthetical clause to clarify that the types of information that may

    be relevant in this regard may include, only by way of example,

    information reflecting the transactions and positions of a such person

    and the owned entity. The Commission believes it is helpful to clarify

    in the rule text what types of information may potentially be involved.

    The mention of transaction and position information as examples of this

    information is not intended to limit the types of information that may

    be relevant.

    Finally, the Commission preliminarily believes that the question of

    what legal authorities, in particular, constitute ``state law'' or

    ``foreign law,'' where it is relevant, is a question to be addressed in

    the written memorandum of law. In general, any state-level or foreign

    legal authority that is binding on the person could be a basis for the

    exemption.

    The Commission solicits comment as to all aspects of proposed rule

    150.4(b)(8). In particular, the Commission solicits comment as to the

    appropriateness of requiring that a person provide a written memorandum

    of law, rather than an opinion of counsel, regarding the reasonable

    risk of a violation of law. Also, what types of information may

    potentially be the subject of the sharing that is of concern in this

    rule?

    C. Ownership of Positions Generally

    1. Part 151 Proposed Approach

    The Part 151 Aggregation Proposal reflected the Commission's long-

    [[Page 68951]]

    standing incremental approach to exemptions from the aggregation

    requirement for persons owning a financial interest in an entity. The

    Part 151 Aggregation Proposal highlighted the relevant statutory

    language of section 4a(a)(1) of the CEA, which requires aggregation of

    an entity's positions on the basis of either ownership or control of

    the entity, and the related legislative history and regulatory

    developments which support the Commission's approach. In addition, the

    Part 151 Aggregation Proposal also explained that the Commission's

    historical practice has been to craft narrowly-tailored exemptions,

    when and if appropriate, to the basic requirement of aggregation when

    there is either ownership or control of an entity.\38\

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

    \38\ See also note 41, below, and accompanying text.

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

    Regarding the threshold level at which an exemption from

    aggregation on the basis of ownership would be available, the

    Commission noted in the Part 151 Aggregation Proposal that it has

    generally found that an ownership or equity interest of less than 10

    percent in an account or position that is controlled by another person

    who makes discretionary trading decisions does not present a concern

    that such ownership interest results in control over trading or can be

    used indirectly to create a large speculative position through

    ownership interests in multiple accounts. As such, the Commission has

    exempted an ownership interest below 10 percent from the aggregation

    requirement.\39\ Prior comments discussed in the Part 151 Aggregation

    Proposal suggested that a similar analysis should prevail for an

    ownership interest of 10 percent or more where such ownership

    represents a passive investment that does not involve control of the

    trading decisions of the owned entity, because such passive investments

    would present a reduced concern that ownership would result in trading

    pursuant to direct or indirect control, as well as a reduced risk for

    persons with positions in multiple accounts to hold an unduly large

    overall position.

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

    \39\ The Commission codified this aggregation threshold in its

    1979 statement of policy on aggregation, which was derived from the

    administrative experience of the Commission's predecessor. See

    Statement of Policy on Aggregation of Accounts and Adoption of

    Related Reporting Rules (``1979 Aggregation Policy''), 44 FR 33839,

    33843 (June 13, 1979). Note, however, that consistent with the

    approach taken in 151.7(d), proposed rule 150.4(d) will separately

    require aggregation of investments in accounts with identical

    trading strategies.

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

    While other Commission rulemakings prior to the Part 151

    Aggregation Proposal generally restricted exemptions from aggregation

    based on ownership to FCMs, limited partner investors in commodity

    pools, and independent account controllers managing customer funds for

    an eligible entity, a broader passive investment exemption has

    previously been considered but not enacted by the Commission.\40\

    Further, the Commission reiterated its belief in incremental

    development of aggregation exemptions over time.\41\ Consistent with

    that incremental approach, the Commission considered the additional

    information provided and the concerns raised by the aggregation

    petition, and proposed relief from the ownership criteria of

    aggregation.

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

    \40\ See, e.g., 53 FR 13290, 13292 (1988) (proposal). The 1988

    proposal for the independent account controller rule requested

    comment on the possibility of a broader passive investment

    exemption, and specifically noted:

    [Q]uestions also have been raised regarding the continued

    appropriateness of the Commission's aggregation standard which

    provides that a beneficial interest in an account or positions of

    ten percent or more constitutes a financial interest tantamount to

    ownership. This threshold financial interest serves to establish

    ownership under both the ownership criterion of the aggregation

    standard and as one of the indicia of control under the 1979

    Aggregation Policy.

    In particular, certain instances have come to the Commission's

    attention where beneficial ownership in several otherwise unrelated

    accounts may be greater than ten percent, but the circumstances

    surrounding the financial interest clearly exclude the owner from

    control over the positions. The Commission is requesting comment on

    whether further revisions to the current Commission rules and

    policies regarding ownership are advisable in light of the exemption

    hereby being proposed. If such financial interests raise issues not

    addressed by the proposed exemption for independent account

    controllers, what approach best resolves those issues while

    maintaining a bright-line aggregation test?

    \41\ See 77 FR 31767, 31773. This incremental approach to

    account aggregation standards reflects the Commission's historical

    practice. See, e.g., 53 FR 41563, 41567, Oct. 24, 1988 (the

    definition of eligible entity for purposes of the IAC exemption

    originally only included CPOs, or exempt CPOs or pools, but the

    Commission indicated a willingness to expand the exemption after a

    ``reasonable opportunity'' to review the exemption.); 56 FR 14308,

    14312, Apr. 9, 1991 (the Commission expanded eligible entities to

    include commodity trading advisors, but did not include additional

    entities requested by commenters until the Commission had the

    opportunity to assess the current expansion and further evaluate the

    additional entities); and 64 FR 24038, May 5, 1999 (the Commission

    expanded the list of eligible entities to include many of the

    entities commenters requested in the 1991 rulemaking).

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

    The Part 151 Aggregation Proposal would have established a notice

    filing procedure to permit a person with an ownership or equity

    interest in a separately organized entity (``owned entity'') of 10

    percent or greater, but no more than 50 percent, to disaggregate the

    positions of the owned entity in specified circumstances. Under that

    proposal, the notice filing would demonstrate compliance with certain

    conditions set forth in the proposed amendment to part 151. Similar to

    other exemptions from aggregation, the notice filing would be effective

    upon submission to the Commission, but the Commission would be able to

    subsequently call for additional information as well as reject, modify

    or otherwise condition such relief. Further, such person would be

    obligated to amend the notice filing in the event of a material change

    to the circumstances described in the filing.

    a. Initial Proposed Ownership Threshold for Disaggregation Relief

    The proposed amendment to part 151 would have conditioned

    disaggregation relief on a demonstration that the person does not have

    greater than a 50 percent ownership or equity interest in the owned

    entity. The Part 151 Aggregation Proposal explained that an equity or

    ownership interest above 50 percent constitutes a majority ownership or

    equity interest of the owned entity and is so significant as to require

    aggregation under the ownership prong of Section 4a(a)(1) of the CEA.

    As noted in the Part 151 Aggregation Proposal, the proposed amendment

    to part 151 would have provided certainty and an easily administrable

    bright-line test, and would have addressed concerns about circumvention

    of position limits by coordinated trading or direct or indirect

    influence between entities. To the extent that the majority owner may

    have the ability and incentive to direct, control or influence the

    management of the owned entity, the proposed bright-line test would be

    a reasonable approach to the aggregation of owned accounts pursuant to

    Section 4a(a)(1). A person with a greater than 50 percent ownership

    interest in multiple accounts would have the ability to hold and

    control a significant and potentially unduly large overall position in

    a particular commodity, which position limits are intended to prevent.

    The owned entity exemption in the Part 151 Aggregation Proposal

    would have applied to both financial and non-financial entities that

    have passive ownership interests. Market participants that qualify for

    the exemption could file a notice with the Commission demonstrating

    independence between entities and, thereafter, forgo the development of

    monitoring and tracking systems for the aggregation of accounts. The

    Commission sought comment as to whether such passive interests present

    a significantly reduced risk of coordinated trading compared to owned

    entities that fail the criteria for the proposed

    [[Page 68952]]

    exemption. In addition, the Commission specifically requested comment

    as to whether the proposed relief should be limited to ownership

    interests in non-financial entities.

    While the owned non-financial entity exemption mentioned in the

    aggregation petition would permit disaggregation even if the owned

    entity is wholly owned, the Commission was concerned that an ownership

    interest greater than 50 percent presents heightened concerns for

    coordinated trading or direct or indirect influence over an account or

    position, and that permitting disaggregation at that level of ownership

    would be inconsistent with the statutory requirement to aggregate on

    the basis of ownership. The Part 151 Aggregation Proposal noted that

    while small ownership interests of less than 10 percent do not warrant

    aggregation, and although 10 percent or greater ownership has served as

    a useful threshold for aggregation, the Commission believed relief may

    be warranted for passive investments above 10 percent. However, for the

    reasons discussed above, aggregation would be inappropriate where an

    ownership interest is greater than 50 percent. Therefore, the

    Commission proposed limiting the availability of the exemption to those

    having an ownership interest no greater than 50 percent.

    b. Initial Proposed Criteria for Disaggregation Relief

    The proposed criteria to claim relief under the proposed amendment

    to part 151 addressed the Commission's concerns that an ownership or

    equity interest of 10 percent and above may facilitate or enable

    control over trading of the owned entity or allow a person to

    accumulate a large position through multiple accounts that could

    overall amount to an unduly large position. The Part 151 Aggregation

    Proposal grouped these criteria into four general categories.

    First, the proposed amendment to part 151 would have conditioned

    aggregation relief on a demonstration that the person filing for

    disaggregation relief and the owned entity do not have knowledge of the

    trading decisions of the other. The Commission noted that where an

    entity has an ownership interest in another entity and neither entity

    shares trading information, such entities demonstrate independence, but

    persons with knowledge of trading decisions of another in which they

    have an ownership interest are likely to take such decisions into

    account in making their own trading decisions.

    Second, the proposed amendment to part 151 would have conditioned

    aggregation relief on a demonstration that the person seeking

    disaggregation relief and the owned entity trade pursuant to separately

    developed and independent trading systems. Further, a demonstration

    that such person and the owned entity have, and enforce, written

    procedures to preclude the one entity from having knowledge of, gaining

    access to, or receiving data about, trades of the other, would also be

    required. Such procedures would address document routing and other

    procedures or security arrangements, including separate physical

    locations, which would maintain the independence of their activities.

    The Part 151 Aggregation Proposal noted that these conditions would

    strengthen the independence between the two entities for the owned

    entity exemption.

    Third, the proposed amendment to part 151 would have conditioned

    aggregation relief on a demonstration that the person does not share

    employees that control the owned entity's trading decisions, and the

    employees of the owned entity do not share trading control with such

    persons. The Part 151 Aggregation Proposal noted that, similar to the

    restriction on information sharing, the sharing of employees with

    knowledge of trading decisions presents a strong risk to the

    independence of trading between entities. In the Part 151 Aggregation

    Proposal, the Commission sought comment regarding whether the sharing

    of employees such as attorneys, accountants, risk managers, compliance

    and other mid- and back-office personnel compromises independence

    because it would provide each entity with knowledge of the other's

    trading decisions.\42\

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

    \42\ In the aggregation petition, the Working Groups asserted

    that entities should be permitted to share ``attorneys, accountants,

    risk managers, compliance and other mid- and back-office

    personnel.'' Aggregation petition at Exhibit A.

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

    Fourth, the proposed amendment to part 151 would have conditioned

    aggregation relief on a demonstration that the person and the owned

    entity do not have risk management systems that permit the sharing of

    trades or trading strategies with the other. This condition, which is

    similar to a condition proposed in the aggregation petition, addressed

    concerns that risk management systems that permit the sharing of trades

    or trading strategies with each other present a significant risk of

    coordinated trading through the sharing of information. The Part 151

    Aggregation Proposal did not include a condition that the risk

    management systems of the two entities be separately developed, and the

    Commission sought comment as to whether independence of trading between

    the two entities can be maintained when their risk management systems

    do not communicate trade information.

    c. Initial Proposed Notice Filing Requirement

    With regard to filing requirements for the exemption in the

    proposed amendment to part 151, the Commission noted that market

    participants would be required to file in accordance with regulation

    151.7(h). As such, market participants would be required to file a

    notice with the Commission with a description of how they adhere to the

    criteria in the proposed amendment to part 151 and a certification that

    the conditions are met. This certification, as well as any other

    certification made under regulation 151.7(h), would be required to be

    made by a senior officer of the market participant with knowledge as to

    the contents of the notice.\43\ Further, regulation 151.7(h)(3)

    requires market participants to promptly update a notice filing in the

    event of a material change of the information contained in the notice

    filing.\44\

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

    \43\ See proposed rule 151.7(h)(1)(ii), 77 FR 31767, 31782.

    \44\ In this regard, the Commission clarified that a material

    change would include, among other events, if the person making the

    original certification is no longer employed by the company. See

    also CEA sections 6(c)(2) and 9(a)(3).

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

    With regard to the type of material necessary to file a notice to

    claim an exemption under the proposed amendment to part 151, the

    Commission noted that each submission would have to be specific to the

    facts of the particular entity. The person claiming the exemption would

    be required to provide specific facts that demonstrate compliance with

    each condition of relief. Such a demonstration would likely include an

    organizational chart showing the ownership and control structure of the

    involved entities, a description of the risk management system, a

    description of the information-sharing systems (including bulletin

    boards, and common email addresses of the entities identified), an

    explanation of how and to whom the trade data and position information

    is distributed (including the responsibilities of the individual

    receiving such information), and the officers that receive reports of

    the trade data and position information.\45\

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

    \45\ The Commission noted that this list was not meant to be

    exhaustive of the factors that would indicate an exemption is

    warranted and should not be interpreted as being solely sufficient

    to claim the exemption because each filing is fact specific. And, as

    noted earlier, the Commission is able to demand additional

    information regarding the exemption within its discretion.

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

    [[Page 68953]]

    d. Initial Proposed Treatment of Higher Tier Entities

    In connection with its request for the Commission to include an

    owned non-financial entity exemption, the aggregation petition also

    requested that the Commission provide relief from the filing

    requirements for claiming the exemption. Specifically, it argued that

    if an entity files a notice and claims the owned non-financial entity

    exemption, then ``every higher-tier company (a company that holds an

    interest in the company that submitted the notice) need not aggregate

    the referenced contracts of the owned non-financial entities identified

    in the notice.'' \46\ After consideration of this request, the

    Commission proposed rules that would provide relief to such ``higher-

    tier entities'' within the context of a corporate structure.\47\

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

    \46\ Aggregation petition at 23.

    \47\ For purposes of the discussion below, ``higher-tier''

    entities include entities with a 10 percent or greater ownership

    interest in an owned entity.

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

    The proposed amendments to part 151 would have provided that

    higher-tier entities may rely upon a notice for exemption filed by the

    owned entity, and such reliance would only go to the accounts or

    positions specifically identified in the notice. For example, if

    company A had a 30 percent interest in company B, and company B filed

    an exemption notice for the accounts and positions of company C, then

    company A could rely upon company B's exemption notice for the accounts

    and positions of company C. Should company A wish to disaggregate the

    accounts or positions of company B, company A would have to file a

    separate notice for an exemption.

    The proposed amendments to part 151 would have also provided that a

    higher-tier entity that wishes to rely upon an owned entity's exemption

    notice would be required to comply with conditions of the applicable

    aggregation exemption other than the notice filing requirements.

    Although higher-tier entities would not have to submit a separate

    notice to rely upon the notice filed by an owned entity, the Commission

    noted that it would be able, upon call, to request that a higher-tier

    entity submit information to the Commission, or allow an on-site visit,

    demonstrating compliance with the applicable conditions.

    The Part 151 Aggregation Proposal stated that the proposed

    amendments to part 151 should significantly reduce the filing

    requirements for aggregation exemptions. Further, the Commission did

    not anticipate that the reduction in filing would impact the

    Commission's ability to effectively surveil the proper application of

    exemptions from aggregation. The first filing of an owned entity

    exemption notice should provide the Commission with sufficient

    information regarding the appropriateness of the exemption, while

    repetitive filings of higher-tier entities would not be expected to

    provide additional substantive information. However, the Commission

    again noted that higher-tier entities would still be required to comply

    with the conditions of the exemption specified in the owned entity's

    notice filing.

    The Commission specifically requested comments as to the

    appropriateness of the owned entity exemption as well as the conditions

    applicable to the exemption, and whether the Commission should add

    additional criteria and if so, what criteria and why. The Commission

    also asked if it should require market participants to submit

    additional information to claim the exemption, and if so, what

    information and why. With regard to the owned entity exemption, the

    Commission asked if it should alter the scope of the exemption, and if

    so, how it should be altered and why. Further, the Commission asked

    commenters to address the percentage ownership interest, if any, at

    which a market participant should no longer be able to claim the

    exemption in the proposed amendments to part 151, and whether there are

    specific circumstances in which a percentage of ownership higher than

    50 percent would be appropriate to claim the exemption notwithstanding

    the concerns described above regarding coordinated trading, direct or

    indirect influence, and significantly large and potentially unduly

    large overall positions in a particular commodity. In addition, the

    Commission invited comment on the owned non-financial entity exemption

    set forth in appendix A of the aggregation petition as an alternative

    to the proposed owned entity exemption.

    2. Commenters' Views

    a. Comments on the Initial Proposed Ownership Threshold for

    Disaggregation Relief

    Some commenters supported the proposed rules requiring that, to

    obtain relief from the aggregation requirement, a person must own 50

    percent or less of an owned entity. One commenter said that unless the

    standards for an independent account controller are met, any exemption

    from aggregation for greater than 50 percent-owned entities would

    constitute an unacceptable weakening of the position limits regime.\48\

    This commenter also noted that CEA section 4a(a)(1) requires

    aggregation of positions held by any persons ``directly or indirectly''

    controlled by a person, and ``ownership is the paradigm example of

    indirect control.'' \49\

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

    \48\ CL-Better Markets.

    \49\ CL-Better Markets.

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

    Two commenters said that the proposed rules went too far in

    allowing exemptions from aggregation. These commenters were concerned

    that the exemptions in the Part 151 Aggregation Proposal could impede

    prevention of excessive speculation on agricultural futures, which

    requires the imposition of position limits based on consistent

    aggregation of positions,\50\ and that allowing owners of more than 10

    percent of another entity not to aggregate could ``potentially spark

    additional `herd-like' behavior, thus causing another commodities

    futures boom-bust cycle.'' \51\

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

    \50\ CL-IATP.

    \51\ International Association of Machinists and Aerospace

    Workers on June 29, 2012 (``CL-IAMAW'').

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

    The other commenters on the Part 151 Aggregation Proposal said that

    the requirement of ownership of 50 percent or less of the owned entity

    should not apply, and disaggregation relief should be available to any

    person demonstrating that the owned entity's trading is independent

    according to criteria along the lines of proposed rule

    151.7(b)(1)(i).\52\ Some of these commenters also said that, as an

    alternative to providing relief for any person that could demonstrate

    independent trading by the owned entity, disaggregation relief should

    be available to the extent specifically provided by the Commission in

    response to a specific request for relief,\53\ or if the person makes

    an additional demonstration of why majority ownership of the owned

    entity does not result in trading control or information sharing that

    warrants

    [[Page 68954]]

    aggregation.\54\ One commenter representing private investment funds

    suggested rules allowing disaggregation relief if a person could

    demonstrate independent trading by the owned entity and one of three

    alternative conditions were met: (i) The owner uses information about

    the owned entity's trading only for risk management, (ii) the owned

    entity only enters into bona fide hedging transactions, or (iii) the

    owned entity is not consolidated on the owner's financial statements,

    representatives of the owner on the owned entity's board of directors

    do not control the owned entity's trading and the owned entity's

    trading qualifies as bona fide hedging.\55\

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

    \52\ American Benefits Council on June 29, 2012 (``CL-ABC''),

    CL-AGA, CL-AIMA, CL-API, Barclays Capital on June 29, 2012 (``CL-

    Barclays''), Commodity Markets Council on June 29, 2012 (``CL-

    CMC''), CL-COPE, CL-EEI, CL-FIA, Iberdrola Renewables, LLC and

    Iberdrola Energy Services LLC, jointly on June 29, 2012 (``CL-

    Iberdrola''), CL-ISDA/SIFMA, Managed Funds Association on June 28,

    2012 (``CL-MFA'') and CL-WGCEF.

    \53\ CL-AIMA, CL-API. Two commenters' first position (not an

    alternative position) was along these lines--that disaggregation

    relief should be available to the extent provided by the Commission.

    CL-Atmos, CL-MFA.

    \54\ CL-ISDA/SIFMA, CL-WGCEF, CL-PEGCC. One of these commenters

    said that, instead of requiring aggregation of positions, the

    Commission should consider requiring that additional safeguards be

    in place for majority-owned entities, such as requiring that both

    the person and the owned entity to make certain annual

    certifications. CL-WGCEF.

    \55\ CL-PEGCC and Private Equity Growth Capital Council

    supplemental letter on August 20, 2012 (``CL-PEGCC Supp.'').

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

    The commenters opposed to the requirement of ownership of 50

    percent or less of the owned entity provided various reasons for why

    the requirement should not apply. Some of these commenters said that

    although ownership of more than 50 percent of an entity is an indicator

    of control, such ownership does not always equate to control,\56\

    because ownership of an entity does not provide control unless the

    owner has an ability to direct or influence management) \57\ or because

    treating ownership as tantamount to control is contrary to principles

    of corporate separateness.\58\ Other commenters said that aggregation

    is consistent with the underlying purposes of the position limits

    regime only if a person has direct and actual control of the trading of

    another person or has access to information about the other entity's

    trading that facilitates its own trading.\59\

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

    \56\ CL-AGA, CL-MFA, CL-PEGCC, CL-WGCEF.

