COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 17, 18 and 150
Revision of Federal Speculative Position Limits and Associated Rules
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Proposed Rulemaking.
SUMMARY: The Commodity Futures Trading Commission ("Commission") has long established and enforced speculative position limits for futures contracts on various agricultural commodities. On April 7, 1993, the Commission promulgated interim final rules amending Federal speculative position limits. The interim amendments generally maintained the existing speculative position limit levels for the delivery months and increased limit levels for the deferred months, at levels below those originally proposed. The Commission is proposing to raise the levels of speculative position limits for the deferred months to the levels originally proposed.
In addition, the Commission is proposing to codify various policies relating to the requirement that exchanges set speculative position limits as required by rule 1.61, 17 CFR 1.61. These relate to the levels which the Commission has approved for such rules, and to various exemptions from the general requirement that exchanges set speculative position limits which the Commission has approved over the years. Specifically, the Commission is proposing to codify an exemption permitting exchanges to substitute position accountability rules for position limits for high volume and liquid markets. The Commission is proposing elsewhere in this issue of the Federal Register to amend its guideline for application for contract market designation to conform it to the changes to the speculative position limit rules proposed herein that apply at initial contract designation. See, Guideline No. 1, 17 CFR Part 5, Appendix A.
The Commission is also proposing to amend the applicability of the
limited exemption from non-spot month speculative position limits
under Commission rule 150.3, 17 CFR 150.3, for entities that authorize
independent account controllers to trade on their behalf.
Specifically, the Commission is proposing to amend the definition of
entities eligible for this relief under Commission rule 150.1(d), 17
CFR 150.1(d), to expand the categories of eligible entities and to
extend it to the separately incorporated affiliates of an eligible
Finally, the Commission is proposing to amend its rule on aggregation.
In particular, the Commission is proposing to clarify the
applicability of a limited partnership exemption to limited partners
or shareholders with less than a 25% ownership interest, or to pooled
trading accounts with ten or fewer account owners. The Commission is
also proposing to amend its rules to clarify that a commodity pool
operator's principals and its affiliates are treated the same as
the commodity pool operator itself for purposes of the
Commission's aggregation rule.
DATE: Comments must be received by [insert date 60 days after publication in the Federal Register].
ADDRESS: Comments should be mailed to the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, attention: Office of the Secretariat; transmitted by facsimile at (202) 418-5521; or transmitted electronically at [email@example.com]. Reference should be made to "Speculative Position Limits."
FOR FURTHER INFORMATION CONTACT: Paul M. Architzel,
Chief Counsel, Division of Economic Analysis, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W.,
Washington, D.C. 20581, (202) 418-5260, or electronically,
Speculative position limits have been a tool for regulation of futures markets for over sixty years. Since the Commodity Exchange Act of 1936, Congress consistently has expressed confidence in the use of speculative position limits as an effective means of preventing unreasonable or unwarranted price fluctuations.(1) Section 4a(1) of the Commodity Exchange Act (Act), 7 U.S.C. 6a(1), provides the Commission with authority to:
fix such limits on the amount of trading which may be done or
positions which may be held by any person under contracts of sale of
such commodity for future delivery on or subject to the rules of any
contract market as the Commission finds are necessary to diminish,
eliminate, or prevent such burden.
The Commission directly administers speculative position limits on futures contracts for most of the domestic agricultural commodities enumerated in section 2(a)(1) of the Act. See, 17 CFR Part 150. Prior to the Act's amendment in 1974 which expanded its jurisdiction to all "services, rights and interests" in which futures contracts are traded, only these enumerated commodities were regulated. Both prior to and after the 1974 amendments to the Act, futures markets which traded commodities not so enumerated applied speculative position limits by exchange rule, if at all. In 1981, the Commission promulgated rule 1.61, requiring exchanges to adopt rules setting speculative position limits for all contract markets not subject to Commission-set speculative position limits. Since then, all contract markets have been subject to either Commission or exchange-set speculative position limits.(2) Responsibility for enforcement of speculative position limits is shared by the Commission and the exchanges.(3)
The Commission periodically has reviewed its policies and rules pertaining to each of the three elements of the regulatory framework for speculative position limits -- the levels of the limits, the exemptions from them (in particular, for hedgers), and the policy on aggregating accounts.(4) The Commission, in this notice of proposed rulemaking, is proposing to raise the levels of Commission speculative position limits and to codify a number of broad exemptions from the requirement of rule 1.61 that exchanges establish speculative position limits for all contracts not subject to Commission limits. These exemptions to rule 1.61 were established through a series of Commission interpretations. The Commission is also proposing to broaden its speculative position limit exemption under rule 150.3 for independent account controllers and to amend its aggregation policy.
