[Federal Register: October 5, 2004 (Volume 69, Number 192)]
[Rules and Regulations]
[Page 59544-59545]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



17 CFR Part 1

RIN 3038-AB56

Close Out of Offsetting Positions; Correction

AGENCY: Commodity Futures Trading Commission.

ACTION: Correcting amendment.


SUMMARY: This document contains a correcting amendment to the final
rule amendments that were published on October 23, 2001 (66 FR 53510).
Those rule amendments related to various aspects of the operations of
intermediaries of commodity interest transactions. The particular rule
in issue concerns the close out of offsetting positions. The correcting
amendment makes clear that an account controller, in addition to the
customer, may instruct a futures commission merchant (FCM) to hold open
offsetting long and short commodity interest positions.

EFFECTIVE DATE: October 5, 2004.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Deputy Director,
Compliance and Registration Section, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, 1155 21st
Street NW., Washington, DC 20581. Telephone (202) 418-5439.

SUPPLEMENTARY INFORMATION: On October 23, 2001, the Commodity Futures
Trading Commission (Commission) published final amendments to
Commission Rule 1.46, among others. The Commission amended Rule 1.46 to
permit customers or account controllers to instruct FCMs (in writing or
orally) if they wish to deviate from the default rule that requires
FCMs to close out offsetting long and short commodity interest
positions on a first-in, first-out basis, looking across all accounts
carried for the same customer. 66 FR 53510, 53514, 53517-18. The
Commission stated that, ``[i]n order to implement this revision of Rule
1.46, the Commission is amending

[[Page 59545]]

the rule by inserting, after the words `omnibus accounts' in paragraph
(a), the phrase `or where the customer or account controller has
instructed otherwise.' '' Id. at 53514 (emphasis added).
    Despite this clear statement of the Commission's intent in the
preamble of the adopting Federal Register release, the regulatory text
neglected to include the words ``or account controller,'' so that it
appears that only the customer may direct an FCM to deviate from the
default rule requiring closing out of offsetting long and short
commodity interest positions. Id. at 53517. The same discrepancy
between the Commission's clear intention as expressed in the preamble
and the regulatory text appears in the proposing release, \1\ as well
as in earlier releases proposing and adopting the same rule amendment.
\2\ The Commission's clear intention to permit account controllers as
well as customers to instruct an FCM to hold open an offsetting
position is bolstered by the fact that, prior to the rule amendments,
the rule contained exceptions that permitted account controllers to
make such an instruction, albeit subject to certain conditions.
Amendments intended to broaden, simplify and streamline the rule would
not further restrict those persons able to take advantage of the
ability to deviate from the normal procedure.

    \1\ 66 FR 45221, 45227, 45230 (August 28, 2001).
    \2\ 66 FR 39008, 39017, 39022 (June 22, 2000) (proposed rules);
66 FR 77993, 78007, 78013 (December 13, 2000) (final rules). Due to
the intervening enactment of revisions to the Commodity Exchange Act
by the Commodity Futures Modernization Act of 2000 (CFMA), the
Commission withdrew almost all of the final rules relating to
intermediaries adopted in November 2000, including the amendments to
Rule 1.46. Upon further review of the amendments to Rule 1.46 in
light of the enactment of the CFMA, the Commission re-proposed and
re-adopted the amendments to Rule 1.46 in 2001 without substantive
change. Although comments were received on both proposals to amend
Rule 1.46, no one pointed out the discrepancy between the preamble
and the regulatory text cited above.

    The Commission, to eliminate the inadvertent confusion that it may
have created in this area, has determined to make a technical amendment
to the introductory text of Rule 1.46(a) so that it is clear that an
account controller, as well as the customer, may instruct an FCM to
hold open offsetting commodity interest positions. Of course, an FCM
retains the discretion to refuse to honor any such instruction from a
customer or account controller and to apply the general rule of closing
out offsetting long and short commodity interest positions on a first-
in, first-out basis.

Need for Correction

    As published, the final rules contain regulatory text that may
prove to be misleading and is in need of clarification.

List of Subjects in 17 CFR Part 1

    Commodity futures; Reporting and recordkeeping requirements.


Accordingly, 17 CFR Part 1 is corrected by making the following
technical amendments:
1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-l, 16, 16a, 19, 21, 23 and 24.

2. In Sec.  1.46, paragraph (a) introductory text is revised to read as
follows: (a) Application of purchases and sales. Except with respect to
purchases or sales which are for omnibus accounts, or where the
customer or account controller has instructed otherwise, any futures
commission merchant who, on or subject to the rules of a designated
contract market or registered derivatives transaction execution
* * * * *

Sec.  1.46  Application and closing out of off setting long and short

    Issued in Washington, DC on September 28, 2004 by the
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 04-22298 Filed 10-4-04; 8:45 am]