    \57\ CL-API, CL-Atmos.

    \58\ CL-ISDA/SIFMA, CL-PEGCC.

    \59\ CL-CMC, CL-EEI.

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

    Other commenters claimed that the requirement of ownership of 50

    percent or less of the owned entity is inconsistent with the CEA or

    past practices of the Commission. These commenters said that while CEA

    section 4a(a)(1) refers to positions held by ``controlled'' persons, it

    does not refer to positions held by owned persons,\60\ that the

    Commission does not require aggregation of positions of owned commodity

    pools, or of positions (even those held by the entity itself) if there

    is an independent account controller,\61\ and that the ``bright line''

    standard at 50 percent ownership is arbitrary,\62\ inconsistent with

    both a 1979 policy statement of the Commission that trading control is

    a question of fact and with prior practice of DCMs to allow owners to

    demonstrate lack of control of an owned entity's trading,\63\ or

    unnecessary in light of the Commission's Part 151 Aggregation Proposal

    of factors to determine whether a person controls the trading of an

    owned entity.\64\

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

    \60\ CL-ISDA/SIFMA, CL-PEGCC.

    \61\ CL-PEGCC.

    \62\ CL-AGA, CL-API, CL-COPE.

    \63\ CL-API, CL-WGCEF.

    \64\ CL-AIMA.

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

    Another reason cited by commenters against the requirement of

    ownership of 50 percent or less of the owned entity is that in certain

    corporate structures, majority ownership may not provide for control of

    the owned entity. Commenters said, for example, that limited partners

    may not control the trading of a limited partnership, even though they

    own a majority equity interest in the limited partnership,\65\ or a

    joint venture may contain contractual provisions that prevent the

    venture partners from controlling its trading,\66\ or a passive

    majority investor in a commercial company may not control the company's

    trading.\67\ Commenters also said that it would be inappropriate to

    treat two companies that operate in different regions or at different

    levels of commerce (e.g., wholesale and retail) as trading under common

    control simply because both companies are owned by a common holding

    company.\68\

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

    \65\ CL-CMC, CL-COPE, CL-WGCEF.

    \66\ CL-API, CL-CMC.

    \67\ U.S. Chamber of Commerce and the Real Estate Roundtable,

    jointly on June 29, 2012 (``CL-Chamber''). Other commenters along

    these lines added that to requiring passive investors to aggregate

    the positions of majority-owned companies would inhibit legitimate

    commercial and investment activity, CL-FIA, and that providing

    relief from aggregation for passive investors would be similar to

    the lack of aggregation for passive owners of commodity pools. CL-

    PEGCC.

    \68\ CL-AGA, CL-Iberdrola. Another commenter added that since

    the independent account controller exemption would generally not be

    available to holding companies owning operating companies, the

    requirement of ownership of 50 percent or less of the owned entity

    in order to disaggregate creates a regulatory imbalance between such

    holding companies and the entities to which the independent account

    controller exemption is available. CL-WGCEF.

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

    Commenters also described other factors that they believe weigh

    against the requirement of ownership of 50 percent or less of the owned

    entity in order to disaggregate. One commenter said that requiring

    persons to aggregate the positions of all majority-owned entities would

    lead to more information sharing and coordinated trading between such

    entities, which the Commission should seek to prevent, and it would

    also likely lead to incorrect position reporting while disaggregation

    would encourage more granular and more accurate reporting.\69\ Another

    commenter was concerned that the Commission's adoption of aggregation

    rules would lead DCMs and SEFs to apply similar aggregation rules for

    the position limits regimes that they enforce, thereby increasing the

    importance of the aggregation rules to a wider variety of firms using

    many different types of swaps.\70\ A commenter representing employee

    benefit plans said that the Commission should not require aggregation

    of the positions of a corporate entity that is the sponsor of an

    employee benefit plan with the positions of the plan even if the

    employees of the plan sponsor (or its subsidiaries) control the

    investments of the plan, because such employees have a legal duty to

    act solely in the interests of the plan.\71\

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

    \69\ CL-CMC.

    \70\ CL-Chamber.

    \71\ CL-ABC. This commenter also asked for clarification whether

    a person that owns an entity that controls the trading of an

    employee benefit plan would be required to aggregate the positions

    of such plan with such person's positions. Id.

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

    b. Comments on the Initial Proposed Criteria for Disaggregation Relief

    There were a variety of comments on the criteria in the proposed

    amendment to part 151 that must be met in order for a person to obtain

    disaggregation relief with respect to an owned entity. One general

    point raised by several commenters was that the limits on sharing

    information between the person and the owned entity should not apply to

    employees that do not direct or influence trading (such as attorneys or

    risk management and compliance personnel), although the employees may

    have knowledge of the trading of both the person and the owned

    entity.\72\ A commenter representing employee benefit plan managers

    said that restrictions on information sharing are, in general, a

    problem for plan managers, which have a fiduciary duty to inquire as to

    an owned entities' activities, so the Commission should recognize that

    acting as required by fiduciary duties

    [[Page 68955]]

    does not constitute a violation of the information sharing

    restriction.\73\

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

    \72\ CL-AGA, CL-API, CL-Atmos, CL-Cargill, CL-EEI. Commenters

    said that shared knowledge among employees is not relevant if they

    are not involved in trading and do not serve as conduit for sharing

    trading information, CL-AGA, CL-AIMA, CL-Atmos, and that it is

    important that risk management and compliance personnel have

    continuous knowledge of trading. CL-EEI.

    \73\ CL-ABC.

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

    Summarized below are the comments on each of the four general

    categories of criteria for disaggregation relief in the proposed rule.

    No shared knowledge of trading decisions. Commenters said that this

    proposed amendment to part 151 should be clarified to indicate that it

    prohibits the sharing only of knowledge held by personnel with the

    ability to direct or participate in trading decisions by either the

    person or the owned entity that would allow them to trade in

    anticipation or in concert, and that it allows post-trade information

    sharing for risk management, accounting, compliance, or similar

    purposes and information sharing among mid- and back-office personnel

    that do not control trading.\74\ Another commenter said that this

    proposed amendment to part 151 should be clarified to provide that

    information sharing resulting when the person and the owned entity (or

    two owned entities) are counterparties in an arm's length transaction

    should not be a violation of the rule.\75\

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

    \74\ CL-AIMA, CL-EEI, CL-MFA, CL-WGCEF.

    \75\ CL-COPE.

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

    Trade pursuant to separately developed and independent trading

    systems; have and enforce written procedures to preclude sharing of

    trading information and other procedures to maintain independence,

    including separate physical locations. Commenters said that this

    requirement should not apply to commercial energy firms which use

    similar trading systems,\76\ or where existing systems can be modified

    to prevent coordinated trading,\77\ or to prevent the use of third

    party ``off-the-shelf'' execution algorithms.\78\ Other commenters said

    the requirement should apply only to systems that direct trading

    decisions, and not trade capture, trade risk or trade facilitation

    systems.\79\ One commenter said this provision of the proposed

    amendment to part 151 should be deleted, because it is the use of the

    system, not its development, which is relevant.\80\ Commenters also

    said that this proposed amendment to part 151 should apply only with

    respect to personnel directing or participating in trading

    decisions,\81\ and it should permit the sharing of virtual

    documentation, so long as such document can be accessed only by persons

    that do not manage or control trading.\82\ Commenters said that the

    requirement of separate physical locations should not require that

    personnel be located in separate buildings, so long as the relevant

    employees of the person and the owned entity do not have access to each

    other's physical premises.\83\ One commenter said that the requirement

    to have specified policies and procedures should not apply to the owned

    entity, because it does not control its owner.\84\

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

    \76\ CL-WGCEF.

    \77\ CL-API.

    \78\ CL-AIMA. The commenter said that, in this case, the rule

    should require only that the systems be independently operated.

    \79\ CL-EEI, CL-FIA.

    \80\ CL-COPE.

    \81\ CL-WGCEF.

    \82\ CL-FIA.

    \83\ CL-API, CL-EEI, CL-WGCEF.

    \84\ CL-AIMA.

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

    No shared employees that control trading decisions. Commenters on

    this proposed amendment to part 151 said it should not prohibit sharing

    of board or advisory committee members who do not influence trading

    decisions, sharing of research personnel, or sharing for training,

    operational or compliance purposes, so long as trading of the person

    and the owned entity remains independent.\85\

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

    \85\ CL-API, CL-Cargill.

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

    No risk management systems that permit shared trading. Commenters

    said that this proposed amendment to part 151 should permit continuous

    sharing of position information so long as such information is used

    only for risk management and surveillance purposes and is not shared

    with trading personnel.\86\

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

    \86\ CL-FIA, CL-WGCEF.

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

    c. Comments on the Initial Proposed Notice Filing Requirement

    Commenters also addressed the burdens that would result from the

    requirement that a filing be made to support disaggregation relief for

    persons owning more than 10 percent of an owned entity. Two commenters

    questioned the statement in the Part 151 Aggregation Proposal that

    allowing persons that own more than 50 percent of an owned entity to

    file requests for disaggregation relief would be burdensome, saying

    that such filings would be required only if the person were seeking

    disaggregation relief, and that such filings could be tailored so as to

    provide the necessary information in an efficient way.\87\ One of these

    commenters also said that requiring private investment funds to

    aggregate positions held by majority-owned entities would be burdensome

    because it would lead to persons owning between 10 and 50 percent of

    the fund to make filings to support disaggregation relief.\88\ Another

    commenter said that a single aggregate notice filing (with annual

    updates for material changes) should be permitted, where the person

    would list all owned entities for which it claims an exemption from the

    aggregation requirement and make the required certifications, that the

    filing should be effective retroactively to the beginning of the prior

    filing period, and that affiliates at same level of ownership should be

    able to rely on each other's notice filings (as do higher tier owners)

    if the filings contain the appropriate demonstrations of compliance by

    the affiliates.\89\ Last, one commenter said that no filing should be

    required to support disaggregation relief or, in the alternative, a

    filing should be required only where the absence of control of the

    owned entity is not obvious and the filing should not be required until

    90 days after the threshold level of ownership of the owned entity is

    obtained.\90\

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

    \87\ CL-Atmos, CL-PEGCC.

    \88\ CL-PEGCC.

    \89\ CL-FIA.

    \90\ CL-Barclays. Another commenter said that requiring a person

    owning 50 percent or less of an owned entity to make a filing in

    support of disaggregation relief is overly burdensome, and such

    filings should be required only if the person owns more than 50

    percent of the owned entity. CL-ISDA/SIFMA.

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

    d. Comments on Other Issues Relating to Disaggregation Relief in the

    Part 151 Aggregation Proposal

    Commenters addressed several miscellaneous issues arising from the

    proposed amendments to part 151 requiring ownership of 50 percent or

    less of the owned entity in order to disaggregate. In response to the

    Commission's request for comment on whether applications for exemption

    from the aggregation requirements should be handled on a case-by-case

    basis, several commenters said that doing so would not be efficient and

    the process in the proposed rule is preferable.\91\ One commenter said

    that the final regulation on aggregation adopted by the Commission

    should also apply for exemptions from the aggregation requirements of

    DCMs and SEFs.\92\ Another commenter requested a transition period of

    at least six months after the date that compliance with the position

    limits regime is required before compliance with the aggregation

    requirements would be required.\93\ Several commenters said that when

    aggregation of positions are required, the positions should be

    attributed from the owned entity to the owner on a basis that is pro

    rata to the owner's interest in

    [[Page 68956]]

    the owned entity, to avoid double counting and an artificial limit on

    trading that may affect liquidity.\94\ Two commenters addressed

    information that the Commission may request under the proposed

    amendments to part 151, saying they should be amended to specifically

    limit such information to that which is relevant to establishing

    whether a person meets the criteria for disaggregation and will be kept

    confidential.\95\

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

    \91\ CL-AGA, CL-EEI, CL-FIA.

    \92\ CL-MFA.

    \93\ CL-FIA.

    \94\ CL-ABC, CL-Barclays, CL-FIA.

    \95\ CL-API, CL-WGCEF.

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

    One commenter said that the Commission should not adopt a rule

    regarding aggregation of positions of owned entities and that the

    Commission should instead rely on information provided on reports on

    Commission Form 40, which includes information regarding whether the

    respondent controls, or is controlled by, any other entity.\96\ Another

    commenter said that the position limits regime is long overdue and

    there should be a general requirement of aggregation, with no

    exceptions or waivers.\97\

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

    \96\ CL-Barclays.

    \97\ CL-Ja Sto.

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

    3. Proposed Rule

    The Commission continues to believe, as stated in the Part 151

    Aggregation Proposal, that ownership of an entity is an appropriate

    criterion for aggregation of that entity's positions. Section 4a(a)(1)

    of the CEA provides for the general aggregation standard with regard to

    position limits, and specifically provides:

    In determining whether any person has exceeded such limits, the

    positions held and trading done by any persons directly or

    indirectly controlled by such person shall be included with the

    positions held and trading done by such person; and further, such

    limits upon positions and trading shall apply to positions held by,

    and trading done 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 were done by, a single

    person.\98\

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

    \98\ 7 U.S.C. 6a(a)(1).

    The legislative history to the enactment of this provision in 1968

    states that Congress added this language to expressly incorporate prior

    administrative determinations of the Commodity Exchange Authority

    (predecessor to the Commission) into the statute.\99\ These prior

    administrative determinations, as well as regulations of the Commodity

    Exchange Authority, announced standards that included control of

    trading and financial interests in positions. As early as 1957, the

    Commission's predecessor issued determinations requiring that accounts

    in which a person has a financial interest be included in

    aggregation.\100\ In addition, the definition of ``proprietary

    account'' in regulation 1.3(y), which has been in effect for decades,

    includes any account in which there is 10 percent ownership.\101\

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

    \99\ See S. Rep No. 947, 90th Cong., 2 Sess. 5 (1968) regarding

    the CEA Amendments of 1968, Public Law 90-258, 82 Stat. 26 (1968).

    This Senate Report provides:

    Certain longstanding administrative interpretations would be

    incorporated in the act. As an example, the present act authorizes

    the Commodity Exchange Commission to fix limits on the amount of

    speculative ``trading'' that may be done. The Commission has

    construed this to mean that it has the authority to set limits on

    the amount of buying or selling that may be done and on the size of

    positions that may be held. All of the Commission's speculative

    limit orders, dating back to 1938, have been based upon this

    interpretation. The bill would clarify the act in this regard. . . .

    Section 2 of the bill amends section 4a(1) of the act to show

    clearly the authority to impose limits on ``positions which may be

    held.'' It further provides that trading done and positions held by

    a person controlled by another shall be considered as done or held

    by such other; and that trading done or positions held by two or

    more persons acting pursuant to an express or implied understanding

    shall be treated as if done or held by a single person.

    \100\ See Administrative Determination (``A.D.'') 163 (Aug. 7,

    1957) (``[I]n the application of speculative limits, accounts in

    which the firm has a financial interest must be combined with any

    trading of the firm itself or any other accounts in which it in fact

    exercises control.''). In addition, the Commission's predecessor,

    and later the Commission, provided the aggregation standards for

    purposes of position limits in the large trader reporting rules. See

    Supersedure of Certain Regulations, 26 FR 2968, Apr. 7, 1961. In

    1961, then regulation 18.01 read:

    (a) Multiple Accounts. If any trader holds or has a financial

    interest in or controls more than one account, whether carried with

    the same or with different futures commission merchants or foreign

    brokers, all such accounts shall be considered as a single account

    for the purpose of determining whether such trader has a reportable

    position and for the purpose of reporting. 17 CFR 18.01 (1961).

    In the 1979 Aggregation Policy, the Commission discussed

    regulation 18.01, stating:

    Financial Interest in Accounts. Consistent with the underlying

    rationale of aggregation, existing reporting Rule 18.10(a) a (sic)

    basically provides that if a trader holds or has a financial

    interest in more than one account, all accounts are considered as a

    single account for reporting purposes. Several inquiries have been

    received regarding whether a nomial (sic) financial interest in an

    account requires the trader to aggregate. Traditionally, the

    Commission's predecessor and its staff have expressed the view that

    except for the financial interest of a limited partner or

    shareholder (other than the commodity pool operator) in a commodity

    pool, a financial interest of 10 percent or more requires

    aggregation. The Commission has determined to codify this

    interpretation at this time and has amended Rule 18.01 to provide in

    part that, ``For purposes of this Part, except for the interest of a

    limited partner or shareholder (other than the commodity pool

    operator) in a commodity pool, the term `financial interest' shall

    mean an interest of 10 percent or more in ownership or equity of an

    account.''

    Thus, a financial interest at or above this level will

    constitute the trader as an account owner for aggregation purposes.

    1979 Aggregation Policy, 44 FR at 33843.

    The provisions concerning aggregation for position limits

    generally remained part of the Commission's large trader reporting

    regime until 1999 when the Commission incorporated the aggregation

    provisions into rule 150.4 with the existing position limit

    provisions in part 150. See 64 FR 24038, May 5, 1999. The

    Commission's part 151 rulemaking also incorporated the aggregation

    provisions in rule 151.7 along with the remaining position limit

    provisions in part 151. See 76 FR 71626, Nov. 18, 2011.

    \101\ 17 CFR 1.3(y). This provision has been in Regulation

    1.3(y)(1)(iv) since at least 1976, which the Commission adopted from

    regulations of its predecessor, with ``for the most part,

    procedural, housekeeping-type modifications, conforming the

    regulations to the recently enacted CFTCA.'' See 41 FR 3192, 3195

    (January 21, 1976).

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

    In light of the language in section 4a, its legislative history,

    subsequent regulatory developments, and the Commission's historical

    practices in this regard, the Commission continues to believe that

    section 4a requires aggregation on the basis of either ownership or

    control of an entity. The Commission also believes that aggregation of

    positions across accounts based upon ownership is a necessary part of

    the Commission's position limit regime.\102\

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

    \102\ See Revision of Federal Speculative Position Limits and

    Associated Rules, 64 FR 24038, 24044, May 5, 1999 (``[T]he

    Commission . . . interprets the `held or controlled' criteria as

    applying separately to ownership of positions or to control of

    trading decisions.''). See also, Exemptions from Speculative

    Position Limits for Positions which have a Common Owner but which

    are Independently Controlled and for Certain Spread Positions, 53 FR

    13290, 13292, Apr. 22, 1988. In response to two separate petitions,

    the Commission proposed the independent account controller exemption

    from speculative position limits, but declined to remove the

    ownership standard from its aggregation policy.

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

    Also, an ownership standard establishes a bright-line test that

    provides certainty to market participants and the Commission.\103\

    Without aggregation on the basis of ownership, the Commission would

    have to apply a control test in all cases, which would pose significant

    administrative challenges to individually assess control across all

    market participants. Further, the Commission considers that if the

    statute required aggregation based only on control, market participants

    may be able to use an ownership interest to directly or indirectly

    influence the account or

    [[Page 68957]]

    position and thereby circumvent the aggregation requirement.

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

    \103\ In this regard, the Commission is mindful of the point

    raised by some commenters that the aggregation rules adopted by the

    Commission would be a precedent for aggregation rules enforced by

    DCMs and SEFs, leading to the application of the aggregation rules

    to a wide variety of firms. See CL-Chamber. The Commission believes

    that for this reason, it is important that the aggregation rules set

    out, to the extent feasible, ``bright line'' rules that are capable

    of easy application by a wide variety of market participants while

    not being susceptible to circumvention.

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

    The Commission does not believe, as suggested by some commenters,

    that an aggregation requirement would lead to more information sharing

    and significantly increased levels of coordinated speculative trading

    by the entities subject to aggregation. Among other things, the

    position limits would affect the trading of only the relatively small

    number of entities that hold positions in excess of the limits.\104\

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

    \104\ See, e.g., Position Limits for Futures and Swaps, 76 FR

    71626, 71668 (Nov. 18, 2011) (describing the number of traders

    estimated to be subject to position limits).

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

    For example, the following table shows the relatively small number

    of persons that held positions over the applicable limit during the

    period of January 17 to September 12, 2012. For comparison, the table

    also shows the number of persons with positions at a level in excess of

    60 percent or 80 percent of the applicable limit. It is important to

    note that this table was prepared by applying the current aggregation

    requirements in regulation 150.4 without applying any of the current

    exemptions to aggregation that may be available. Thus, this table

    reflects the maximum number of persons that may hold positions of the

    level shown, assuming that no exemptions to aggregation apply.

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

    \105\ In this table, ``*'' means fewer than 4 unique owners

    exceeded the level, and ``--'' means no unique owner exceeded the

    level.