II. Commission Speculative Position Limit
In 1987, the Commission completely revised Commission speculative position limits. 52 FR 38914 (October 20, 1987). As part of these revisions, the Commission added Commission speculative position limits for soybean meal and soybean oil, which, because of an historical anomaly, previously were not included. The Commission also amended the structure and levels of the Commission speculative position limits. It restructured speculative position limits by establishing them by contract market, rather than generically by commodity. The Commission proposed generally to increase limit levels from the spot-month limits, which were not proposed to be increased, to progressively higher individual-month and all-futures-combined limits. However, the rules as promulgated generally did not provide for such stepped increases. Instead, the amended rules generally maintained the then existing structure of a uniform spot- and single-month level and only increased the all-months-combined level.(5)
In 1991, the Chicago Board of Trade (CBT), the New York Cotton Exchange (NYCE), the Kansas City Board of Trade (KCBT) and the Minneapolis Grain Exchange (MGE) petitioned the Commission to increase further the levels of Commission speculative position limits.(6) On August 2, 1991, the Commission published in the Federal Register notice of, and requested public comment on, these petitions for rulemaking. 56 FR 37049.
On April 13, 1992, the Commission proposed a number of revisions to the structure and levels of Commission speculative position limits. 57 FR 12766. The Commission proposed these revisions to the levels of the speculative position limits based upon two criteria: (1) the distribution of speculative traders in the markets; and (2) the size of open interest. Previously, the Commission had given little weight to the size of open interest in the contract in determining the appropriate speculative position limit level. The Commission noted, however, that the size of open interest and the distribution of speculative traders had not increased at the same rate over time. Accordingly, the Commission determined that, in proposing the new levels, both criteria should be taken into account. The Commission noted that:
[t]his approach will permit speculative position limits to reflect better the changing needs and composition of the futures markets, while adhering to the policies of the Act and Commission Rule 1.61. Although the Commission in setting levels is proposing to place greater reliance on the criterion of percentage of open interest represented by a particular level than previously, it has always recognized that there is a range of acceptable limit levels [.] . . . even when relying on a single criterion . . . .
57 FR 12770.
In proposing these increases to the limit levels, the Commission reasoned that, as the total open interest of a futures market increased, speculative position limit levels could be raised. The Commission therefore applied the open interest criterion by using a formula that specified appropriate increases to the limit level as a percentage of open interest. Specifically, the Commission proposed combined futures and option speculative position limits for both a single month and for all months combined at the level of 10% of open interest up to an open interest of 25,000 contracts, with a marginal increase of 2.5% thereafter. It reasoned that such levels were "not excessively large under the criteria of Commission rule 1.61."(7) Id. The Commission also determined that this analysis did not apply to spot-month levels, which are "based most appropriately on an analysis of current deliverable supplies and the history of various spot-month expirations." Id.
The Commission received 63 comments in response to the proposed
rules.(8) Typically, commodity pool
operators, commodity trading advisors and futures commission merchants
strongly favored the amendments. Most agricultural producers and their
representative organizations strongly opposed any increase to the
speculative position limits. Others, however, recommended that the
Commission proceed, but in a more cautious manner. In particular, they
recommended that the Commission raise speculative position limits on a
phased or test basis. These commenters advocated taking additional
time to study the need for, and the possible effects of, further
increasing speculative position limits, and in their view, the trial
implementation of expanded speculative limits would provide such an
Based on its consideration of the comments received and its favorable
administrative experience with the rule's prior amendment, the
Commission in April 1993 adopted interim final rules to Commission
speculative position limits. These interim amendments increased the
position limit levels by half of the increase originally proposed, in
two steps. 58 FR 18057 (April 7, 1993). The first phase, which
took effect on June 7, 1993, increased speculative position
limits by combining the previously separate futures and option limits.
The second phase, which took effect on March 31, 1994, increased
the back-month speculative position limits halfway to the level
originally proposed by the Commission.