    Number of Unique Persons Over 60, 80, and 100 Percent of Levels of Rule 150.2 Federal Speculative Position Limits January 17, 2012 to September 30, 2012

    \105\

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

    Spot month Single month All months

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

    Percent of Total number Total number Total number

    Contract/DCM limit level of unique Number of of unique Number of of unique Number of

    persons over person-days persons over person-days persons over person-days

    level level level

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

    Chicago Board of Trade

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

    Corn and Mini-Corn...................... 60 97 517 22 1347 26 2289

    80 72 372 11 643 13 1069

    100 26 198 5 315 9 822

    Oats.................................... 60 * * 6 436 8 527

    80 * * * * 5 283

    100 * * * * 4 217

    Soybeans and Mini-Soybeans.............. 60 59 316 33 2751 36 3044

    80 39 223 20 1580 25 1962

    100 19 102 11 979 16 1244

    Wheat and Mini-Wheat.................... 60 19 95 33 2877 32 3181

    80 12 53 18 1660 23 2342

    100 6 32 13 1050 15 1446

    Soybean Oil............................. 60 54 211 36 3291 47 3568

    80 34 126 25 2161 32 2589

    100 12 47 14 1281 17 1551

    Soybean Meal............................ 60 26 158 33 2546 37 2690

    80 18 99 18 1480 21 1645

    100 8 45 7 895 12 930

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

    Kansas City Board of Trade

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

    Hard Winter Wheat....................... 60 10 38 6 334 7 450

    80 5 28 * * * *

    100 4 20 * * * *

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

    Minneapolis Grain Exchange

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

    Hard Red Spring Wheat................... 60 5 12 -- -- * *

    80 5 12 -- -- -- --

    100 * * -- -- -- --

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

    ICE Futures U.S.

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

    Cotton No. 2............................ 60 5 31 35 3386 39 3417

    80 5 30 21 2133 25 2554

    100 5 25 14 1363 17 1701

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

    Also, some of the entities subject to aggregation, which is based

    on common ownership or control, might already share information

    regarding their trading activities. Thus, the Commission continues to

    believe, as it explained in the Part 151 Aggregation Proposal, that the

    regulations proposed here will not result in a significantly increased

    level of information sharing that would increase coordinated

    speculative trading. The Commission notes that these proposed

    regulations will provide further aggregation exemptions, lessening the

    need to share information regarding speculative trading to ensure

    compliance with position limits.

    As a final introductory point, the Commission has considered that

    relief from any rule requiring the aggregation of positions held by

    separate entities is

    [[Page 68958]]

    only necessary where the entities would be below the relevant limits on

    an individual basis, but above a limit when aggregated. Thus, if a

    group of affiliated entities can take steps to maintain an aggregate

    position that does not exceed any limit, then the group will not have

    to seek disaggregation relief.

    In other words, seeking disaggregation relief is one option for

    those groups of affiliated entities that may exceed a limit on an

    aggregate basis but will remain below the relevant limits on an

    individual basis. Other avenues are also available to corporate groups

    that seek to remain in compliance with the position limit regime. For

    example, the affiliated entities may put into place procedures to avoid

    exceeding the limits on an aggregate basis.\106\ One potential approach

    that could be available to a holding company with multiple subsidiaries

    would be to assign each subsidiary an internal limit based on a

    percentage of the level of the position limit. The holding company

    would allocate no more in aggregate internal limits than the level of

    the position limit.\107\ Further, a breach of an internal limit would

    provide the holding company with notice that it should consider filing

    for bona fide hedging exemptions or taking other compliance steps, as

    applicable.

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

    \106\ The procedures adopted by the affiliates may obviate more

    complex steps such as the implementation of real-time monitoring

    software to consolidate all derivative activities of the affiliates,

    especially if the group currently does not have an aggregate

    position approaching the size of a position limit and has

    historically not changed position sizes day-over-day by a

    significant percentage of the position limit.

    \107\ An even more cautious approach would be for the holding

    company to limit the overall allocation to the subsidiaries to less

    than 100% of the position limit. For example, a holding company with

    three subsidiaries may assign each subsidiary an internal limit

    equal to 30% of the level of the federal limit. Thus, the holding

    company has allocated permission to subsidiaries to hold, in the

    aggregate, positions equal to up to 90% of the level of the relevant

    position limit. Each subsidiary would simply report at close of

    business its derivative position to the holding company. The 10%

    cushion provides the holding company with the ability to remain in

    compliance with the limit, even if all subsidiaries slightly exceed

    the internal limits on the same side of the market at the same time.

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

    a. Disaggregation Relief for Ownership or Equity Interests of 50

    Percent or Less

    The Commission is proposing to adopt rule 150.4(b)(2), which is

    largely similar to proposed rule 151.7(b)(1). Proposed rule 150.4(b)(2)

    would continue the Commission's longstanding rule that persons with

    either an ownership or an equity interest in an account or position of

    less than 10 percent need not aggregate such positions solely on the

    basis of the ownership criteria, and persons with a 10 percent or

    greater ownership interest would still generally be required to

    aggregate the account or positions.\108\ However, rule 150.4(b)(2)

    would establish a notice filing procedure, effective upon submission,

    to permit a person with either an ownership or an equity interest in an

    owned entity of 50 percent or less to disaggregate the positions of an

    owned entity in specified circumstances, even if such person has a 10

    percent or greater interest in the owned entity.\109\ The notice filing

    would have to demonstrate compliance with certain conditions set forth

    in proposed rule 150.4(b)(2). As discussed in the Part 151 Aggregation

    Proposal, and similar to other exemptions from aggregation, the notice

    filing would be effective upon submission to the Commission, but the

    Commission would be able to subsequently call for additional

    information, and to amend, terminate or otherwise modify the person's

    aggregation exemption for failure to comply with the provisions of rule

    150.4(b)(2). Further, the person would be obligated to amend the notice

    filing in the event of a material change to the circumstances described

    in the filing.

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

    \108\ For purposes of aggregation, the Commission believes that

    contingent ownership rights, such as an equity call option, would

    not constitute an ownership or equity interest.

    \109\ Under the approach proposed here, and in a manner similar

    to current regulation, if a person qualifies for disaggregation

    relief, the person would nonetheless have to aggregate those same

    accounts or positions covered by the relief if they are held in

    accounts with substantially identical trading strategies. See

    proposed rule 150.4(a)(2). The exemptions in proposed rule 150.4 are

    set forth as alternatives, so that, for example, the applicability

    of the exemption in paragraph (b)(2) would not affect the

    applicability of a separate exemption from aggregation (e.g., the

    independent account controller exemption in paragraph (b)(5)).

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

    The Commission preliminarily believes that a 50 percent limit on

    the ownership interest in another entity is a reasonable, ``bright

    line'' standard for determining when aggregation of positions is

    required, even where the ownership interest is passive. As explained in

    the Part 151 Aggregation Proposal, majority ownership (i.e., over 50

    percent) is indicative of control, and this standard addresses the

    Commission's concerns about circumvention of position limits by

    coordinated trading or direct or indirect influence between entities.

    To the extent that a majority owner would have the ability and

    incentive to direct, control or influence the management of the owned

    entity, the 50 percent limit is a reasonable approach to the

    aggregation of owned accounts pursuant to Section 4a(a)(1) of the CEA.

    Aggregation based upon an ownership or equity interest of greater than

    50 percent is appropriate to address the heightened risk of direct or

    indirect influence over the owned entity.\110\

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

    \110\ The Commission notes that, as stated in the Part 151

    Aggregation Proposal, the requirement in proposed rule 150.4(b)(2)

    of aggregation based on ownership depends on a person's ownership

    interest in another entity, regardless of the person's voting

    control of that entity. However, as discussed further below, the

    Commission believes that relief from the aggregation requirement may

    be appropriate in some circumstances, where the owned entity is not

    consolidated on the owner's financial statements. Since the extent

    of the owner's voting interest in the owned entity may be a factor

    in determining whether financial consolidation is required, the

    voting interest may indirectly be a factor in determining if

    aggregation is required.

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

    Moreover, greater than 50 percent ownership is a standard used by

    other government agencies and reflects a general understanding that

    ownership at this level poses substantial potential for direct or

    indirect control over an owned entity. For example, the U.S. Federal

    Trade Commission and U.S. Department of Justice use a 50 percent

    ownership threshold test to determine ``control'' for the purpose of

    defining pre-merger and acquisition filing requirements under the Hart-

    Scott-Rodino Antitrust Improvements Act of 1974.\111\

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

    \111\ 15 U.S.C. 18(a); see also 16 CFR 801.1(b) (defining

    ``control'' for purpose of implementing regulations to include

    ``[h]olding 50 percent or more of the outstanding voting securities

    of an issuer or, in the case of any unincorporated entity, having

    the right to 50 percent or more of the profits of the entity, or

    having the right in the event of dissolution to 50 percent or more

    of the assets of the entity''); Premerger Notification; Reporting

    and Waiting Period Requirements, 43 FR 33450, 33457 (July 31, 1978)

    (`` `Control' was defined at the level of 50 percent stock ownership

    for two reasons. First, it supplied an objective, easily

    administrable criterion. Second, except for cases in which the

    holding is exactly 50 percent, majority ownership will always enable

    the holder to direct the day-to-day activities of the controlled

    entity, even though for many large corporations, de facto control

    may arise from holdings well below 50 percent'').

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

    The Commission notes that a requirement of ownership of 50 percent

    or less of the owned entity in order to obtain disaggregation relief by

    making a notice filing would not affect a person's ability to obtain

    other exemptions. For example, exemptions from position limits for bona

    fide hedging positions or from aggregation for independent account

    controllers, if applicable, would still be utilized to the extent an

    owned entity is entering into positions for bona fide hedging or on

    behalf of customers, as provided in those exemptions.

    Regarding those commenters who said that if an owned entity's

    positions are aggregated with the owner's position, the aggregation

    should be pro rata to the ownership interest, the Commission believes

    that a pro rata approach could be administratively burdensome for both

    owners and the Commission. For

    [[Page 68959]]

    example, the level of ownership interest in a particular owned entity

    may change over time for a number of reasons, including stock

    repurchases, stock rights offerings, or mergers and acquisitions, any

    of which may dilute or concentrate an ownership interest. Thus, it may

    be burdensome to determine and monitor the appropriate pro rata

    allocation on a daily basis. Moreover, the Commission has historically

    interpreted the statute to require aggregation of all the relevant

    positions of owned entities, absent an exemption. This is consistent

    with the view that a holder of a significant ownership interest in

    another entity may have the ability to influence all the trading

    decisions of the entity in which such ownership interest is held.

    The Commission invites commenters to address whether the Commission

    should adopt an approach that would require aggregation of only a pro-

    rata allocation of owned-entity positions to equity owners based on the

    percentage of ownership interest. How could aggregation in a manner pro

    rata to the ownership interest be effected in practice? What procedures

    could be used to implement a pro rata method, and what would those

    procedures entail? If procedures to implement a pro rata method are

    suggested, please address the burden those procedures could place on

    the owners and on the Commission.

    The Commission also solicits comment on whether the Commission

    should permit a person to file a notice that would inform the

    Commission of that person's ownership interest in an owned entity, and

    permit that person to aggregate only a pro rata allocation of the

    owned-entity's positions based on that person's less than 100 percent

    ownership. In light of the potential administrative burdens associated

    with the adoption of an aggregation methodology based on allocation pro

    rata to ownership interest, should the Commission provide for

    aggregation of an owned-entity's positions to the owner based on

    ownership tiers? Commenters may address, for example, the establishment

    of two ownership tiers, one for an ownership interest of 10 percent to

    25 percent, with an attribution of 25 percent of the owned-entity's

    positions (rather than 100 percent of the affiliate's position) to the

    owner, and another tier for an ownership interest of greater than 25

    percent to 50 percent, with an attribution of 50 percent of the owned-

    entity's positions (rather than 100 percent of the affiliate's

    position) to the owner. Would a tiered approach such as this alleviate

    concerns about aggregation in general? What are the potential burdens

    of applying this approach? If this approach is implemented, should

    owners be required to file a notice with the Commission when the

    relevant ownership interest changes from one tier to another?

    Regarding those commenters who said that there should be a

    transition period for application of the requirement of ownership of 50

    percent or less of the owned entity in order to obtain disaggregation

    relief, the Commission notes that this proposal would apply to existing

    position limits currently in effect, and as noted above, would provide

    further aggregation exemptions.

    The Commission also considered comments that aggregation of

    positions is unnecessary because information about ownership and

    control is available to the Commission through reports on Commission

    Form 40. However, the Commission is not persuaded that these reports

    are a sufficient substitute for the position limits regime. While these

    reports provide some information necessary for surveillance of

    positions, some owned entities may not file these reports. Also, the

    obligation to provide updates to the Commission if there are material

    changes to the relevant information, which is included in the proposed

    revision of rule 150.4, may not necessarily apply to information

    provided in the reports on Form 40. On a more fundamental level, the

    Commission believes that compliance with the position limit rules,

    including aggregation of the positions of owned entities, is primarily

    the responsibility of the owned entities and their owners. Even if the

    information on Form 40 were sufficient, it would be impractical and

    inefficient for the Commission to use that information to monitor

    compliance with the position limit rules, as compared to the ability of

    the entities themselves to maintain compliance with the position

    limits.

    Similarly, the Commission is not persuaded by the commenter who

    asserted that aggregation of positions would, in general, lead to

    inaccurate reporting of positions. Rather, the Commission believes that

    the proposed rule would facilitate accurate reporting by providing a

    ``bright line'' rule for determining when aggregation is required.\112\

    The Commission emphasizes the responsibility of those who are subject

    to the aggregation and position reporting requirements to ensure that

    the information required by the Commission's regulations is provided

    accurately.

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

    \112\ See note 103 and accompanying text, supra.

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

    b. Disaggregation Relief for Ownership or Equity Interests of Greater

    Than 50 Percent

    The Commission continues to believe, as stated in the Part 151

    Aggregation Proposal, that an equity or ownership interest above 50

    percent constitutes a majority ownership or equity interest of the

    owned entity and is so significant as to justify aggregation under the

    ownership prong of Section 4a(a)(1) of the CEA. A person with a greater

    than 50 percent ownership interest in multiple accounts would have the

    ability to hold and control a significant and potentially unduly large

    overall position in a particular commodity, which position limits are

    intended to prevent. Also, as noted above, in general this ``bright

    line'' approach would provide administrative certainty.

    While the Commission continues to believe that relief from the

    aggregation requirement should not be available merely upon a notice

    filing by a person who has a greater than 50 percent ownership or

    equity interest in the owned entity, the Commission has considered the

    points raised by commenters in this regard. In view of the comments,

    the Commission understands that in some limited situations

    disaggregation relief may be appropriate even for majority owners if

    the owned entity is not required to be, and is not, consolidated on the

    financial statement of the person, if the person can demonstrate that

    the person does not control the trading of the owned entity, based on

    the criteria in proposed rule 150.4(b)(2)(i), and if both the person

    and the owned entity have procedures in place that are reasonably

    effective to prevent coordinated trading. The person would have to

    demonstrate that it does not control the owned entity's trading even

    though the person is the majority owner of the owned entity.

    To provide such limited relief in order to address issues raised by

    commenters would represent a break by the Commission from past

    practice. The Commission is authorized to provide such relief by the

    plenary authority granted to the Commission in section 4a(a)(7) of the

    CEA to provide relief from the requirements of the position limits

    regime.

    Consequently, the proposed rules includes a provision (proposed

    rule 150.4(b)(3)) that would permit a person with a greater than 50

    percent ownership of an owned entity to apply to the Commission for

    relief from aggregation on a case-by-case basis. The

    [[Page 68960]]

    person would be required to demonstrate to the Commission that:

    i. the owned entity is not required to be, and is not, consolidated

    on the financial statement of the person,

    ii. the person does not control the trading of the owned entity

    (based on criteria in rule 150.4(b)(2)(i)), with the person showing

    that it and the owned entity have procedures in place that are

    reasonably effective to prevent coordinated trading in spite of

    majority ownership,\113\

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

    \113\ The Commission points out that since this criterion

    requires a person to certify that the person does not control

    trading of its owned entity, the criterion could not be met by a

    natural person or any entity, such as a partnership, where it is not

    possible to separate knowledge and control of the person from that

    of the owned entity.

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

    iii. each representative of the person (if any) on the owned

    entity's board of directors attests that he or she does not control

    trading of the owned entity, and

    iv. the person certifies that either (a) all of the owned entity's

    positions qualify as bona fide hedging transactions or (b) the owned

    entity's positions that do not so qualify do not exceed 20 percent of

    any position limit currently in effect, and the person agrees in either

    case that:

    [ssquf] if this certification becomes untrue for the owned entity,

    the person will aggregate the owned entity for three complete calendar

    months and if all of the owned entity's positions qualify as bona fide

    hedging transactions during that time the person would have the

    opportunity to make the certification again and stop aggregating,

    [ssquf] upon any call by the Commission, the owned entity(ies) will

    make a filing responsive to the call, reflecting the owned entity's

    positions and transactions only, at any time (such as when the

    Commission believes the owned entities in the aggregate may exceed a

    visibility level), and

    [ssquf] the person will provide additional information to the

    Commission if any owned entity engages in coordinated activity, short

    of common control (understanding that if there were common control, the

    positions of the owned entity(ies) would be aggregated).

    The Commission wishes to clarify that this relief would not be

    automatic, but rather would be available only if the Commission finds,

    in its discretion, that the four conditions above are met. Thus,

    persons applying for this relief should not assume that relief would be

    granted. The proposed rule would not impose any time limits on the

    Commission's process for making the determination of whether relief is

    appropriately granted, and relief would be available only if and when

    the Commission acts on a particular request for relief.

    The first requirement would be that the owned entity is not, and is

    not required to be, consolidated on the financial statements of the

    person. The Commission is aware that, for most entities, ownership of

    more than 50 percent of another entity's voting shares is the point at

    which consolidation of the owned entity on the owner's financial

    statements is required under U.S. Generally Accepted Accounting

    Principles (``GAAP'').\114\ Consequently, if a person holds an equity

    or ownership interest above 50 percent in another entity, but does not

    hold a greater than 50 percent voting interest in that entity, it may

    be possible that the owned entity would not be required to be

    consolidated on the person's financial statements and the person would,

    therefore, be able to apply to the Commission for relief from the

    aggregation requirement. Similarly, in some cases, limited partners

    holding a greater than 50 percent equity or ownership interest in a

    limited partnership are not required to consolidate the limited

    partnership because it is controlled by the general partner.\115\ Also,

    the Commission realizes that there are exceptions to the consolidation

    requirement for certain types of entities. For example, financial

    consolidation may also not be required for entities that are

    ``investment companies'' under GAAP, and certain broker-dealers may not

    be required to consolidate certain owned entities over which the

    broker-dealer is likely to have only temporary control. The Commission

    reiterates that lack of financial consolidation would be only one of

    the factors in determining whether aggregation relief would be granted,

    and even if the owned entity is not consolidated and other requirements

    for relief are satisfied, the Commission could nevertheless, in its

    discretion, determine that relief is not appropriate.

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

    \114\ See Financial Accounting Standards Board Accounting

    Standards Codification Topic 810, at paragraphs 810-10-15-8 and 10,

    available at https://asc.fasb.org/. See also Accounting Research

    Bulletin 51 at paragraph 3 and Statement of Financial Accounting

    Standard No. 94 at paragraph 2.

    \115\ Thus, proposed rule 150.4(b)(3) would address those

    commenters who said that aggregation should not be required by

    limited partners who own a majority equity interest in a limited

    partnership but do not control its trading. Where a limited partner

    does not consolidate the limited partnership on its financial

    statements, and the other conditions of the proposed rule are met,

    the limited partner could apply to the Commission for relief from

    the aggregation requirement.

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

    The Commission preliminarily believes, based in part on points

    raised by commenters, that the presence of certain additional factors

    may, in particular circumstances, be favorable to granting relief from

    the aggregation requirement (although no such factor would be

    dispositive and the Commission could deny granting relief even in the

    presence of any or all such factors). These factors could include

    certain points raised by commenters, such as the owned entity being a

    newly acquired standalone business or a joint venture subject to

    special restrictions on control, or two different owned entities

    conducting operations at different levels of commerce (such as retail

    and wholesale).\116\ Under the proposed approach, the Commission would

    interpret factors such as these to be favorable to granting relief from

    the aggregation requirement.

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

    \116\ See generally CL-AGA, CL-API, CL-Chamber, CL-CMC, CL-

    Iberdrola.

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

    If a person with greater than 50 percent ownership of an owned

    entity could not meet the conditions in proposed rule 150.4(b)(3), the

    person could apply to the Commission for relief from aggregation under

    CEA section 4a(a)(7).\117\ Persons wishing to seek such relief should

    apply to the Commission stating the particular facts and circumstances

    that justify the relief. For example, if the owned entity is

    consolidated on the financial statement of the person, the person could

    describe the facts and circumstances which the person believes indicate

    that the person should not be considered to own or control the owned

    entity's positions, notwithstanding that financial consolidation may be

    associated with ownership and control. The Commission notes that CEA

    section 4a(a)(7) does not impose any time limits on the Commission's

    process for determining whether relief under that section is

    appropriate, nor does it prescribe or limit the factors that the

    Commission may consider to be relevant in determining whether to grant

    relief. The Commission solicits comment as to whether relief from

    aggregation under CEA section 4a(a)(7) should be available to persons

    with greater than 50 percent ownership of owned entities who cannot

    meet the conditions in proposed rule 150.4(b)(3), and as to the facts

    and circumstances that the Commission should take into account in

    considering such relief.

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

    \117\ Section 4a(a)(7) of the CEA provides authority to the

    Commission to grant relief from the position limits regime.

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

    The Commission has considered the comment that a corporate entity

    that is the sponsor of an employee benefit plan should not be required

    to aggregate the positions of the plan with the sponsor's

    [[Page 68961]]

    proprietary positions.\118\ The Commission notes that the sponsor of an

    employee benefit plan is an ``eligible entity'' as defined in

    regulation 150.1(d),\119\ and the Commission preliminarily believes it

    is appropriate to provide relief in this regard that is similar to the

    provisions that apply to positions controlled by an IAC. In particular,

    the Commission proposes to treat the manager of the employee benefit

    plan as an IAC and the plan's positions as client positions. To effect

    this treatment, the Commission is proposing amended rule 150.1(e)(5)

    and proposed rule 150.4(b)(5) that would allow managers of employee

    benefit plans (i.e., persons that manage a commodity pool, the operator

    of which is excluded from registration as a commodity pool operator

    under rule 4.5(a)(4)) to be treated as an IAC, on the condition that an

    IAC notice filing is made as required under rule 150.4(c). The

    Commission emphasizes that this proposed relief would be limited to

    employee benefit plans.

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

    \118\ CL-ABC.

    \119\ The definition of ``eligible entity'' in regulation

    150.1(d) includes the operator of a trading vehicle which is

    excluded from the definition of the term ``pool'' under regulation

    4.5, which in turn excludes, in regulation 4.5(a)(4), the sponsors

    of most employee benefit plans.

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

    c. Proposed Criteria for Disaggregation Relief

    The Commission is proposing criteria to claim disaggregation relief

    in proposed rule 150.4(b)(2)(i) that are similar to the criteria set

    forth in proposed rule 151.7(b)(1)(i). Essentially, the criteria are

    the conditions that would have to be met in order for a person to rebut

    the presumption that an ownership or equity interest of between 10 and

    50 percent (inclusive) requires aggregation of the positions of the

    owned entity.\120\

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

    \120\ As noted in the Part 151 Aggregation Proposal, the

    criteria would apply to the person filing the notice as well as the

    owned entity. In addition, for purposes of meeting the criteria,

    such ``person'' would include any entity that such person must

    aggregate pursuant to proposed rule 150.4. For example, if company A

    files a notice under proposed rule 150.4(c) for company A's equity

    interest of 30 percent in company B, then company A must comply with

    the conditions for the exemption, including any entity with which

    company A aggregates positions proposed rule 150.4. In this

    connection, if company A controlled the trading of company C, then

    company A's 150.4(c) notice filing must demonstrate that there is

    independence between company B and company C.

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

    In general, the Commission proposes that these criteria would be

    interpreted and applied in accordance with the Commissions' past

    practices in this regard.\121\ In accordance with these precedents, the

    Commission would not expect that the criteria would impose requirements

    beyond a reasonable, plain-language interpretation of the criteria. For

    example, routine pre- or post-trade systems to effect trading on an

    operational level (such as trade capture, trade risk or order-entry

    systems) would not, broadly speaking, have to be independently

    developed in order to comply with the criteria. Also, employees that do

    not direct or participate in an entity's trading decisions would

    generally not be subject to these requirements. A brief discussion of

    each of the five criteria in proposed rule 150.4(b)(2)(i) is set forth

    below.

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

    \121\ See, e.g., 1979 Aggregation Policy, 44 FR 33839 (providing

    indicia of independence); CFTC Interpretive Letter No. 92-15 (CCH ]

    25,381) (ministerial capacity overseeing execution of trades not

    necessarily inconsistent with indicia of independence); revision of

    federal speculative position limits, 64 FR 24038, 24044 (May 5,

    1999) (intent in issuing final aggregation rule ``merely to codify

    the 1979 Aggregation Policy, including the continued efficacy of the

    [1992] interpretative letter'').

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

    Proposed rule 150.4(b)(2)(i)(A) would condition aggregation relief

    on a demonstration that the person filing for disaggregation relief and

    the owned entity do not have knowledge of the trading decisions of the

    other. The Commission preliminarily believes that where an entity has

    an ownership interest in another entity and neither entity shares

    trading information, such entities demonstrate independence. In

    contrast, persons with knowledge of trading decisions of another in

    which they have an ownership interest are likely to take such decisions

    into account in making their own trading decisions, which implicates

    the Commission's concern about independence and enhances the risk for

    coordinated trading.\122\ As noted above, this proposed criterion would

    address concerns regarding knowledge of employees who control, direct

    or participate in an entity's trading decisions, and would not prohibit

    information sharing solely for risk management, accounting, compliance,

    or similar purposes and information sharing among mid- and back-office

    personnel that do not control, direct or participate in trading

    decisions. In response to comments on this criterion, the Commission

    wishes to clarify that this criterion would generally not require

    aggregation solely based on knowledge that a party gains during

    execution of a transaction regarding the trading of the counterparty to

    that transaction, nor would it encompass knowledge that an entity would

    gain when carrying out due diligence under a fiduciary duty, so long as

    such knowledge is not directly used to affect the entity's trading.

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

    \122\ As noted in the Part 151 Aggregation Proposal, the

    Commission does not consider knowledge of overall end-of-day

    position information to necessarily constitute knowledge of trading

    decisions, so long as the position information cannot be used to

    dictate or infer trading strategies. As such, the knowledge of end-

    of-day positions for the purpose of monitoring credit limits for

    corporate guarantees does not necessarily constitute knowledge of

    trading information. However, the ability to monitor the development

    of positions on a real time basis could constitute knowledge of

    trading decisions because of the substantial likelihood that such

    knowledge might affect trading strategies or influence trading

    decisions of the other.

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

    Proposed rule 150.4(b)(2)(i)(B) would condition aggregation relief

    on a demonstration that the person seeking disaggregation relief and

    the owned entity trade pursuant to separately developed and independent

    trading systems. Further, proposed rule 150.4(b)(2)(i)(C) would

    condition relief on a demonstration that such person and the owned

    entity have, and enforce, written procedures to preclude the one entity

    from having knowledge of, gaining access to, or receiving data about,

    trades of the other. Such procedures would have to include document

    routing and other procedures or security arrangements, including

    separate physical locations, which would maintain the independence of

    their activities. As noted in the Part 151 Aggregation Proposal, the

    Commission has applied these same conditions in connection with the IAC

    exemption to ensure independence of trading between an eligible entity

    and an affiliated independent account controller.\123\ Similar to the

    IAC exemption, proposed rule 150.4(b)(2) permits disaggregation in

    certain circumstances where there is independence of trading between

    two entities. Thus, the Commission is proposing the above conditions,

    which are already applicable and working well in the IAC context, and

    which are expected to strengthen the independence between the two

    entities for the owned entity exemption.

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

    \123\ See regulation 150.3(a)(4) (proposed here to be replaced

    by proposed rule 150.4(b)(5)). Such conditions have been useful in

    ensuring that trading is not coordinated through the development of

    similar trading systems, and that procedures are in place to prevent

    the sharing of trading decisions between entities.

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

    The Commission proposes that the phrase ``separately developed and

    independent trading systems'' should be interpreted in accordance with

    the Commission's prior practices in this regard.\124\ The Commission

    generally

    [[Page 68962]]

    does not expect that this criterion would prevent an owner and an owned

    entity from both using the same ``off-the-shelf'' system that is

    developed by a third party. Rather, the Commission's concern is that

    trading systems (in particular, the parameters for trading that are

    applied by the systems) could be used by multiple parties who each know

    that the other parties are using the same trading system as well as the

    specific parameters used for trading and, therefore, are indirectly

    coordinating their trading.\125\

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

    \124\ See, e.g., 1979 Aggregation Policy, 44 FR 33839, 33840-1

    (futures commission merchant (FCM) ``deemed to control'' trading of

    customer accounts in trading program where FCM gives specific advice

    or recommendations not made available to other customers, unless

    such accounts and programs are traded independently and for

    different purposes than proprietary accounts).

    \125\ Compare id. at 33841. ``However, the Commission also

    recognizes that purportedly different programs which in fact are

    similar in design and purpose and are under common control may be

    initiated in an attempt to circumvent speculative limit and

    reporting requirements.''

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

    The requirement of ``separate physical locations'' in proposed rule

    150.4(b)(2)(i)(C) would not necessarily require that the relevant

    personnel be located in separate buildings. The Commission believes

    that the important factor is that there be a physical barrier between

    the personnel that prevents access between the personnel that would

    impinge on their independence. For example, locked doors with

    restricted access would generally be sufficient, while merely providing

    the purportedly ``independent'' personnel with desks of their own would

    not. Similar principles would apply to sharing documents or other

    resources.

    Proposed rule 150.4(b)(2)(i)(D) would condition aggregation relief

    on a demonstration that the person does not share employees that

    control the owned entity's trading decisions, and the employees of the

    owned entity do not share trading control with such persons. The

    Commission continues to be concerned that, as stated in the Part 151

    Aggregation Proposal, shared employees with control of trading

    decisions may undermine the independence of trading between entities.

    Regarding the comments on the sharing of attorneys, accountants, risk

    managers, compliance and other mid- and back-office personnel, the

    Commission proposes, as noted above, that sharing of such personnel

    between entities would generally not compromise independence so long as

    the employees do not control, direct or participate in the entities'

    trading decisions.\126\ Similarly, sharing of board or advisory

    committee members, research personnel or sharing of employees for

    training, operational or compliance purposes would not result in a

    violation of the criteria if the personnel do not influence (e.g.,

    ``have a say in'') or direct the entities' trading decisions.\127\

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

    \126\ As noted in the Part 151 Aggregation Proposal, the

    condition barring the sharing of employees that control the owned

    entity's trading decisions would include a prohibition on sharing of

    the types of employees described in the aggregation petition

    (attorneys, accountants, risk managers, compliance and other mid-and

    back-office personnel), to the extent such employees participate in

    control of the trading decisions of the person or the owned entity.

    For further clarification, see previous discussion regarding the

    condition under proposed rule 150.4(b)(2)(i)(A) (conditioning

    aggregation relief on a demonstration that the person filing for

    disaggregation relief and the owned entity do not have knowledge of

    the trading decisions of the other, and discussing what constitutes

    ``knowledge'' for this purpose).

    \127\ In this respect, proposed rule 150.4(b)(2)(i)(D) would be

    consistent with the Commission's Interpretive Letter No. 92-15 (CCH

    ] 25,381), where an employee both oversaw the execution of orders

    for a commodity pool, as well as maintained delta neutral option

    positions in non-agricultural commodities for the proprietary

    account of an affiliate of the sponsor of the commodity pool. The

    Commission concluded that the use of clerical personnel who are dual

    employees of both affiliates would not require aggregation when the

    clerical personnel engage in ministerial activities and steps are

    taken to maintain independence, such as: (i) Limiting trading

    authority so that the personnel do not have responsibility for the

    two entities' activities in the same commodity; and (ii) separating

    the times at which the personnel conduct activities for the two

    entities.

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

    Proposed rule 150.4(b)(2)(i)(E) would condition aggregation relief

    on a demonstration that the person and the owned entity do not have

    risk management systems that permit the sharing of trades or trading

    strategies with the other. This condition would address concerns that

    risk management systems that permit the sharing of trades or trading

    strategies with each other present a significant risk of coordinated

    trading through the sharing of information.\128\ The Commission

    proposes that this criterion generally would not prohibit sharing of

    information to be used only for risk management and surveillance

    purposes, when such information is not used for trading purposes and

    not shared with employees that, as noted above, control, direct or

    participate in the entities' trading decisions. Thus, sharing with

    employees who use the information solely for risk management or

    compliance purposes would generally be permitted, even though those

    employees' risk management or compliance activities could be considered

    to have an ``influence'' on the entity's trading.

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

    \128\ The Commission remains concerned, as stated in the Part

    151 Aggregation Proposal and as noted above, that a trading system,

    as opposed to a risk management system, that is not separately

    developed from another system can subvert independence because such

    a system could apply the same or similar trading strategies even

    without the sharing of trading information.

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

    d. Proposed Notice Filing Requirement

    The Commission is proposing a notice filing requirement in proposed

    rule 150.4(c) that is similar to the criteria set forth in proposed

    rule 151.7(h)(1), with a modification to add an application procedure

    for ownership interests of more than 50 percent under proposed rule

    150.4(b)(3). The proposed rule contemplates that the filing under

    proposed rule 150.4(c)(1) would be made before the exemption from

    aggregation is needed, since the filing is a pre-requisite for

    obtaining the exemption. However, where a prior filing is impractical

    (such as where a person lacks information regarding a newly-acquired

    subsidiary's activities), the Commission proposes that the filing under

    proposed rule 150.4(c)(1) should be made as promptly as practicable.

    Even though a filing under proposed rule 150.4(c)(1) may be made

    after an ownership or equity interest is acquired, the Commission

    proposes that the exemption from aggregation would not be effective

    retroactively because the filing is a pre-requisite to the exemption.

    The Commission believes that retroactive application of such filings

    could result in administrative difficulty in monitoring the scope of

    exemptions from aggregation and negatively affect the Commission

    staff's surveillance efforts.

    Generally, the Commission proposes that entities could consolidate

    these filings in any efficient manner by, for example, discussing more

    than one owned entity in a single filing, so long as the scope of the

    filing is made clear.\129\ The Commission also wishes to emphasize that

    if an entity determines to no longer apply an exemption (or if an

    exemption is no longer available), the entity would be required to

    inform the Commission by making a filing under proposed rule 150.4(c)

    because this would constitute a material change to the prior filing. Of

    course, once an exemption no longer applies to an owned entity, the

    person would be required to subsequently aggregate the positions of the

    entity in question.

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

    \129\ In response to commenters on the Part 151 Aggregation

    Proposal, the Commission clarifies that section 8 of the CEA would

    apply to the information that the Commission may request under

    proposed rule 150.4(c), and sets out the extent to which such

    information will be treated confidentially.

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

    In order to implement an application procedure for ownership

    interests of more than 50 percent under proposed rule 150.4(b)(3), as

    noted above, the Commission is also proposing proposed rule

    150.4(c)(2), under which filings would not be effective until the

    Commission's finding that the person

    [[Page 68963]]

    has satisfied the conditions of proposed rule 150.4(b)(3).

    The Commission solicits comment as to all aspects of proposed rule

    150.4. Commenters are invited to address the potential effects and

    implications of the proposed rule as the scope of the position limits

    regime may change in the future. For example, what issues or concerns

    arising from the scope and the requirements of the disaggregation

    relief in the proposed rule would have to be addressed if the

    Commission were to adopt its proposal to establish speculative position

    limits for 28 exempt and agricultural commodity futures and option

    contracts, and physical commodity swaps that are ``economically

    equivalent'' to such contracts? \130\

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    \130\ See Position Limits for Derivatives (November 5, 2013).

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

    If the Commission were to adopt its proposal to establish position

    limits on physical commodity swaps, are there any implications with

    respect to the interplay between the disaggregation relief in the

    proposed rule and the Commission's other rules relating to swaps? For

    instance, the Commission understands that various corporate groups

    organize the swap activities of the affiliated entities within

    corporate groups in different ways. Some corporate groups centralize

    some or all swap activities in a particular affiliate, while in other

    groups the affiliates engage in swaps independently. Also, corporate

    groups may apply centralized risk management policies to varying

    degrees, which may affect how the affiliated entities in the group

    engage in swaps. What are the implications of the disaggregation relief

    in the proposed rule for the various ways that affiliated entities in

    corporate groups organize their swap activities? In considering the

    proposed rule, what other Commission rules should the Commission take

    into account and what are the implications of how other Commission

    rules may affect affiliated entities? Have corporate groups begun to

    organize their swap activities to comply with other Commission rules in

    ways that could be affected by the proposed rule? If so, what

    considerations should the Commission take into account in this regard?

    The Commission also solicits comment as to the appropriateness of

    the conditions for disaggregation relief in proposed rule 150.4(b), and

    whether relief should be available for persons that have a greater than

    50 percent ownership or equity interest in an owned entity. If such

    relief should be available, is it appropriate to condition such relief

    on the owned entity not being, and not being required to be,

    consolidated on the financial statements of the owner? Is financial

    consolidation a relevant consideration in this regard? Why or why not?

    For example, is financial consolidation a useful proxy for other

    characteristics that are relevant to the position limits regime, such

    as ownership and control?

    Regarding the condition in proposed rule 150.4(b)(3)(iii), is it

    clear when an individual board member is considered the

    ``representative'' of a person on the board of directors? Are there

    modifications to this condition that would help to identify which board

    members should be required to make the certification?

    e. Proposed Revisions To Clarify Regulations

    In connection with the proposed modifications to rule 150.4, the

    Commission has reviewed whether the text of existing regulation 150.4

    is easy to understand and apply. In this regard, the Commission notes

    that the existing regulation may be unclear, especially in terms of the

    relationship between the provisions of paragraphs (a) through (d) of

    the existing regulation and whether a particular paragraph is an

    exception to another. Also, as more different types of market

    participants have studied existing regulation 150.4 (and regulation

    151.7, which has similar provisions), both in connection with the Dodd-

    Frank Act and otherwise, questions have arisen about the application of

    the aggregation requirements to a wide variety of circumstances. The

    Commission believes it is important that the rules setting forth the

    aggregation requirements be clear in their application to both the

    circumstances in which they currently apply, and the various

    circumstances in which they may apply in the future. These textual

    modifications are not intended to effect any substantive change to the

    meaning of rule 150.4, and the Commission invites commenters to address

    whether any of these modifications change the meaning of the

    aggregation requirements in their particular circumstances.\131\

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

    \131\ The textual modifications proposed here relate to the

    Commission regulations currently in effect. The Commission notes

    that its proposal regarding position limits includes amendments to

    the text of certain Commission regulations. See Position Limits for

    Derivatives (November 5, 2013). If both of the proposals are

    adopted, conforming technical changes to reflect the interplay

    between the two amendments may be necessary.

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

    Therefore, the Commission is proposing to modify the text to

    clarify that paragraph (a) of rule 150.4 states the general requirement

    to aggregate positions a person may hold in various accounts, and

    paragraph (b) of the rule sets out the exemptions to the aggregation

    requirement that may apply. The Commission believes that this format

    clarifies that the exemptions in rule 150.4(b) are alternatives; that

    is, aggregation is not required to the extent that any of the

    exemptions in rule 150.4(b) may apply.

    In rule 150.4(b), the Commission is proposing text for rule

    150.4(b)(1) that is substantially similar to existing regulation

    150.4(c). The Commission believes that stating this provision as the

    first exemption will clarify that any person that is a limited partner,

    limited member, shareholder or other similar type of pool participant

    holding positions in which the person by power of attorney or otherwise

    directly or indirectly has a 10 percent or greater ownership or equity

    interest in a pooled account or positions may apply this exemption.

    That is, if the requirements of this exemption are satisfied with

    respect to a person, then the person need not determine if the

    requirements of the exemption in paragraph (b)(2) or (b)(3) are

    satisfied. The text of paragraphs (b)(2) and (b)(3), in turn, state

    that they apply to persons with an ownership or equity interest in an

    owned entity, other than an interest in a pooled account which is

    subject to paragraph (b)(1).

    Proposed rule 150.4(b)(1) states that for any person that is a

    limited partner, limited member, shareholder or other similar type of

    pool participant holding positions in which the person by power of

    attorney or otherwise directly or indirectly has a 10 percent or

    greater ownership or equity interest in a pooled account or positions,

    aggregation of the accounts or positions of the pool is not required,

    except as provided in paragraphs (b)(1)(i), (b)(1)(ii) or (b)(1)(iii).

    Although existing regulation 150.4(c) does not contain any explicit

    statement of this rule, the lack of an aggregation requirement in these

    circumstances is implicit in the existing regulation's statement that

    aggregation is required only in certain specified circumstances. Thus,

    proposed rule 150.4(b)(1)(i) states explicitly a principle that is

    implicit in the existing regulation.\132\ Paragraphs (b)(1)(i),

    (b)(1)(ii) and (b)(1)(iii) of proposed rule 150.4 set out the

    circumstances in which aggregation requirements apply; these

    circumstances are substantially similar to those covered by paragraphs

    [[Page 68964]]

    (c)(1), (c)(2) and (c)(3) of existing regulation 150.4, but the text of

    the rule has been modified to simplify the wording of the

    provisions.\133\

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

    \132\ This modification to the rule is not intended to effect a

    substantive change. Rather, it is intended to state explicitly a

    rule that the Commission has applied since at least 1979. See note

    100, above.

    \133\ The revised text also includes references to a ``limited

    member'' in addition to the references in the existing regulation to

    a limited partner in a pool.

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

    Paragraphs (b)(4) to (b)(8) of rule 150.4 set forth other

    exemptions that may apply in various circumstances. The exemption for

    certain accounts held by FCMs in paragraph (b)(4) is substantially the

    same as existing regulation 150.4(d), except that it has been rephrased

    in a form of a statement of when an exemption is available, instead of

    the statement in the existing regulation that the aggregation

    requirement applies unless certain conditions are met. Paragraph (b)(5)

    sets forth the exemption for accounts carried by an IAC that is

    substantially similar to existing regulation 150.3(a)(4). Paragraphs

    (b)(6), (b)(7) and (b)(8) set forth the exemptions for underwriting,

    broker-dealer activity and circumstances where laws restrict

    information sharing that are discussed in more detail above. Paragraph

    (b)(9) describes how higher-tier entities may apply an exemption

    pursuant to a notice filed by an owned entity.

    The Commission solicits comment as to whether the revised text of

    rule 150.4 is easy to understand and apply.

    D. Underwriting

    1. Part 151 Proposed Approach

    As noted above, regulation 151.7(g) includes an exemption from

    aggregation where an ownership interest is in an unsold allotment of

    securities. In the Part 151 Aggregation Proposal, the Commission noted

    that the ownership interest of a broker-dealer \134\ in an entity based

    on the ownership of securities acquired as part of reasonable activity

    in the normal course of business as a dealer is largely consistent with

    the ownership of an unsold allotment of securities covered by the

    underwriting exemption in regulation 151.7(g). In both circumstances,

    the ownership interest is likely transitory and not to hold for

    investment purposes. Accordingly, the Commission proposed to include an

    aggregation exemption in regulation 151.7(g) for such activity.\135\

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

    \134\ Broker-dealers are those persons registered as such with

    the SEC, see 15 U.S.C. 78o, or similarly registered with a foreign

    regulatory authority.