When the Commission adopted the interim final rules, it provided
notice that the comment period on the original proposed levels would
be reopened in March 1994, coinciding with implementation of the
second phase of the interim rules. The comment period was kept open
for a year, closing on April 30, 1995. Anticipating that it would
determine whether to adopt the levels originally proposed based upon
trading experience under the interim rules, the Commission directed
the Division of Economic Analysis (Division) to study the effects of
the phased increases.
In April 1995, the Division reported to the Commission on the interim
rule's effects. The report reviewed trading under both phases of
the interim rules over a period of eighteen months and was based upon
an analysis of extensive Commission and exchange data relating to
individual and aggregate positions of reportable traders, as well as
inter- and intra-day price series for the entire period of 1988
through 1994. The report concluded that overall the impact of the
interim final rules on actual, observed large trader positions was
modest and that any changes in market performance were most likely
attributable to factors other than changes in the rules.
Specifically, the report concluded that the phase 1 and
phase 2 modifications of futures and option limits had little
impact on the overall activities of large traders during the first 18
months of the interim final rules with relatively few speculative
traders increasing the size of their positions above the previously
permitted levels. The report further concluded that the periods of
higher volatility and measurable changes in market liquidity observed
in particular markets during the first 18 months of the interim rules
appear to have been a result of rapidly-changing cash market
conditions rather than the amended limits. Finally, the report
concluded that there was no discernable negative impact on commercial
use of the markets during the time period studied.
Only 13 comment letters were received during the post-phase 2
comment period, none from agricultural interests. Generally, all of
the commenters supported increasing Commission speculative position
limit levels as originally proposed. However, at that time concerns
began to arise regarding the continued viability of the delivery
provisions of the CBT's corn, soybean, and wheat futures
contracts. The Commission directed its attention to resolving those
surveillance-related concerns before further raising speculative
position limit levels. Accordingly, the Commission took no further
action on the proposed rules, and they remain pending.
The Commission recently reviewed open interest and trader position
data to determine market changes since the Division's report to it
following implementation of the phase 2 limits. With the exception of
CBT oats, the markets' 1997 open interest substantially exceeded
their 1994 open interest.(9) Although
the Division's report concluded that the phase 1 increases to
speculative position limits had little discernable impact on trader
behavior, since then the number of large traders in these markets, the
general size of their positions and the number of large traders
holding positions above the phase 1 speculative position limits have
increased. In addition, a number of traders now frequently hold
positions greater than 80% of the current phase 2
all-months-combined level. These increases suggest that, under both of
the criteria the Commission has applied in the past -- size of
traders' positions and open interest -- expansion of the back
month speculative position limits to the levels originally proposed is
Accordingly, the Commission is reproposing to raise the back month speculative position limits to the levels it proposed initially. Consistent with its previous determination, the Commission is not proposing any change to spot-month limits.(10) The Commission has determined to seek public comment on the reproposed levels because commenters may have modified their views or additional persons may have formed an opinion during the extended period of time since the comment period closed. The following table compares the phase 2 speculative position limits now in effect for selected contracts to those that the Commission is reproposing.
SPECULATIVE POSITION LIMITS (by contract)(11)
(as of March 31, 1994)
|CHICAGO BOARD OF TRADE|
|MIDAMERICA COMMODITY EXCHANGE|
|MINNEAPOLIS GRAIN EXCHANGE|
|Hard Red Spring Wheat||600||2,100||3,200||600||3,000||4,000|
|NEW YORK COTTON EXCHANGE|
|Cotton No. 2||300||1,600||2,500||300||2,500||3,500|
|KANSAS CITY BOARD OF TRADE|
|Hard Winter Wheat||600||2,100||3,200||600||3,000||4,000|
III. Exemptions from Required Exchange-set Speculative
Although Commission rule 1.61 generally requires that all contract
markets not subject to Commission speculative position limits impose
exchange-set speculative position limits, the Commission over the
years has approved a number of significant exemptions from this
requirement. These exemptions were approved by the Commission under
Commission rule 1.61(e), a broad exemptive provision enabling the
Commission to exempt contract markets "consistent with the
purposes of this section." In each case, the Commission
considered and granted such an exemption by approving a proposed rule
change of a contract market.