    \135\ The Commission specifically noted that this proposed

    exemption would not apply to registered broker-dealers that acquire

    an ownership interest in securities with the intent to hold for

    investment purposes.

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

    However, the Commission noted in the Part 151 Aggregation Proposal

    that this exemption would not have applied where a broker-dealer

    acquires more than a 50 percent ownership interest in another entity

    because such acquisition would not be consistent with holding a

    transitory interest for the purpose of market making and runs a higher

    risk of coordinated trading.\136\ Therefore, a broker-dealer that

    acquires a greater than 50 percent ownership interest in another entity

    would be required to aggregate the positions of that entity, in the

    absence of another aggregation exemption.

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

    \136\ The proposed rules would encompass within the proposed

    exemption a broker-dealer's ownership of securities in anticipation

    of demand or as part of routine life cycle events, if the activity

    was in the normal course of the person's business as a broker-

    dealer.

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

    The Commission requested comment on whether ownership of stock, by

    a broker-dealer registered with the SEC or similarly registered with a

    foreign regulatory authority, that is acquired as part of reasonable

    activity in the normal course of business as a dealer, without other

    ownership interests or indicia of control or concerted action, warrants

    aggregation.

    2. Commenters' Views

    FIA commented on the Part 151 Aggregation Proposal, saying that the

    underwriting exemption should not require that ownership be acquired

    ``as part of [the] reasonable activity'' of a broker-dealer, because

    the normal course requirement is sufficient and the additional

    requirement that the acquisition be part of reasonable activity creates

    uncertainty.\137\ FIA also said that broker-dealers should be able to

    use the underwriting exemption for any level of ownership, i.e., even a

    more than 50 percent ownership interest, or, alternatively, the

    ownership interests that a broker-dealer holds in its capacity as a

    broker-dealer should not be aggregated with ownership interests held by

    the broker-dealer or its affiliates in any other capacity.\138\

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

    \137\ CL-FIA.

    \138\ CL-FIA.

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

    3. Proposed Rule

    The Commission continues to believe that any acquisition by a

    broker-dealer of a greater than 50 percent ownership interest in an

    owned entity (other than in a distribution of securities directly by an

    issuer or through an underwriter) requires aggregation, and further

    relief from this requirement is not appropriate. For example, if a

    broker-dealer has a 49 percent ownership interest in an entity and then

    acquires a 2 percent ownership interest in the same entity in the

    normal course of the broker-dealer's activity, aggregation of the owned

    entity's positions should be required.

    On the other hand, the Commission is proposing an exemption from

    aggregation where an ownership interest is in an unsold allotment of

    securities in proposed rule 150.4(b)(7) that is essentially the same as

    the exemption in regulation 151.7(g). However, proposed rule

    150.4(b)(7) does not include the phrase ``as part of reasonable

    activity,'' as was suggested by a commenter on the Part 151 Aggregation

    Proposal, because the Commission proposes to interpret the phrase

    ``reasonable activity'' to be effectively synonymous with the phrase

    ``normal course of business'' in this context.

    The Commission solicits comment as to all aspects of proposed rule

    150.4(b)(7). In particular, the Commission solicits comment as to the

    appropriateness of the proposed treatment of ownership interests

    acquired in the normal course of the broker-dealer's activity.

    E. Independent Account Controller for Eligible Entities

    1. Part 151 Proposed Approach

    As noted above, regulation 150.3(a)(4) provides an eligible entity

    with an exemption from aggregation of the eligible entity's customer

    accounts that are managed and controlled by independent account

    controllers. The definition of eligible entity in regulation 150.1(d)

    includes ``the limited partner or shareholder in a commodity pool the

    operator of which is exempt from registration under Sec. 4.13 of this

    chapter. . . .'' However, with regard to a CPO that is exempt under

    regulation 4.13, the definition of an independent account controller in

    regulation 150.1(e)(5) only extends to ``a general partner of a

    commodity pool the operator of which is exempt from registration under

    Sec. 4.13 of this chapter.'' At the time the Commission expanded the

    IAC exemption to include regulation 4.13 commodity pools, market

    participants generally structured such pools as limited

    partnerships.\139\

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

    \139\ See 63 FR 38532.

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

    The Commission understands that today, not all regulation 4.13

    commodity pools are formed as partnerships. For example, regulation

    4.13 pools may be formed as limited liability companies and have

    managing members, not general partners. Accordingly, in the Part 151

    Aggregation Proposal, the Commission proposed to expand the definition

    of independent account controller to

    [[Page 68965]]

    include the managing member of a limited liability company, and to

    amend the definitions of eligible entity and independent account

    controller to specifically provide for regulation 4.13 commodity pools

    established as limited liability companies.

    2. Commenters' Views

    One commenter said that the independent account controller rule

    should be expanded to apply to any person with a role equivalent to a

    general partner in a limited partnership or managing member of a

    limited liability company, to accommodate various structures that are

    used for commodity pools in jurisdictions outside the U.S.\140\

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

    \140\ CL-AIMA.

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

    Another commenter addressed 4.13 pools more broadly, and said that

    the Commission's rules should treat ownership of 4.13 pools in the same

    way that the rules treat ownership of operating companies.\141\ In

    particular, this commenter said that the Commission should eliminate

    the requirement that the positions of a 4.13 pool be aggregated with

    the positions of any person that owns more than 25% of the 4.13

    pool.\142\

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

    \141\ CL-ABC.

    \142\ CL-ABC.

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

    3. Proposed Rule

    The Commission proposes to adopt rule 150.4(b)(5) to take the place

    of the existing IAC rule in regulation 150.3(a)(4), so that the IAC

    exemption is in the regulatory section providing for aggregation of

    positions. Proposed rule 150.4(b)(5) is substantially similar to

    existing regulation 150.3(a)(4) except that, in response to the

    commenters, the Commission proposes to modify it (and the related

    definitions in regulation 150.1) so that it could be applied with

    respect to any person with a role equivalent to a general partner in a

    limited liability partnership or a managing member of a limited

    liability company.

    Regarding the treatment of regulation 4.13 pools in a manner that

    is equivalent to the treatment of operating companies, the Commission

    believes that this is a matter that could be the subject of relief

    granted under CEA section 4a(a)(7).\143\ Persons wishing to seek such

    relief should apply to the Commission stating the particular facts and

    circumstances that justify the relief.

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

    \143\ Section 4a(a)(7) of the CEA provides authority to the

    Commission to grant relief from the position limits regime.

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

    The Commission solicits comment as to all aspects of the proposed

    rule 150.4(b)(5) and the related amendments to regulation 150.1. In

    particular, the Commission solicits comment as to the appropriateness

    of treating limited liability companies that are commodity pools in the

    same way as limited liability partnerships that are commodity pools.

    Commenters are invited to provide information regarding the

    considerations that determine whether commodity pools are, in practice,

    structured as limited liability companies or limited liability

    partnerships and whether there are any relevant differences in the two

    types of entities. Also, what are the facts and circumstances that

    commenters believe would justify relief under CEA section 4a(a)(7)?

    III. Related Matters

    A. Considerations of Costs and Benefits

    Section 15(a) of the CEA requires the Commission to consider the

    costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing certain orders. Section 15(a) further

    specifies that the costs and benefits shall be evaluated in light of

    the following 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. The Commission considers the costs and

    benefits resulting from its discretionary determinations with respect

    to the section 15(a) factors.

    On May 30, 2012, the Commission proposed, partially in response to

    a petition for interim relief from part 151's provision for the

    aggregation of positions across accounts,\144\ certain modifications to

    its policy for aggregation under the part 151 position limits regime

    (the ``Part 151 Aggregation Proposal''). In an order dated September

    28, 2012, the District Court for the District of Columbia vacated part

    151 of the Commission's regulations. The Commission is now proposing

    modifications to part 150 of the Commission's regulations that are

    substantially similar to the modifications proposed to part 151.

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

    \144\ A copy of the petition (the ``aggregation petition'') can

    be found on the Commission's Web site at www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgap011912.pdf. The

    aggregation petition was originally filed by the Working Group of

    Commercial Energy Firms; certain members of the group later

    reconstituted as the Commercial Energy Working Group. Both groups

    (hereinafter, collectively, the ``Working Groups'') presented one

    voice with respect to the aggregation petition.

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

    The Part 151 Aggregation Proposal provided the public with an

    opportunity to comment on the Commission's considerations of costs and

    benefits of the proposed rules. In the Part 151 Aggregation Proposal,

    the Commission explained its position that the proposed changes to the

    aggregation policy would, on net, lower costs for market participants

    without lessening the effectiveness of the Commission's position limits

    regime. The Commission requested comment on all aspects of its

    consideration of costs and benefits, including identification and

    assessment of any costs and benefits not discussed therein. In

    addition, the Commission requested that commenters provide data and any

    other information or statistics that they believe supports their

    positions with respect to the Commission's consideration of costs and

    benefits.

    The modifications to part 150 proposed herein reflect the

    Commission's consideration of the comments that were received on the

    proposed amendments to part 151. The Commission summarizes the proposed

    modifications to part 150 below, including those provisions proposed to

    be modified or amended in response to public comment on the Part 151

    Aggregation Proposal, describes expected costs and benefits of the

    proposed regulations, requests public comment on its considerations of

    costs and benefits, and considers the proposed regulations in light of

    the five factors outlined in Section 15(a).\145\

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

    \145\ The Commission notes that the opinions and beliefs

    expressed herein are preliminary assertions based on comments from

    previous releases, and are subject to change after consideration of

    any further comments. The Commission welcomes public comment on all

    aspects of this release in order to better inform its policy

    determinations.

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

    1. Background

    As discussed above, the Commission's historical approach to

    position limits generally includes three components: (1) The level of

    the limits, which set a threshold that restricts the number of

    speculative positions that a person may hold in the spot-month, in any

    individual month, and in all months combined, (2) an exemption for

    positions that constitute bona fide hedging transactions, and (3) rules

    to determine which accounts and positions a person must aggregate for

    the purpose of determining compliance with the position limit levels.

    The proposed rules address the third component of the Commission's

    position limits regime--aggregation--which is set out in regulation

    150.4. This regulation generally requires that

    [[Page 68966]]

    unless a particular exemption applies, a person must aggregate all

    positions for which that person: (1) Controls the trading decisions, or

    (2) has a 10 percent or greater ownership interest in an account or

    position; and in doing so the person must treat positions that are held

    by two or more persons pursuant to an express or implied agreement or

    understanding as if they were held by a single person.

    2. Part 151 Aggregation Proposal

    As noted above, the Commission received the aggregation petition on

    January 19, 2012.\146\ The aggregation petition requested interim

    relief under CEA section 4a(a)(7) from, among other things, part 151's

    provision for aggregation of positions across accounts. The Commission

    also received letters that were generally supportive of the aggregation

    petition. In addition, several commenters opined on the aggregation

    rules in connection with the Commission's request for comment on the

    spot-month position limits on cash-settled contracts established on an

    interim final basis in November 2011.\147\ As further discussed in the

    Part 151 Aggregation Proposal, the aggregation petition and the interim

    final regulation commenters asserted that the Commission should clarify

    regulation 151.7(i), which provides an exemption where the sharing of

    information would cause a violation of federal law, and expand the

    exemption to include circumstances in which the sharing of information

    would cause a violation of state or foreign law. In addition, the

    aggregation petition and commenters to the interim final regulation

    requested that the Commission create an aggregation exemption for owned

    non-financial entities. In this connection, some interim final

    regulation commenters argued that the Commission should only aggregate

    on the basis of control and not ownership. Finally, one interim final

    regulation commenter requested that the Commission expand the exemption

    provided in Sec. 151.7(g) for the ownership interests of broker-

    dealers connected with specific market-making activity.

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

    \146\ See note 18, supra.

    \147\ See Proposed Rules, 77 FR at 31769, fn. 24.

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

    As regards the violation-of-laws exemption in Sec. 151.7(i), the

    Part 151 Aggregation Proposal clarified that the exemption would apply

    where the sharing of information presents a ``reasonable risk'' of

    violating the applicable law(s), retained the requirement to submit an

    opinion of counsel, and expanded the violation-of-laws exemption to

    include state law and the law of foreign jurisdictions.

    Proposed rule 151.7(b)(1) in the Part 151 Aggregation Proposal

    provided that any person with an ownership or equity interest in an

    entity (financial or non-financial) of between 10 percent and 50

    percent (inclusive) may disaggregate the owned entity's positions upon

    demonstrating compliance with each of several specified indicia of

    independence. The proposed indicia were that such person and the owned

    entity: (1) Do not have knowledge of the trading decisions of the

    other; (2) trade pursuant to separately developed and independent

    trading systems; (3) have in place policies and procedures to preclude

    sharing knowledge of, gaining access to, or receiving data about,

    trades of the other; (4) do not share employees that control the

    trading decisions of the other; and (5) maintain a risk management

    system that does not allow the sharing of trade information or trading

    strategies between entities.

    The Commission also proposed to expand the exemption for the

    underwriting of securities in regulation 151.7(g) to include ownership

    interests acquired through the market-making activities of an

    affiliated broker dealer. The Part 151 Aggregation Proposal proposed to

    exempt from aggregation ownership interests acquired as part of a

    person's reasonable market-making activity in the normal course of

    business as a broker-dealer registered with the SEC or comparable

    registration in a foreign jurisdiction, so long as there is no other

    ownership interests or indicia of control or concerted action. The

    Commission said in the Part 151 Aggregation Proposal that this

    exemption would apply to ownership interests that are likely transitory

    and not for investment purposes.

    Proposed rule 151.7(j) in the Part 151 Aggregation Proposal

    extended filing relief to ``higher-tier'' entities--i.e., entities with

    an ownership interest in the entity that is itself the owner of an

    entity and the subject of a filing for relief from aggregation. As

    such, the proposed rule allowed higher-tier entities to rely on

    exemption notices filed by owned entities. The Part 151 Aggregation

    Proposal explained that such an exemption would reduce the burden of

    filing exemption notices by eliminating redundancies.

    The Commission also proposed in the Part 151 Aggregation Proposal

    to amend the IAC exemption in regulation 151.7(f), which includes

    commodity pools exempt from registration under Sec. 4.13 that are

    structured as limited partnerships, to also encompass commodity pools

    structured as limited liability companies.

    As discussed below, the Commission received comments on the Part

    151 Aggregation Proposal.\148\ The amendments now being proposed to

    regulation 150.4 reflect the Commission's consideration of the comments

    that were received on the Part 151 Aggregation Proposal. Thus, the

    discussion below covers the amendments in the Part 151 Aggregation

    Proposal and the comments on those proposed amendments.\149\ The

    Commission considers these comments, discusses the current proposed

    amendments to the aggregation provisions in Sec. 150.4, considers the

    costs and benefits of the current proposal, and evaluates the current

    proposal in light of the five enumerated factors of Section 15(a)(2) of

    the CEA.

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

    \148\ The written comments are available on the Commission's Web

    site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1208.

    \149\ For additional background on part 150 and part 151 and the

    existing provisions for aggregation, see the Part 151 Aggregation

    Proposal.

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

    3. Comments on the Part 151 Aggregation Proposal

    The Commission received numerous comments regarding the proposed

    changes to the aggregation policy in Sec. 151.7. This section

    summarizes the issues raised in those comments relevant to the

    Commission's considerations of costs and benefits; a more thorough

    discussion of comments relating to each provision of the Part 151

    Aggregation Proposal can be found in section II of this release.

    The proposed owned-entity exemption and its attendant indicia of

    independence was a topic in the majority of comments. Several

    commenters requested the Commission extend the owned entity exemption

    to a person with a greater than 50 percent ownership in the owned

    entity, so long as the person and the owned entity can both demonstrate

    independence.\150\ These commenters generally objected to the 50

    percent ceiling on the grounds that ownership above 50 percent is

    potentially indicative of control but does not equate to control, and

    that ownership of an entity regardless of control over that entity is

    not an appropriate measure to determine aggregation.\151\ Some

    commenters asserted that the ``bright-line test'' of 50

    [[Page 68967]]

    percent ownership is arbitrary.\152\ Another claimed that passive

    ownership poses little risk of coordinated trading and that requiring

    aggregation even when management and trading are independent inhibits

    legitimate commercial activity.\153\ Some commenters expressed concern

    that the aggregation standards may require information sharing and

    coordination between entities that had previously constructed barriers

    to preclude such activity, and that relaxing those barriers to comply

    with aggregation standards may create antitrust concerns.\154\

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

    \150\ CL-ABC, CL-AGA, CL-AIMA, CL-API, CL-Barclays, CL-CMC, CL-

    COPE, CL-EEI, CL-FIA, CL-Iberdrola, CL-ISDA/SIFMA, CL-MFA, CL-WGCEF.

    \151\ CL-AGA, CL-MFA, CL-PEGCC, CL-WGCEF, CL-API, CL-Atmos, CL-

    CMC, CL-Chamber, CL-EEI.

    \152\ CL-AGA, CL-API, CL-COPE.

    \153\ CL-FIA.

    \154\ CL-WGCEF, CL-CMC, CL-COPE.

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

    Conversely, other commenters expressed support for the Commission's

    proposed 50 percent ceiling as reasonable and appropriate.\155\ Two

    commenters suggested that the Commission should not expand the

    exemption for owned entities.\156\

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

    \155\ CL-Better Markets, Chris Barnard on June 21, 2012 (``CL-

    Barnard'').

    \156\ CL-IAMAW, CL-IATP.

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

    Commenters presented several alternatives to the 50 percent

    threshold. Some commenters suggested that ownership over 50 percent

    should create a ``rebuttable presumption,'' requiring entities to

    demonstrate why ownership above that threshold does not result in

    trading control or information sharing.\157\ Others supported

    disaggregation relief for an entity with greater than 50 percent

    ownership only in circumstances in which the Commission had

    specifically approved a request for relief.\158\ One commenter

    requested an exemption specifically for private equity investment funds

    that meet certain criteria.\159\ Another requested an exemption for

    pension plans to free them from aggregating a plan sponsor's corporate

    positions with the plan's positions given that pension plan managers

    are subject to fiduciary responsibilities to the plans they

    manage.\160\ In lieu of a new rule on owned entities, one commenter

    urged the Commission to rely on Form 40 reports and raise the

    presumptive control standard to 50 percent instead of 10 percent, thus

    never requiring aggregation below 50 percent ownership.\161\

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

    \157\ CL-ISDA/SIFMA, CL-WGCEF, CL-PEGCC.

    \158\ CL-AIMA, CL-API, CL-Atmos, CL-MFA.

    \159\ CL-PEGCC.

    \160\ CL-ABC.

    \161\ CL-Barclays.

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

    Commenters also expressed concerns about the costs associated with

    the owned-entity exemption--in particular, the direct and indirect

    costs of the 50 percent ``ceiling'' for disaggregation imposed by Sec.

    151.7(b)(1)(ii). Several noted that developing a system to coordinate

    trading among aggregated entities will be costly for market

    participants.\162\ One commenter said it would be costly to implement a

    system to monitor when ownership of an entity exceeds 10 percent.\163\

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

    \162\ CL-API, CL-Chamber, CL-CMC.

    \163\ CL-Barclays.

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

    More specifically, two commenters said that the rules would require

    entities that are currently operated and managed separately, but who

    have common upstream ownership greater than 50 percent, to implement

    information sharing systems solely to comply with the Commission's

    position limits regime. These commenters noted that these systems would

    be costly to implement without providing a corresponding benefit

    because these entities are not currently operating in concert.\164\

    Similarly, another commenter said that aggregation is impractical for

    commercial entities engaged in independent operations under common

    ownership and may put such entities at a competitive disadvantage.\165\

    Another commenter noted that automatic aggregation at 50 percent would

    require sophisticated information controls and expensive trade

    monitoring systems.\166\

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

    \164\ CL-COPE, CL-Iberdrola.

    \165\ CL-Chamber.

    \166\ CL-WGCEF.

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

    Commenters also stated concerns about costs of complying with the

    50 percent ``ceiling'' for private funds and pension plans. One

    commenter noted that private funds would need entirely new (and costly)

    programs to monitor, allocate, and coordinate trading across portfolio

    companies though the fund company was not previously involved in

    trading.\167\ Another commenter had the same concern regarding the

    costs incurred by pension plans, which do not currently collect

    position or trading information from owned collective investment

    vehicles, to monitor positions in real-time across potentially hundreds

    of these vehicles.\168\

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

    \167\ CL-PEGCC.

    \168\ CL-ABC.

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

    Commenters were also concerned that the automatic aggregation at 50

    percent would lead to indirect costs by unnecessarily limiting hedging,

    because commonly owned companies will have to remain below position

    limits unless a bona fide hedging exemption is available.\169\

    Commenters were also concerned about potential impacts on investment in

    other entities; one opined that the rules would discourage investment

    because owners would have to be more deeply involved in the operations

    of owned companies, including by overseeing trading.\170\ One commenter

    said that automatic aggregation at 50 percent would hinder management

    and could limit joint-venture formation.\171\

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

    \169\ CL-API, CL-Chamber, CL-PEGCC.

    \170\ CL-CMC, CL-Chamber.

    \171\ CL-WGCEF.

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

    Commenters also weighed in on the other aspects of the Commission's

    proposed rules. Regarding the filing of exemptions, one commenter noted

    that the Commission's estimated costs of aggregation filings appeared

    to be correct. This commenter also disputed the validity of the Working

    Group's ``fear of vast new information infrastructure'' and said that

    entities affected by the provisions will have the resources to apply

    for and receive the proposed exemptions from aggregation.\172\

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

    \172\ CL-IATP.

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

    Regarding the violation-of-laws exemption, several commenters

    generally expressed support for the ``reasonable risk'' of violation

    standard,\173\ and the proposed exemption for federal, state, or

    foreign laws.\174\ One commenter expressed that the exemption should be

    limited to violations of federal law, and that exemption from

    aggregation for potential violations is impractical and should not be

    allowed.\175\ Further, some commenters opined that a memorandum of law,

    prepared by internal, as opposed to outside, counsel, should suffice,

    thereby mitigating outside legal fees.\176\ Another commenter noted it

    had no objection to the proposed opinion of counsel requirement,\177\

    while others expressed support for the requirement as proposed, on

    grounds that aggregation relief should be available in only the most

    clear-cut cases.\178\

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

    \173\ CL-EEI, CL-FIA.

    \174\ CL-ISDA/SIFMA.

    \175\ CL-IATP.

    \176\ CL-API, CL-EEI, CL-FIA, CL-ISDA/SIFMA, CL-PEGCC, CL-WGCEF.

    \177\ CL-Atmos.

    \178\ CL-Better Markets, CL-IATP.

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

    Some commenters asserted that aggregation should be applied on a

    pro-rata basis to avoid the double-counting of positions and a

    potential limit on trading that may affect liquidity.\179\ One

    commenter said that the aggregation requirements would cause pension

    plans to reconsider investing in collective investment vehicles. This

    commenter also maintained that the current federal position limits

    regime has had little effect on commodity pools

    [[Page 68968]]

    because position limits were imposed on only nine agricultural

    products.\180\

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

    \179\ CL-ABC, CL-Barclays, CL-FIA.

    \180\ CL-ABC.

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

    One commenter noted that the Part 151 Aggregation Proposal to allow

    higher-tier entities to rely on filings by subsidiaries strikes an

    appropriate cost balance.\181\ Another commenter expressed support for

    the alternative of a single aggregate notice filing, that filing should

    be effective retroactively, and that sister affiliates of the filing

    entity should be able to rely on the filing.\182\

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

    \181\ CL-IATP.

    \182\ CL-FIA.

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

    4. The Proposed Amendments to Part 150

    a. Aggregation of Positions in Owned Entities

    The Commission is proposing two exemptions concerning the

    aggregation of positions in owned entities. First, as proposed in the

    Part 151 Aggregation Proposal, the Commission is proposing to allow a

    person to disaggregate the positions of an owned entity provided such

    person demonstrates compliance with the conditions of the exemption.

    Such conditions include ownership of less that 50 percent of the owned

    entity, independent trading systems, prohibition of the sharing of

    trading knowledge between the entities, and the other criteria found in

    proposed regulations 150.4(b)(2)(i)(A-E). Second, the Commission is

    proposing to allow persons with a greater than 50 percent ownership

    interest to apply for relief in accordance with proposed regulation

    150.4(b)(3), subject to the conditions of that section and the approval

    of the Commission or its delegate.

    As noted above and in the Part 151 Aggregation Proposal, the

    Commission's general policy on aggregation is derived from CEA Section

    4a(a)(1), which directs the Commission to aggregate positions based on

    separate considerations of ownership, control, or persons acting

    pursuant to an express or implied agreement. The Commission's

    historical approach to its statutory aggregation obligation has thus

    included both ownership and control factors in a manner designed to

    prevent evasion of prescribed position limits. The Commission continues

    to believe that ownership of an entity is an appropriate criterion for

    aggregation of that entity's positions.

    Some commenters on the Part 151 Aggregation Proposal opposed the

    requirement that a person own 50 percent or less of another entity in

    order to obtain relief from the aggregation requirement, asserting that

    an ownership stake of greater than 50 percent does not necessarily

    indicate control. However, as explained in part II.B.3. above, this

    requirement of 50 percent or less ownership is in line with the

    language in CEA section 4a, the legislative history of that section,

    subsequent regulatory developments, and the Commission's historical

    practices in this regard. Moreover, the ability for persons owning 50

    percent or less of another entity (subject to establishing the indicia

    of independence) to disaggregate the positions of the owned entity

    would substantially liberalize the Commission's approach to aggregation

    for position limits. The Commission does not consider this ceiling on

    disaggregation to be arbitrary; rather, ownership above 50 percent of

    an entity is a level at which there is a strong likelihood that a

    person would be able to use its ownership interest to directly or

    indirectly influence the owned entity's accounts or positions. As noted

    above, 50 percent ownership is a standard used by other government

    agencies and reflects a general understanding that greater than 50

    percent ownership level poses substantial potential for direct or

    indirect control over an owned entity. Accordingly, the Commission

    views the 50 percent ceiling to be a reasonable outer limit in most

    cases on the general availability of aggregation exemptions, even for

    passively-owned entities.

    However, the Commission recognizes that in certain specific

    circumstances it may be appropriate to allow exemptions from

    aggregation of an owned entity's positions, even at greater than 50

    percent ownership. In particular, the Commission notes that while, in

    many instances, ownership of more than 50 percent of an entity requires

    the owner to consolidate the financial statements of the owned entity,

    consolidation is not always required. Thus, as discussed in more detail

    in section II.B3.b of this release, the proposed amendments to part 150

    include a provision for a person with more than 50 percent ownership of

    an owned entity, but that does not consolidate that entity in its

    financial statements, to apply to the Commission for aggregation relief

    on a case-by-case basis, provided the applicant can demonstrate

    adherence to stringent indicia of independence. Notwithstanding that it

    represents a relaxation from historical practice, the Commission

    believes that allowing case-by-case applications for disaggregation

    addresses commenters' concerns without jeopardizing the effectiveness

    of the Commission's position limits regime.

    The Commission expects no material negative effects on market

    quality as a result of the proposed relief from aggregation that would

    be available to persons that hold ownership interests in other

    entities. The Commission does not believe that a material reduction in

    hedging will result from the proposed requirement that, to obtain

    relief from aggregation based on notice only, a person must own 50

    percent or less of an entity, because hedge exemptions would be

    available to any entity regardless of position aggregation. In

    addition, the proposed aggregation exemptions are more permissive than

    the 10 percent threshold currently applied. Impacts from the proposed

    regulations on investment activity where the investor desires a passive

    interest should also be minor, as these proposed regulations permit a

    passive investor to have a larger ownership interest and still claim an

    exemption from aggregation. As noted above, prior rules required

    aggregation at a 10 percent ownership level, so these proposed

    regulations allowing for relief from aggregation at higher ownership

    levels should lower the overall impact of aggregation on market quality

    factors.

    The Commission requests comment on its proposed amendments to

    regulation 150.4. Are there other potential impacts on market quality

    factors that the Commission should consider? What costs and benefits

    may attend the proposed owned entity exemptions in proposed regulations

    150.4(b)(2) and 150.4(b)(3) that the Commission should consider?

    b. Consideration of Alternative Approaches to Aggregation of Positions

    in Owned Entities

    The Commission believes that the approach reflected in these

    proposed regulations--a bright-line ceiling on the availability of

    notice relief from aggregation at 50 percent ownership, with the

    potential for case-by-case relief in appropriate circumstances--is

    preferable to the various alternatives suggested by commenters for a

    variety of reasons.

    Several commenters to the Part 151 Aggregation Proposal suggested

    that the aggregation requirements should be loosened further than was

    proposed by allowing persons with a more than 50 percent ownership

    interest in another entity to obtain relief from aggregation by

    demonstrating independent trading by the two entities. While this

    approach would make relief from the aggregation requirements available

    to more entities in more different situations, the

    [[Page 68969]]

    Commission believes, as noted above, that CEA Section 4a(a)(1) requires

    the aggregation of positions of an owned entity and that a 50 percent

    ownership interest is a reasonable indicator that a person is the owner

    of an entity and therefore aggregation should be required. The

    Commission notes that the proposed amendments to regulation 150.4 would

    allow an entity with a more than 50 percent ownership interest in

    another entity to apply for relief from the aggregation requirement on

    a case-by-case basis if it meets the other conditions in regulation

    150.4(b)(3). Through an exemption application, such entities may be

    able to rebut the presumption that greater than 50 percent ownership

    results in trading control or information sharing; however, the

    Commission does not believe it is appropriate to grant such entities a

    broader exemption based only on a notice filing, because of the

    importance of the ownership standard in the statute as described above.

    The Commission has not proposed the commenters' alternative because,

    while to loosen the standards as requested might lower immediate

    compliance burdens, the Commission believes it would also lessen the

    effectiveness of the position limits regime.

    Another commenter on the Part 151 Aggregation Proposal urged that

    the Commission not require aggregation of positions and instead rely on

    information reported on Form 40. However, the Commission notes that not

    necessarily all subsidiaries file those reports, and in any case the

    Commission believes that effective and efficient compliance with

    position limit regulations, including compliance with aggregation

    requirements, is better served when it is primarily the responsibility

    of each market participant. The Commission believes that each entity

    can track its own compliance more efficiently compared to the

    Commission tracking the compliance of all the market participants

    involved; thus, the Commission does not endorse the shifting of the

    compliance burden from large traders to the Commission. For these

    reasons, the Commission believes that this proposed alternative does

    not have advantages that would justify its acceptance, and instead it

    could potentially impede compliance with the position limits regime.

    The Commission believes that aggregation on a pro-rata basis, as

    suggested by some commenters, would be administratively burdensome for

    both owners of financial interests and the Commission. For example,

    since the level of financial interest in a particular company may

    change over time, it would be burdensome to determine and monitor the

    appropriate pro rata allocation on a daily basis. Moreover, a pro rata

    approach would be inconsistent with the Commission's historical

    requirement of aggregation of all the relevant positions of owned

    entities, absent an exemption. This is consistent with the view that a

    holder of a significant ownership interest in another entity may have

    the ability to influence all the trading decisions of that entity in

    which such ownership interest is held. For these reasons, the

    Commission declines to propose amending the policy in Sec. 150.4 to

    require a pro-rata aggregation of positions.

    c. Other Sec. 150.4 Exemptive Relief

    The Commission is proposing the violation-of-laws exemption largely

    as previously adopted in part 151 with the proposed changes in the Part

    151 Aggregation Proposal, with one amendment. The Commission has

    proposed the alternative posed by commenters to allow a memorandum of

    law, which can be prepared by internal counsel, to satisfy the

    requirement that the applicant explain the potential for a violation of

    law. This requirement is intended to provide the Commission with the

    ability to review the legal basis for the asserted regulatory

    impediment to the sharing of information, particularly where the

    asserted impediment arises from laws and/or regulations that the

    Commission does not directly administer; to consult with other federal

    regulators as to the accuracy of the opinion; and to coordinate the

    development of rules surrounding information sharing and aggregation

    across accounts in the future. The Commission believes that a

    memorandum of law prepared by internal counsel could provide the

    information and legal analysis to accomplish these goals, and a formal

    opinion of counsel is not required. Thus, the proposed amendments to

    part 150 include the requirement suggested by commenters on the Part

    151 Aggregation Proposal.

    The Commission requests comment as to the costs and benefits of

    proposed rule 150.4(b)(8). In particular, the Commission requests

    comment as to the relative costs and benefits of requiring a written

    memorandum of law, rather than an opinion of counsel, regarding the

    reasonable risk of a violation of law.

    Regarding higher-tier entities, the Commission is proposing

    regulation 150.4(b)(9), which is identical to previously proposed

    regulation 151.7(j). The exemption in proposed regulation 150.4(b)(9)

    would allow higher-tier entities to rely on exemption notices filed by

    the owned entity, with respect to the accounts or positions

    specifically identified in the notice. In response to the suggestion of

    one Part 151 Aggregation Proposal commenter that aggregate notice

    filings should be permitted, the Commission notes, as discussed above,

    that entities would be able to utilize the exemption in the manner most

    efficient for their enterprise. However, the Commission is not

    persuaded by the commenter's assertion that the filing should be

    permitted to be effective retroactively, because retroactive

    application would result in administrative difficulty in monitoring the

    scope of exemptions from aggregation and negatively affect the

    Commission staff's surveillance efforts.

    The Commission is also proposing exemptions for underwriting

    activity in proposed regulation 150.4(b)(6) and for broker dealer

    activity in proposed regulation 150.4(b)(7). The Commission believes

    that such activity may present less of a risk of coordinated trading

    because in both circumstances, the ownership interest is likely

    transitory and not held for investment purposes.

    Finally, consistent with the approach taken in 151.7(d), proposed

    rule 150.4(d) will require aggregation of investments in accounts with

    substantially identical trading strategies.

    5. Costs and Benefits

    In the Part 151 Aggregation Proposal, the Commission stated its

    goal in proposing to amend the aggregation provisions of part 151:

    It is the Commission's goal that this proposal uphold part 151's

    regulatory aims without diminishing its effectiveness. In so doing,

    the Commission adheres to its belief that aggregation represents a

    key element to prevent evasion of prescribed position limits and

    that its historical approach towards aggregation--one that

    appropriately blends consideration of ownership and control

    indicia--remains sound.'' \183\

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

    \183\ 77 FR 31767 at 31779.

    Similarly, in proposing these amendments to part 150, the Commission

    aims to achieve an appropriate balance between reducing costs for

    market participants and maintaining the effectiveness of part 150's

    regulatory objectives. The Commission believes that the regulations

    proposed herein would contribute to that goal by maintaining the

    Commission's historical approach to aggregation while simultaneously

    updating that approach with thoughtful exemptions that relieve the

    burdens of

    [[Page 68970]]

    aggregation for those market participants who can demonstrate

    compliance with certain criteria and who choose to avail themselves of

    the exemptions--without undermining the effectiveness of the

    Commission's position limits regime.

    In adopting the now-vacated part 151, the Commission noted that the

    amendments to regulation 151.7 largely tracked regulation 150.4 and

    therefore reflected continuity in the position limits regime. In this

    release, the Commission is proposing to provide the same exemptions

    that it had provided in regulation 151.7, along with the additional

    exemptions proposed in the Part 151 Aggregation Proposal, with some

    changes to reflect the views of commenters on that release.\184\

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

    \184\ In regulation 151.7, the Commission added a requirement

    that accounts trading pursuant to identical trading strategies be

    aggregated. The Commission also provided exemptions for the

    underwriters of securities and for instances in which the sharing of

    information between persons would cause either person to violate

    federal law or regulations adopted thereunder. The Commission

    proposed in the Part 151 Aggregation Proposal to extend the

    violation-of-laws exemption to include state law and the laws of a

    foreign jurisdiction; to include an exemption for broker-dealers

    engaged in market-making activity; to allow higher-tier entities to

    file notices on behalf of lower-tier entities; to expand the

    applicability of the IAC exemption to include limited liability

    companies; and to provide a limited exemption for entities owning

    greater than 10 but less than 50 percent of another entity.

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

    Using existing part 150 as the standard for comparison, the

    Commission will consider the incremental costs and benefits that arise

    from these proposed amendments. That is, if these proposed regulations

    are not adopted, the aggregation standards that would apply would be

    those described in regulation 150.4 as it currently exists.

    Although the Commission anticipates certain costs as a result of

    the proposed regulations--including a greater number of entities

    preparing and filing notices and memoranda of law, among other costs,

    since the availability of relief from aggregation has been expanded--

    the Commission believes that the regulations proposed herein, on a net

    basis, would cause market participants that use the exemptions in the

    regulations to incur a smaller burden as compared to the burden they

    would have incurred under regulation 150.4.

    a. Costs

    There are a myriad of ways a market participant could conceivably

    ensure proper compliance with the proposed amendments to regulation

    150.4, depending on the particular circumstances of each market

    participant. In general, however, the Commission anticipates that

    entities who wish to take advantage of the exemptions in proposed

    regulation 150.4 will incur direct costs associated with the following:

    (1) Developing a system for aggregating positions across owned

    entities; (2) initially determining which owned entities, other

    persons, or transactions qualify for any of the exemptions in

    regulation 150.4; (3) developing and maintaining some system of

    determining the scope of such exemptions over time; (4) potentially

    amending current operational structures to achieve eligibility for such

    exemptions; and (5) preparing and filing notices of exemption with the

    Commission, including memoranda of law if claiming the violation-of-

    laws exemption.\185\

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

    \185\ The Commission notes that direct costs associated with how

    a particular entity aggregates its positions would be dependent upon

    that entity's individual ownership structure, how and why the entity

    chooses to avail themselves of any particular exemption, and the

    methods employed by the entity to ensure compliance. Thus, as noted

    in the Part 151 Aggregation Proposal, costs relating to this rule

    are highly entity-specific; actual costs may be higher or lower than

    the Commission can anticipate accurately.

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

    To a large extent, market participants have incurred many of these

    costs to comply with existing regulation 150.4. For example, market

    participants that are affected by the existing aggregation requirement

    should already have a system in place for aggregating positions across

    owned entities. This rulemaking does not increase the costs of

    complying with the basic aggregation requirements of part 150, and in

    fact may decrease those costs by providing for relief from the

    aggregation requirements in certain situations. Because the Commission

    and DCMs generally have required aggregation of positions starting at a

    10 percent ownership threshold under the current regulatory

    requirements of part 150 and the acceptable practice found in the prior

    version of part 38, the Commission expects that market participants

    active on DCMs have developed systems of aggregating positions across

    owned entities.\186\

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

    \186\ The 10 percent threshold has been in place for the nine

    agricultural contracts with federal limits for decades, and for

    other contracts where limits were imposed by DCMs and enforced by

    the Commission. See supra, note 39 (citing to the statement of

    policy on aggregation issued in 1979, where the Commission codified

    its view, that, except in certain limited circumstances, a financial

    interest in an account at or above 10 percent ``will constitute the

    trader as an account owner for aggregation purposes.'' 44 FR 33839,

    33843, June 13, 1979).

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

    Thus, the main direct costs associated with the proposed amendments

    to regulation 150.4, relative to the standard of existing

    regulation150.4, would be those incurred by entities as they determine

    whether they may be eligible for the proposed exemptions, and as they

    make subsequent filings required by the exemptions. For example, the

    Commission recognizes that there may be costs to market participants to

    adapt their systems in order to allow such systems to be used to

    determine whether persons qualify for the exemptions from the

    aggregation requirement proposed herein. Some entities may also incur

    direct costs to modify existing operational procedures--such as

    firewalls and reporting schemes--in order to be eligible to claim an

    exemption.

    The Commission does not believe that these proposed regulations

    would result in material indirect costs to market participants or the

    public. For market participants, these proposed regulations provide for

    relief in certain circumstances from the requirement to aggregate

    positions. For the public, the Commission believes that these proposed

    regulations appropriately balance the need for exemptions from

    aggregation in certain circumstances with the public interest in

    maintaining the effectiveness of the Commission's position limits

    regime.

    The direct costs of the proposed regulations are impracticable to

    quantify in the aggregate because such costs are heavily dependent on

    the characteristics of each entity's current systems, its corporate

    structure, its use of derivatives, the specific modifications it would

    implement in order to qualify for an exemption, and other

    circumstances. However, the Commission believes that market

    participants would choose to incur the costs of qualifying for and

    using the exemptions in the proposed regulations only if doing so is

    less costly than complying with the position limits. Thus, by providing

    these market participants with a lower cost alternative (i.e.,

    qualifying for and using the exemptions) the proposed regulations may

    ease the overall compliance burden resulting from position limits, for

    it is reasonable to assume that no entity will elect the exemption if

    the benefits of doing so do not justify the costs. Accordingly, the

    Commission anticipates that notwithstanding the additional costs of

    determining eligibility and filing exemptions, the net result of the

    proposed rules for impacted market participants would be a reduction in

    costs as compared to the current standard in regulation 150.4.

    In the Part 151 Aggregation Proposal, the Commission requested

    ``that commenters submit data from which the Commission can consider

    and quantify the costs of the proposed rules'' because it recognized

    that ``costs associated with

    [[Page 68971]]

    the aggregation of positions are highly variable and entity-specific.''

    No commenter on that rule provided data, leaving the Commission without

    additional data or another basis to quantify the incremental direct

    costs to determine eligibility and file for exemptions beyond those

    previously estimated by the Commission.

    One commenter asserted that the compliance with the rules would

    cost in excess of the $5.9 million estimate stated in the Part 151

    Aggregation Proposal; however, the Commission notes that this comment

    relates to an estimate of costs relating to now-vacated regulation

    151.7 and not the costs relating to the proposed rules in this release.

    Another commenter, without providing estimates, described a list of

    costs that could be incurred by each affected entity, including: (1)

    Evaluating its business structure and determine whether or not it

    qualifies for disaggregation relief; (2) planning for being compelled

    to aggregate should corporate structure change; (3) designing, testing,

    and implementing systems to aggregate positions across multiple

    entities across jurisdictions to ensure intraday compliance with

    position limits; and (4) incurring the ``as yet unknown and ongoing

    cost of complying'' with the proposed rules. The Commission again notes

    that entities who have been transacting in futures markets have been

    subject to these aggregation requirements for decades, and should have

    means of aggregating positions across multiple owned entities.

    Some of the costs mentioned above likely relate to the imposition

    of the Commission's aggregation provision on swaps contracts as well as

    on the additional contract markets that would have been subject to

    federal position limits under the now-vacated part 151. Although part

    151 is no longer in effect, the Commission has proposed, in accordance

    with the Dodd-Frank Act revisions to CEA section 4a, amendments to part

    150 that would, among other things: expand the number of contract

    markets subject to federal position limits; impose speculative limits

    on swaps contracts; and require exchanges to conform their aggregation

    policies to the Commission's aggregation policy in Sec. 150.4.\187\

    That proposed rulemaking thus may have significant implications for the

    Commission's considerations of costs and benefits of the instant

    proposal.

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

    \187\ See Position Limits for Derivatives (November 5, 2013).

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

    Should that rule be adopted as proposed, the aggregation policies

    proposed herein would apply on a federal level to commodity derivative

    contracts, including swaps, based on an additional 19 commodities. This

    expansion may create additional compliance costs for futures market

    participants, who would have to expand current procedures for

    aggregating futures positions in order to include swaps positions, as

    well as for swaps market participants, who would be required to develop

    a system to comply with aggregation policies or expand already existing

    policies and procedures to incorporate the aggregation rules. Further,

    should the other proposed rulemaking be adopted as proposed, exchanges

    would be required to conform their aggregation policies to the

    Commission's aggregation policy. As such, all contracts with

    speculative position limits, including exempt commodity contracts,

    would utilize the Commission's aggregation policy, including the

    amendments to that policy proposed in this rulemaking.

    Until and unless that proposal is finalized by the Commission, part

    150 applies to only the nine contracts enumerated in current Sec.

    150.2; in that case, the Commission believes that many of the costs

    described by commenters would be substantially less than previously

    estimated. The Commission requests that commenters submit data from

    which the Commission can quantify the costs of the proposed rules

    amending Sec. 150.4. The Commission also requests that commenters

    provide data that would help the Commission to compare the potential

    cost implications of the instant proposal in the event that the other

    amendments to part 150 are adopted to the potential cost implications

    in the event that they are not.

    The Commission understands that the additional exemptions proposed

    herein may create additional costs to file the proper exemptive notices

    in accordance with regulations 150.4(c) and 150.4(d). However, the

    exemptions are elective, so no entity is required to make this filing

    if that entity determines the costs of doing so do not justify the

    potential benefit resulting from the exemption. Thus, the Commission

    does not anticipate the costs of obtaining any of the exemptions to be

    overly burdensome. Nor does the Commission anticipate the costs would

    be so great as to discourage entities from utilizing available

    exemptions, as applicable.

    In accordance with the Paperwork Reduction Act (PRA) the Commission

    has estimated the costs of the paperwork required to claim the proposed

    exemptions. As stated in the PRA section of this release, the

    Commission estimates that 240 entities will submit a total of 340

    responses per year and incur a total burden of 7,100 labor hours at a

    cost of approximately $852,000 annually in order to claim exemptive

    relief under regulation 150.4.\188\ This burden includes a recounting

    of the estimates included in the final regulations promulgating now

    vacated part 151, as those exemptions are being re-proposed in part

    150; however, the estimates have been reduced from that rulemaking

    because of the relatively smaller sphere of impact for part 150 as

    compared to part 151. That is, as part 151 extended federal position

    limits to swap contracts, the impact of that rule was broader than the

    impact anticipated for the proposed regulations herein. Should the

    proposed amendments to other sections of part 150 be adopted, the

    Commission anticipates the PRA burden would increase accordingly.

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

    \188\ See Section III.B of this release for a more detailed

    summary of the Commission's PRA burden estimates.

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

    The Commission requests comment on its consideration of the costs

    imposed by the proposed regulations. Are there other direct or indirect

    costs that the Commissions should consider? Has the Commission

    accurately characterized the nature of the costs to be incurred?

    Commenters are specifically encouraged to submit both qualitative and

    quantitative estimates of the potential costs associated with the

    proposed changes to Sec. 150.4, as well as data or other information

    to support such estimates.

    b. Benefits

    As discussed above, the Commission's goal in proposing amendments

    to its aggregation policy in regulation 151.7 was to reduce costs for

    market participants without jeopardizing the effectiveness of its

    aggregation policy and by extension its position limits regime.

    Similarly, the Commission believes that the proposed amendments to

    regulation 150.4 would help to realize that goal, essentially

    benefiting both market participants (through lower costs) and the

    market at large (through an effective position limits regime).

    The Commission continues to view aggregation as an essential part

    of its position limits regime. The proposed regulations include

    exemptions from the aggregation policy, the purpose of which is to

    prevent evasion of position limits through coordinated trading. The

    Commission believes that because the proposed exemptions would require

    demonstration of eligibility and qualification for an entity to take

    advantage of them, only those entities

    [[Page 68972]]

    whose activities impose a lesser risk of coordinated trading would be

    exempted from the aggregation requirements. In this way, the Commission

    believes that the exemptions that would be available through these

    proposed regulations would not inhibit the effectiveness of the

    Commission's aggregation policy in particular or position limits regime

    in general.

    However, for those entities who represent a lesser risk of

    coordinated trading--as demonstrated by their eligibility to obtain an

    applicable exemption--the proposed rule represents a benefit in the

    form of lower costs of complying with the Commission's position limits

    regime while preserving the important protections of the existing

    aggregation policy. Based on the comments received on the part 151

    Aggregation Proposal, the Commission has attempted where possible to

    minimize the regulatory burden of applying for the exemption--for

    example, allowing a memorandum of law prepared by internal counsel

    instead of a formal opinion--to increase the net benefits available to

    market participants. The Commission also proposed an avenue for certain

    entities to apply for relief on a case-by-case basis, providing

    additional flexibility for market participants.

    The Commission requests comment on its considerations of the

    benefits of the proposed rules. Are there other benefits to markets,

    market participants, and/or the public that the Commission should

    consider? Commenters are specifically encouraged to include both

    quantitative and qualitative assessments of the potential benefits of

    the proposed regulations in Sec. 150.4, as well as data or other

    information to support such assessments.

    6. Section 15(a) Considerations

    As the Commission has long held, position limits are an important

    regulatory tool that is designed to prevent concentrated positions of

    sufficient size to manipulate or disrupt markets. The aggregation of

    accounts for purposes of applying position limits represents an

    integral component that impacts the effectiveness of those limits. The

    rules proposed herein would amend the Commission's longstanding

    aggregation policy to introduce certain exemptions. The Commission

    believes these proposed regulations would preserve the important

    protections of the existing aggregation policy, but at a lower cost for

    market participants.

    a. Protection of Market Participants and the Public

    The Commission believes these proposed rules would not materially

    affect the level of protection of market participants and the public

    provided by the aggregation policy reflected currently in regulation

    150.4. Given that the account aggregation standards are necessary to

    implement an effective position limit regime, it is important that the

    exemptions proposed herein be sufficiently tailored to exempt from

    aggregation only those accounts that pose a low risk of coordinated

    trading. The owned-entity exemption would maintain the Commission's

    historical presumption threshold of 10 percent ownership or equity

    interest and make that presumption rebuttable only where several

    conditions indicative of independence are met. This proposed exemption

    focuses on the conditions that impact trading independence. In

    addition, by providing an avenue to apply for relief when ownership is

    greater than 50 percent of the owned entity, the proposed rules would

    allow market participants greater flexibility in meeting the

    requirements of the position limits regulations, provided they are

    eligible to apply. The Commission believes that these proposed

    exemptions would allow the Commission to direct its resources to

    monitoring those entities that pose a higher risk of coordinated

    trading and thus a higher risk of circumventing position limits,

    without reducing the protection of market participants and the public

    that the Commission's aggregation policy affords.

    The Commission believes the proposed exemptions would reduce costs

    for market participants without compromising the integrity or

    effectiveness of the Commission's aggregation policy.

    b. Efficiency, Competition, and Financial Integrity of Markets

    As discussed above, the Commission does not believe that the

    proposed regulations would negatively impact market quality indicators,

    such as liquidity or incentive for investment, to the detriment of the

    efficiency, competitiveness, or integrity of derivatives markets.

    Rather, the Commission believes that these proposed regulations would

    balance appropriately the need to preserve account aggregation as a

    tool to uphold the integrity of the part 151 position limit regime,

    while also providing for relief from the aggregation requirements where

    they are not necessary to prevent coordinated speculative trading. The

    Commission expects the proposed rules to further the Commission's

    mission to deter and prevent manipulative behavior while maintaining

    sufficient liquidity for hedging activity and protecting the price

    discovery process. Prior rules required aggregation at a 10 percent

    ownership level, so these regulations, which propose relief from

    aggregation at higher ownership levels, should lower the overall impact

    of aggregation on market quality factors without imposing unnecessary

    or inappropriate restrictions on trading.

    c. Price Discovery

    Similarly, because the Commission has structured the exemptions in

    these proposed regulations to maintain the effectiveness of the

    position limits regime in part 150, the Commission believes that these

    rules would not impact the price discovery process, which the position

    limit regime (including the account aggregation provisions in

    regulation 150.4) is designed to protect. Because the exemptions in and

    of themselves do not directly impact the formation of prices--only the

    aggregation of positions--the rules would not impact the price

    discovery process.

    d. Risk Management

    The Commission has stated previously that the imposition of

    position limits requires market participants to ensure they do not

    amass positions of sufficient size to disrupt the orderly flow of the

    market or to influence unduly the formation of prices. In so doing,

    market participants protect themselves--and the market as a whole--from

    the disruption that such large positions could cause, when traded

    improperly.\189\ The proposed rules would allow entities to not

    aggregate positions in circumstances where the Commission has

    determined that the positions are at a lesser risk of disrupting the

    market through the coordinated trading of affiliated entities. Thus,

    the Commission believes these rules, if adopted, would not lessen the

    effectiveness of the sound risk management practices that the position

    limits regime promotes. The Commission does not expect the proposed

    regulations to materially inhibit the use of derivatives for hedging,

    because hedge exemptions are available to any entity regardless of

    position aggregation and the proposed regulations would be more

    permissive than the 10 percent threshold for

    [[Page 68973]]

    aggregation that applied in existing regulation 150.4.

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

    \189\ 76 FR 71626 at 71675.

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

    e. Other Public Interest Considerations

    The Commission has not identified any other public interest

    considerations related to the costs and benefits of the rules.

    B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies

    consider whether the rules they propose will have a significant

    economic impact on a substantial number of small entities and, if so,

    provide a regulatory flexibility analysis respecting the impact.\190\ 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).\191\ The

    requirements related to the proposed amendments fall mainly on

    registered entities, exchanges, FCMs, swap dealers, clearing members,

    foreign brokers, and large traders. The Commission has previously

    determined that registered DCMs, FCMs, swap dealers, major swap

    participants, eligible contract participants, SEFs, clearing members,

    foreign brokers and large traders are not small entities for purposes

    of the RFA.\192\ While the requirements under the proposed rulemaking

    may impact non-financial end users, the Commission notes that position

    limits levels apply only to large traders. Accordingly, the Chairman,

    on behalf of the Commission, hereby certifies, on behalf of the

    Commission, pursuant to 5 U.S.C. 605(b), that the actions proposed to

    be taken herein would not have a significant economic impact on a

    substantial number of small entities. The Chairman made the same

    certification in the Proposal,\193\ and the Commission did not receive

    any comments on the RFA in relation to the proposed rulemaking.

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

    \190\ 44 U.S.C. 601 et seq.

    \191\ 5 U.S.C. 601(2), 603-05.

    \192\ See Policy Statement and Establishment of Definitions of

    ``Small Entities'' for Purposes of the Regulatory Flexibility Act,

    47 FR 18618, 18619, Apr. 30, 1982 (DCMs, FCMs, and large traders)

    (``RFA Small Entities Definitions''); Opting Out of Segregation, 66

    FR 20740, 20743, Apr. 25, 2001 (eligible contract participants);

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

    Rule, 76 FR 71626, 71680, Nov. 18, 2011 (clearing members); Core

    Principles and Other Requirements for Swap Execution Facilities, 78

    FR 33476, 33548, June 4, 2013 (SEFs); A New Regulatory Framework for

    Clearing Organizations, 66 FR 45604, 45609, Aug. 29, 2001 (DCOs);

    Registration of Swap Dealers and Major Swap Participants, 77 FR

    2613, Jan. 19, 2012, (swap dealers and major swap participants); and

    Special Calls, 72 FR 50209, Aug. 31, 2007 (foreign brokers).

    \193\ See 77 FR 31780.

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

    C. Paperwork Reduction Act

    1. Overview

    The Paperwork Reduction Act (``PRA'') imposes certain requirements

    on Federal agencies in connection with their conducting or sponsoring

    any collection of information as defined by 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 issued by the Office of Management and Budget (``OMB''). Certain

    provisions of the proposed regulations would result in amendments to a

    previously-approved collection of information requirements within the

    meaning of the PRA. Therefore, the Commission is submitting to OMB for

    review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11 the

    information collection requirements proposed in this rulemaking

    proposal as an amendment to the previously-approved collection

    associated with OMB control number 3038-0013.

    If adopted, responses to this collection of information would be

    mandatory. The Commission will protect proprietary information

    according to the Freedom of Information Act and 17 CFR part 145, headed

    ``Commission Records and Information.'' In addition, the Commission

    emphasizes that section 8(a)(1) of the Act strictly prohibits the

    Commission, unless specifically authorized by the Act, from making

    public ``data and information that would separately disclose the

    business transactions or market positions of any person and trade

    secrets or names of customers.'' The Commission also is required to

    protect certain information contained in a government system of records

    pursuant to the Privacy Act of 1974. In January of 2012, the Commission

    received a petition requesting relief under section 4a(a)(7) of the CEA

    and clarification of certain aggregation requirements in regulation

    151.7.

    On May 30, 2012, the Commission published in the Federal Register a

    notice of proposed modifications to part 151 of the Commission's

    regulations. The modifications addressed the policy for aggregation

    under the Commission's 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. In

    an Order dated September 28, 2012, the District Court for the District

    of Columbia vacated part 151 of the Commission's regulations. The

    Commission is now proposing modifications to the aggregation provisions

    of part 150 of the Commission's regulations that are substantially

    similar to the aggregation modifications proposed to part 151, except

    that the modifications address the policy for aggregation under the

    Commission's position limits regime for futures and option contracts on

    nine agricultural commodities set forth in part 150.

    The Commission is also proposing to amend other sections of part

    150 in a separate rulemaking that would, among other things: Expand the

    number of contract markets subject to federal position limits; impose

    speculative limits on swaps contracts; and require exchanges to conform

    their aggregation policies to the Commission's aggregation policy in

    part 150.4.\194\ Given the increase in scope proposed in the other

    rulemaking, the Commission anticipates a corresponding increase in the

    PRA burdens arising from this proposal should the amendments to other

    sections of part 150 be adopted. Unless and until that rulemaking is

    finalized, however, the instant proposal applies only to the nine

    commodities enumerated in current Sec. 150.2. The Commission requests

    comment regarding the impact on its PRA analysis should the amendments

    to part 150 proposed in the separate rulemaking be adopted.

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

    \194\ See Position Limits for Derivatives (November 5, 2013).

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

    Specifically, regulation 150.4(b)(2) proposes an exemption for a

    person to disaggregate the positions of a separately organized entity

    (``owned entity''). To claim the exemption, a person would need to meet

    certain criteria and file a notice with the Commission in accordance

    with regulation 150.4(c). The notice filing would need to demonstrate

    compliance with certain conditions set forth in regulations

    150.4(b)(2)(i)(A)-(E). Similar to other exemptions from aggregation,

    the notice filing would be effective upon submission to the Commission,

    but the Commission may call for additional information as well as

    reject, modify or otherwise condition such relief. Further, such person

    is obligated to amend the notice filing in the event of a material

    change to the filing.

    The proposed rules also contain proposed regulation 150.4(b)(3)

    which establishes a similar but separate owned-entity exemption with

    more intensive qualifications for exemption. To claim the exemption, a

    person would

    [[Page 68974]]

    need to meet certain criteria above and beyond that imposed by

    regulation 150.4(b)(2) and file an application for exemption with the

    Commission in accordance with regulation 150.4(c). The notice filing

    would need to demonstrate compliance with certain conditions as well as

    additional information that could inform the Commission's decision to

    grant or not to grant the person's application. Similar to other

    exemptions from aggregation, the notice filing would be effective upon

    submission to the Commission, but the Commission may call for

    additional information as well as reject, modify or otherwise condition

    such relief. Further, such person is obligated to amend the notice

    filing in the event of a material change to the filing.

    The Commission is also proposing to amend the definitions of

    eligible entity and independent account controller in part 150.1 and

    150.4(5) to specifically provide for regulation 4.13 commodity pools

    established as limited liability companies. In addition, the Commission

    is proposing to amend the definition of independent account controller

    to specifically provide for commodity pool operators that operate

    excluded pools as defined under regulation 4.5(a)(4) of the

    Commission's regulations. These amendments would likely expand the

    number of entities that can file for the independent account controller

    aggregation exemption.

    The proposal includes two provisions in proposed regulations

    150.4(b)(6) and 150.4(b)(7) providing exemptions from aggregation for

    underwriting agents and broker-dealers engaging in market making

    activity, respectively. Both exemptions are self-executing and do not

    require a notice filing.

    The proposal also includes proposed regulation 150.4(b)(8) which

    provides an exemption from aggregation where the sharing of information

    between persons would cause either person to violate federal law. The

    exemption would apply to a situation where the sharing of information

    creates a reasonable risk of a violation of federal, state, or foreign

    law or regulations adopted thereunder. The rules also propose a

    requirement that market participants file a notice demonstrating

    compliance with the condition, including an internal memorandum of

    counsel. The memorandum allows Commission staff to review the legal

    basis for the asserted regulatory impediment to the sharing of

    information, and is particularly helpful where the asserted impediment

    arises from laws and/or regulations that the Commission does not

    directly administer. Further, Commission staff will have the ability to

    consult with other federal regulators as to the accuracy of the

    opinion, and to coordinate the development of rules surrounding

    information sharing and aggregation across accounts in the future.

    Finally, the proposed rules propose relief from notice filings for

    ``higher-tier'' entities, which, under proposed regulation 150.4(b)(9),

    may rely on the filings submitted by owned entities. A ``higher-tier''

    entity need not submit a separate notice pursuant to the notice filing

    requirements to rely upon the notice filed by an owned entity as long

    as it complies with conditions of the applicable aggregation exemption.

    2. Methodology and Assumptions

    It is not possible at this time to precisely determine the number

    of respondents affected by the proposed rules. Many of the regulations

    that impose PRA burdens are exemptions that a market participant may

    elect to take advantage of, meaning that without intimate knowledge of

    the day-to-day business decisions of all its market participants, the

    Commission could not know which participants, or how many, may elect to

    obtain such an exemption. Further, the Commission is unsure of how many

    participants not currently in the market may be required to or may

    elect to incur the estimated burdens in the future.

    These limitations notwithstanding, the Commission has made best-

    effort estimations regarding the likely number of affected entities for

    the purposes of calculating burdens under the PRA. The Commission used

    its proprietary data, collected from market participants, to estimate

    the number of respondents for each of the proposed obligations subject

    to the PRA by estimating the number of respondents who may be close to

    a position limit and thus may file for relief from aggregation

    requirements.

    The Commission's estimates concerning wage rates are based on 2011

    salary information for the securities industry compiled by the

    Securities Industry and Financial Markets Association (``SIFMA''). The

    Commission is using a figure of $120 per hour, which is derived from a

    weighted average of salaries across different professions from the

    SIFMA Report on Management & Professional Earnings in the Securities

    Industry 2011, modified to account for an 1800-hour work-year, adjusted

    to account for the average rate of inflation in 2012. This figure was

    then multiplied by 1.33 to account for benefits \195\ and further by

    1.5 to account for overhead and administrative expenses.\196\ The

    Commission anticipates that compliance with the provisions would

    require the work of an information technology professional; a

    compliance manager; an accounting professional; and an associate

    general counsel. Thus, the wage rate is a weighted national average of

    salary for professionals with the following titles (and their relative

    weight); ``programmer (average of senior and non-senior)'' (15%

    weight), ``senior accountant'' (15%) ``compliance manager'' (30%), and

    ``assistant/associate general counsel'' (40%). All monetary estimates

    have been rounded to the nearest hundred dollars.

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

    \195\ The Bureau of Labor Statistics reports that an average of

    32.8% of all compensation in the financial services industry is

    related to benefits. This figure may be obtained on the Bureau of

    Labor Statistics Web site, at http://www.bls.gov/news.release/ecec.t06.htm. The Commission rounded this number to 33% to use in

    its calculations.

    \196\ Other estimates of this figure have varied dramatically

    depending on the categorization of the expense and the type of

    industry classification used (see, e.g., BizStats at http://www.bizstats.com/corporation-industry-financials/finance-insurance-52/securities-commodity-contracts-other-financial-investments-523/commodity-contracts-dealing-and-brokerage-523135/show and Damodaran

    Online at http://pages.stern.nyu.edu/~adamodar/pc/datasets/

    uValuedata.xls. The Commission has chosen to use a figure of 50% for

    overhead and administrative expenses to attempt to conservatively

    estimate the average for the industry.

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

    The Commission welcomes comment on its assumptions and estimates.

    3. Reporting Burdens

    Proposed regulation 150.4(b)(2) would require qualified persons to

    file a notice in order to claim exemptive relief from aggregation.

    Further, proposed regulation 150.4(b)(2)(ii) states that the notice is

    to be filed in accordance with proposed regulation 150.4(c), which

    requires a description of the relevant circumstances that warrant

    disaggregation and a statement that certifies that the conditions set

    forth in the exemptive provision have been met. Regulation 150.4(b)(3)

    specifies that qualified persons may request an exemption from

    aggregation in accordance with proposed regulation 150.4(c). Such a

    request would be required to include a description of the relevant

    circumstances that warrant disaggregation and a statement certifying

    the conditions have been met. Persons claiming these exemptions would

    be required to submit to the Commission, as requested, such information

    as relates to the claim for exemption. An updated or amended notice

    must be filed with the Commission upon any material change.

    [[Page 68975]]

    The release also proposes to extend relief available under

    150.4(b)(5) to additional entities; the Commission expects that, as a

    result of the expanded exemptive relief available to these entities, a

    greater number of persons will file exemptive notices under

    150.4(b)(5). The Commission also expects entities to file for relief

    under proposed regulation 150.4(b)(8), which allows for entities to

    file a notice, including a memorandum of law, in order to claim the

    exemption.

    Given the expansion of the exemptions that market participants may

    claim, the Commission anticipates an increase in the number of notice

    filings. However, because of the relief for ``higher-tier'' entities

    under regulation 150.4(b)(9) the Commission expects that increase to be

    offset partially by a reduction in the number of filings by ``higher-

    tier'' entities. Thus, the Commission anticipates a net increase in the

    number of filings under regulation 150.4 as a result of the adoption of

    these proposed rules. The Commission believes that this increase will

    create an increase in the annual labor burden. However, because

    entities have already incurred the capital, start-up, operating, and

    maintenance costs to file other exemptive notices--such as those

    currently allowed for independent account controllers and futures

    commission merchants under regulation 150.4--the Commission does not

    anticipate an increase in those costs.

    The Commission estimates that 100 entities will each file two

    notices annually under proposed regulation 150.4(b)(2), at an average

    of 20 hours per filing. Thus, the Commission approximates a total per

    entity burden of 40 labor hours annually. At an estimated labor cost of

    $120, the Commission estimates a cost of approximately $4,800 per

    entity for filings under proposed regulation 150.4(b)(2).

    The Commission estimates that 25 entities will each file one notice

    annually under proposed regulation 150.4(b)(3), at an average of 30

    hours per filing. Thus, the Commission approximates a total per entity

    burden of 30 labor hours annually. At an estimated labor cost of $120,

    the Commission estimates a cost of approximately $3,600 per entity for

    filings under proposed regulation 150.4(b)(3).

    The Commission estimates that 75 entities will each file one notice

    annually under proposed regulation 150.4(b)(5), at an average of 10

    hours per filing. Thus, the Commission approximates a total per entity

    burden of 10 labor hours annually. At an estimated labor cost of $120,

    the Commission estimates a cost of approximately $1,200 per entity for

    filings under proposed regulation 150.4(b)(5).

    The Commission estimates that 40 entities will each file one notice

    annually under proposed regulation 150.4(b)(8), including the requisite

    memorandum of law, at an average of 40 hours per filing. Thus, the

    Commission approximates a total per entity burden of 40 labor hours

    annually. At an estimated labor cost of $120,\197\ the Commission

    estimates a cost of approximately $4,800 per entity for filings under

    proposed regulation 150.4(b)(8).

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

    \197\ See above, text accompanying note 196.

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

    In sum, the Commission estimates that 240 entities will submit a

    total of 340 responses per year and incur a total burden of 7,100 labor

    hours at a cost of approximately $852,000 annually in order to claim

    exemptive relief under regulation 150.4.

    4. Comments on Information Collection

    The Commission invites the public and other federal agencies to

    comment on any aspect of the reporting and recordkeeping burdens

    discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission

    solicits comments in order to: (1) Evaluate whether the proposed

    collections of information are necessary for the proper performance of

    the functions of the Commission, including whether the information will

    have practical utility; (2) evaluate the accuracy of the Commission's

    estimate of the burden of the proposed collections of information; (3)

    determine whether there are ways to enhance the quality, utility, and

    clarity of the information to be collected; and (4) minimize the burden

    of the collections of information on those who are to respond,

    including through the use of automated collection techniques or other

    forms of information technology.

    Comments may be submitted directly to the Office of Information and

    Regulatory Affairs, by fax at (202) 395-6566 or by email at OIRA-submissions@omb.eop.gov. Please provide the Commission with a copy of

    comments submitted so that all comments can be summarized and addressed

    in the final regulation preamble. Refer to the Addresses section of

    this notice for comment submission instructions to the Commission. A

    copy of the supporting statements for the collection of information

    discussed above may be obtained by visiting RegInfo.gov. OMB is

    required to make a decision concerning the collection of information

    between 30 and 60 days after publication of this release. Consequently,

    a comment to OMB is most assured of being fully considered if received

    by OMB (and the Commission) within 30 days after the publication of

    this notice of proposed rulemaking.

    As noted above, the following proposed amendments to part 150 may

    require conforming technical changes if the Commission also adopts any

    proposed amendments to its regulations regarding position limits.\198\

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

    \198\ See Position Limits for Derivatives (November 5, 2013).

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

    List of Subjects in 17 CFR Part 150

    Position limits, Bona fide hedging, Referenced contracts.

    For the reasons discussed in the preamble, the Commission proposes

    to amend 17 CFR part 150 as follows:

    PART 150--LIMITS ON POSITIONS

    0

    1. The authority citation for part 150 is revised to read as follows:

    Authority: 7 U.S.C. 6a, 6c, and 12a(5), as amended by Title VII

    of the Dodd-Frank Wall Street Reform and Consumer Protection Act,

    Pub. L. 111-203, 124 Stat. 1376 (2010).

    0

    2. Amend Sec. 150.1 to revise paragraphs (d), (e)(2), and (e)(5) to

    read as follows:

    Sec. 150.1 Definitions.

    * * * * *

    (d) 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, limited member 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

    [[Page 68976]]

    to fulfill its duty to supervise diligently the trading done on its

    behalf; or

    (ii) If a limited partner, limited member 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.

    (e) * * *

    (2) Over whose trading the eligible entity maintains only such

    minimum control as is consistent with its fiduciary responsibilities to

    the managed positions and accounts to fulfill its duty to supervise

    diligently the trading done on its behalf or as consistent with such

    other legal rights or obligations which may be incumbent upon the

    eligible entity to fulfill;

    * * * * *

    (5) Who is:

    (i) Registered as a futures commission merchant, an introducing

    broker, a commodity trading advisor, or an associated person of any

    such registrant, or

    (ii) A general partner, managing member or manager of a commodity

    pool the operator of which is excluded from registration under Sec.

    4.5(a)(4) of this chapter or Sec. 4.13 of this chapter, provided that

    such general partner, managing member or manager complies with the

    requirements of Sec. 150.4(c).

    * * * * *

    Sec. 150.3 [Amended]

    0

    3. Amend Sec. 150.3 as follows:

    0

    a. Remove the semicolon and the word ``or'' at the end of paragraph

    (a)(3);

    0

    b. Add a period at the end of paragraph (a)(3); and

    0

    c. Remove paragraph (a)(4).

    0

    4. Revise Sec. 150.4 to read as follows:

    Sec. 150.4 Aggregation of positions.

    (a) Positions to be aggregated--(1) Trading control or 10 percent

    or greater ownership or equity interest. For the purpose of applying

    the position limits set forth in Sec. 150.2, unless an exemption set

    forth in paragraph (b) of this section applies, all positions in

    accounts for which any person, by power of attorney or otherwise,

    directly or indirectly controls trading or holds a 10 percent or

    greater ownership or equity interest must be aggregated with the

    positions held and trading done by such person. For the purpose of

    determining the positions in accounts for which any person controls

    trading or holds a 10 percent or greater ownership or equity interest,

    positions or ownership or equity interests held by, and trading done or

    controlled by, two or more persons acting pursuant to an expressed or

    implied agreement or understanding shall be treated the same as if the

    positions or ownership or equity interests were held by, or the trading

    were done or controlled by, a single person.

    (2) Substantially identical trading. Notwithstanding the provisions

    of paragraph (b) of this section, for the purpose of applying the

    position limits set forth in Sec. 150.2, any person that, by power of

    attorney or otherwise, holds or controls the trading of positions in

    more than one account or pool with substantially identical trading

    strategies, must aggregate all such positions.

    (b) Exemptions from aggregation. For the purpose of applying the

    position limits set forth in Sec. 150.2, and notwithstanding the

    provisions of paragraph (a)(1) of this section, but subject to the

    provisions of paragraph (a)(2) of this section, the aggregation

    requirements of this section shall not apply in the circumstances set

    forth in this paragraph (b).

    (1) Exemption for ownership by limited partners, shareholders or

    other pool participants. Any person that is a limited partner, limited

    member, shareholder or other similar type of pool participant holding

    positions in which the person by power of attorney or otherwise

    directly or indirectly has a 10 percent or greater ownership or equity

    interest in a pooled account or positions need not aggregate the

    accounts or positions of the pool with any other accounts or positions

    such person is required to aggregate, except that such person must

    aggregate the pooled account or positions with all other accounts or

    positions owned or controlled by such person if such person:

    (i) Is the commodity pool operator of the pooled account;

    (ii) Is a principal or affiliate of the operator of the pooled

    account, unless:

    (A) 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;

    (B) The person does not have direct, day-to-day supervisory

    authority or control over the pool's trading decisions;

    (C) The person, if a principal of the operator of the pooled

    account, maintains only such minimum control over the commodity pool

    operator as is consistent with its responsibilities as a principal and

    necessary to fulfill its duty to supervise the trading activities of

    the commodity pool; and

    (D) The pool operator has complied with the requirements of

    paragraph (c) of this section on behalf of the person or class of

    persons; or

    (iii) Has, by power of attorney or otherwise directly or

    indirectly, a 25 percent or greater ownership or equity interest in a

    commodity pool, the operator of which is exempt from registration under

    Sec. 4.13 of this chapter.

    (2) Exemption for certain ownership of greater than 10 percent in

    an owned entity. Any person with an ownership or equity interest in an

    owned entity of 10 percent or greater but not more than 50 percent

    (other than an interest in a pooled account subject to paragraph (b)(1)

    of this section), need not aggregate the accounts or positions of the

    owned entity with any other accounts or positions such person is

    required to aggregate, provided that:

    (i) Such person, including any entity that such person must

    aggregate, and the owned entity:

    (A) Do not have knowledge of the trading decisions of the other;

    (B) Trade pursuant to separately developed and independent trading

    systems;

    (C) Have and enforce written procedures to preclude each 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;

    (D) Do not share employees that control the trading decisions of

    either; and

    (E) Do not have risk management systems that permit the sharing of

    trades or trading strategy; and

    (ii) Such person complies with the requirements of paragraph (c) of

    this section.

    (3) Exemption for certain ownership of greater than 50 percent in

    an owned entity. Any person with a greater than 50 percent ownership or

    equity interest in an owned entity (other than an interest in a pooled

    account subject to paragraph (b)(1) of this section), need not

    aggregate the accounts or positions of the owned entity with any other

    accounts or positions such person is required to aggregate, provided

    that:

    (i) Such person certifies to the Commission that the owned entity

    is not required under U.S. generally accepted accounting principles to

    be, and is not, consolidated on the financial statement of such person;

    (ii) Such person, including any entity that such person must

    aggregate, and the owned entity meet the requirements of paragraphs

    (b)(2)(i)(A) through (E) of this section and such person demonstrates

    to the Commission that procedures are in place that are

    [[Page 68977]]

    reasonably effective to prevent coordinated trading decisions by such

    person, any entity that such person must aggregate, and the owned

    entity;

    (iii) Each representative (if any) of the person on the owned

    entity's board of directors (or equivalent governance body) certifies

    that he or she does not control the trading decisions of the owned

    entity;

    (iv) Such person certifies to the Commission that either all of the

    owned entity's positions qualify as bona fide hedging transactions or

    the owned entity's positions that do not so qualify do not exceed 20

    percent of any position limit currently in effect, and agrees with the

    Commission that:

    (A) If such certification becomes untrue for any owned entity of

    the person, such person will aggregate the accounts or positions of the

    owned entity with any other accounts or positions such person is

    required to aggregate; however, after a period of three complete

    calendar months in which such person aggregates such accounts or

    positions and all of the owned entity's positions qualify as bona fide

    hedging transactions, such person may make such certification again and

    be permitted to cease such aggregation;

    (B) Any owned entity of the person shall, upon call by the

    Commission at any time, make a filing responsive to the call,

    reflecting only such owned entity's positions and transactions, and not

    reflecting the inventory of the person or any other accounts or

    positions such person is required to aggregate (this requirement shall

    apply regardless of whether the owned entity or the person is subject

    to Sec. 18.05 of this chapter); and

    (C) Such person shall inform the Commission, and provide to the

    Commission any information that the Commission may request, if any

    owned entity engages in coordinated activity regarding the trading of

    such owned entity, such person, or any other accounts or positions such

    person is required to aggregate, even if such coordinated activity does

    not conflict with any of the requirements of paragraphs (b)(2)(i)(A) to

    (b)(2)(i)(E) of this section;

    (v) The Commission finds, in its discretion, that such person has

    satisfied the conditions of this paragraph (b)(3);

    (vi) Such person, when first requesting disaggregation relief under

    this paragraph, complies with the requirements of paragraph (c)(2) of

    this section; and

    (vii) Such person complies with the requirements of paragraph

    (c)(1) of this section if, subsequent to a Commission finding that the

    person has satisfied the conditions of this paragraph (b)(3), there is

    a material change to the information provided to the Commission in the

    person's original filing under paragraph (c)(2) of this section.

    (4) Exemption for accounts held by futures commission merchants. A

    futures commission merchant or any affiliate of a futures commission

    merchant need not aggregate positions it holds 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 of its affiliates, if:

    (i) A person other than the futures commission merchant or the

    affiliate directs trading in such an account;

    (ii) 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;

    (iii) Each trading decision of the discretionary account or the

    customer trading program is determined independently of all trading

    decisions in other accounts which the futures commission merchant or

    the affiliate holds, has a financial interest of 10 percent or more in,

    or controls; and

    (iv) The futures commission merchant or the affiliate has complied

    with the requirements of paragraph (c) of this section.

    (5) Exemption for accounts carried by an 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.

    150.1(e), except for the spot month in physical-delivery commodity

    contracts, provided that the eligible entity has complied with the

    requirements of paragraph (c) of this section, and that the overall

    positions held or controlled by such independent account controller may

    not exceed the limits specified in Sec. 150.2.

    (i) 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:

    (A) 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 to the managed

    positions and accounts and necessary to fulfill its duty to supervise

    diligently the trading done on its behalf;

    (B) Trade such accounts pursuant to separately developed and

    independent trading systems;

    (C) Market such trading systems separately; and

    (D) 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.

    (6) Exemption for underwriting. A person need not aggregate the

    positions or accounts of an owned entity if the ownership or equity

    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.

    (7) Exemption for broker-dealer activity. A broker-dealer

    registered with the Securities and Exchange Commission, or similarly

    registered with a foreign regulatory authority, need not aggregate the

    positions or accounts of an owned entity if such broker-dealer does not

    have greater than a 50 percent ownership or equity interest in the

    owned entity and the ownership or equity interest is based on the

    ownership of securities acquired in the normal course of business as a

    dealer, provided that such person does not have actual knowledge of the

    trading decisions of the owned entity.

    (8) Exemption for information sharing restriction. A person need

    not aggregate the positions or accounts of an owned entity if the

    sharing of information associated with such aggregation (such as, only

    by way of example, information reflecting the transactions and

    positions of a such person and the owned entity) creates a reasonable

    risk that either person could violate state or federal law or the law

    of a foreign jurisdiction, or regulations adopted thereunder, provided

    that such person does not have actual knowledge of information

    associated with such aggregation, and provided further that such person

    has filed a prior notice pursuant to paragraph (c) of this section and

    included with such notice a written memorandum of law explaining in

    detail the basis for the conclusion that

    [[Page 68978]]

    the sharing of information creates a reasonable risk that either person

    could violate state or federal law or the law of a foreign

    jurisdiction, or regulations adopted thereunder. However, the exemption

    in this paragraph shall not apply where the law or regulation serves as

    a means to evade the aggregation of accounts or positions. All

    documents submitted pursuant to this paragraph shall be in English, or

    if not, accompanied by an official English translation.

    (9) Exemption for higher-tier entities. If an owned entity has

    filed a notice under paragraph (c) of this section, any person with an

    ownership or equity interest of 10 percent or greater in the owned

    entity need not file a separate notice identifying the same positions

    and accounts previously identified in the notice filing of the owned

    entity, provided that:

    (i) Such person complies with the conditions applicable to the

    exemption specified in the owned entity's notice filing, other than the

    filing requirements; and

    (ii) Such person does not otherwise control trading of the accounts

    or positions identified in the owned entity's notice.

    (iii) Upon call by the Commission, any person relying on the

    exemption in this paragraph (b)(9) 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.

    (c) Notice filing for exemption. (1) Persons seeking an aggregation

    exemption under paragraph (b)(1)(ii), (b)(2), (b)(3)(vii), (b)(4),

    (b)(5), or (b)(8) 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 of a senior officer of the entity certifying that

    the conditions set forth in the applicable aggregation exemption

    provision have been met.

    (2) Persons with a greater than 50 percent ownership or equity

    interest in an owned entity seeking an aggregation exemption under

    paragraph (b)(3)(vi) of this section shall file a request with the

    Commission, which shall not become effective unless and until the

    Commission finds, in its discretion, that such person has satisfied the

    conditions of paragraph (b)(3) of this section, and shall include:

    (i) A description of the relevant circumstances that warrant

    disaggregation;

    (ii) A statement of a senior officer of the entity certifying that

    the conditions set forth in paragraph (b)(3) of this section have been

    met;

    (iii) A demonstration that procedures are in place that are

    reasonably effective to prevent coordinated trading decisions by such

    person, any entity that such person must aggregate, and the owned

    entity; and

    (iv) All certifications required under paragraph (b)(3) of this

    section.

    (3) Upon call by the Commission, any person claiming an aggregation

    exemption under this section shall provide such information

    demonstrating that the person meets the requirements of the exemption,

    as is requested by the Commission. 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.

    (4) In the event of a material change to the information provided

    in any notice filed under this paragraph (c), an updated or amended

    notice shall promptly be filed detailing the material change.

    (5) Any notice filed under this paragraph (c) shall be submitted in

    the form and manner provided for in paragraph (d) of this section.

    (d) 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 using the format, coding

    structure, and electronic data transmission procedures approved in

    writing by the Commission. Unless otherwise provided in this section,

    the notice shall be effective upon filing. When the reporting entity

    discovers errors or omissions to past reports, the entity shall so

    notify the Commission and file corrected information in a form and

    manner and at a time as may be instructed by the Commission or its

    designee.

    (e) Delegation of authority to the Director of the Division of

    Market Oversight. (1) 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:

    (i) In paragraph (b)(3) of this section:

    (A) To determine, after consultation with the General Counsel or

    such other employee or employees as the General Counsel may designate

    from time to time, if a person has satisfied the conditions of

    paragraph (b)(3) of this section; and

    (B) To call for additional information from a person claiming the

    exemption in paragraph (b)(3) of this section, reflecting such owned

    entity's positions and transactions (regardless of whether the owned

    entity or the person is subject to Sec. 18.05 of this chapter).

    (ii) In paragraph (b)(9)(iii) of this section to call for

    additional information from a person claiming the exemption in

    paragraph (b)(9)(i) of this section.

    (iii) In paragraph (d) of this section 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.

    (2) 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.

    (3) Nothing in this section prohibits the Commission, at its

    election, from exercising the authority delegated in this section.

    Issued in Washington, DC, on November 8, 2013, by the

    Commission.

    Christopher J. Kirkpatrick,

    Deputy Secretary of the Commission.

    Appendices to Aggregation of Positions--Commission Voting Summary and

    Statement of Chairman

    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 Chilton,

    O'Malia, and Wetjen voted in the affirmative; no Commissioner voted

    in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rule that would modify the CFTC's

    aggregation provisions for limits on speculative positions.

    As we move forward on position limits for futures and swaps, it

    is important to concurrently implement reforms to the Commission's

    current regulations regarding which positions are totaled up as

    being owned or controlled by a particular entity. These total,

    aggregated positions under common control are then subject to the

    speculative position limits, taking into consideration any relevant

    exemptions.

    We live in a time when companies often have numerous affiliated

    entities, sometimes

    [[Page 68979]]

    measured in the hundreds or thousands. Thus, it is appropriate to

    look at how speculative position limits apply across the enterprise.

    When Lehman Brothers failed, it had 3,300 legal entities within its

    corporate family. The question is--do you count all those 3,300

    legal entities that Lehman Brothers once controlled, or do you apply

    a limit for each and every one of the 3,300? If we chose the second,

    that would be, in practice, a loophole around congressional intent.

    That's why this issue of aggregation comes into play.

    The proposal generally provides for aggregation when various

    entities are under common control. For instance, if the ownership

    interest is greater than 50 percent, it will be presumed to be

    aggregated and part of the group.

    The proposal provides for certain exemptions from aggregation

    for the following reasons:

    Where sharing of information would violate or create

    reasonable risk of violating a federal, state or foreign

    jurisdiction law or regulation;

    Where an ownership interest is less than 50 percent and

    trading is independently controlled;

    Where an ownership interest is greater than 50 percent

    in a non-consolidated entity whose trading is independently

    controlled, and an applicant certifies that such entity's positions

    either qualify as bona fide hedging positions or do not exceed 20

    percent of any position limit; or

    Where ownership of less than 50 percent results from

    broker-dealer activities in the normal course of business.

    [FR Doc. 2013-27339 Filed 11-14-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: November 15, 2013



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