The first of these exchange rule changes was submitted for Commission
approval by the Chicago Mercantile Exchange (CME). In requesting
public comment on the proposed rule change, the Commission explained
that it was considering granting exemptive relief based upon one of
the factors included in rule 1.61 for setting speculative positions
limit levels -- the "breadth and liquidity of the cash
market underlying each delivery month and the opportunity for
arbitrage between the futures market and cash market in the commodity
underlying the futures contract." See, 56 FR 51687, 51688
(October 15, 1991), citing Commission rule 1.61(a)(2). The Commission
further explained that, "(b)ased upon its over ten-years
experience in administering rule 1.61, the Commission believes that
exemptions for three classes of futures and option contacts with
varying degrees of exchange supervision for each class could be
appropriately considered . . . ."
These three classes were based upon the depth and liquidity of the
underlying cash market and the ease of arbitrage between the futures
and underlying cash market. The three classes were futures and option
contracts on foreign currencies and futures and option contracts on
two broad categories of financial instruments. The two categories for
futures and option contracts on financial instruments were based upon
the relative degree of liquidity in both the futures and option
markets and in the cash market for the underlying instrument. The
Commission subsequently added a fourth exemptive class, comprised of
contracts for certain physical commodities. See, 57 FR
The Commission explained that it would exempt contracts in major
foreign currencies from all of rule 1.61's requirements based upon
their nearly inexhaustible deliverable supply, the very highly liquid
underlying cash markets and the great ease of arbitrage between the
cash and futures markets thereon. Contract markets which have been so
exempted are the NYCE U.S. dollar index and NYFE foreign currencies.(12)
The second category of exempt contracts applies to futures and option
contracts on financial instruments which exhibit the highest degree of
liquidity in both the futures and cash markets, which are readily
arbitraged. The Commission noted that for this class of contract the
required speculative position limit could be replaced with a position
accountability rule. Position accountability rules impose a level
which triggers distinct reporting responsibilities by a trader at the
request of the applicable exchange. The CME Eurodollar contracts and
the CBT U.S. Treasury bond contracts were exempted under this
The third class of exemptions was for contract markets on financial
instruments having a highly liquid futures or cash market, but not of
the same magnitude of liquidity as those in the highest class. For
this class of contract, the position accountability rule should
include, in addition to the specified reporting requirements,
automatic consent of the trader not to increase further those
positions which exceed the triggering level when so ordered by the
exchange acting in its discretion.(14)
See, 56 FR 51688-89. Examples of contract markets falling
within this category include CBT U.S. Treasury notes and Eurodollars,
NYCE 5-year U.S. Treasury notes, CME one-month LIBOR, and MCE U.S.
Finally, the Commission noted that certain contracts for tangible
commodities such as precious metals and energy contracts are
characterized by underlying cash markets with liquidity equivalent to
or greater than certain of the financial futures and options which the
Commission exempted. Because of the limitation on the delivery
mechanisms of physically-delivered contracts, however, the Commission
limited the exemption for such contracts on physical commodities to
the deferred trading months, requiring retention of a spot-month
speculative position limit. COMEX gold, silver, and copper contracts
are examples of such contracts.(15)
These policies were first considered by the Commission in connection with specific exemptive requests by exchanges for existing contracts and, because they are based in part on the liquidity of the futures markets, are applicable only to existing markets. Except for several applications for designation of new foreign currency futures and option contracts,(16)
the Commission has approved few additional exemptions since granting the initial exemptive requests.(17)
Moreover, the Commission has never formally promulgated these
exceptions, nor has it incorporated these policies into Guideline
No. 1, the Commission's guideline for exchange compliance
with the requirements for contract market designation. As a
consequence, the exemptions, which appear only in a number of
Federal Register notices, are not readily accessible to
those unfamiliar with Commission precedent.
Similarly, the open-interest criterion and numeric formula used by the
Commission in its 1991 proposed amendment of Commission speculative
position limits, which have provided the most definitive guidance by
the Commission to date on acceptable levels for speculative position
limits for tangible commodities, have not been promulgated as
Commission rules.(18) Rather, the
staff routinely has applied that formula (and its associated minimum
levels) as a matter of administrative practice when reviewing proposed
exchange speculative position limits under Commission rule 1.61. The
staff examines exchange speculative position limit rules in connection
with its review of applications for designation of futures and option
contracts and of any subsequent proposed increases to those limits.
Despite the formula's widespread use as a rule of thumb, it is not
readily accessible in its present form.
The Commission is proposing to promulgate these informal policies as
rules and, in a companion notice of proposed rulemaking located
elsewhere in this edition of the Federal Register, is
proposing conforming amendments to Guideline No. 1. Promulgating
these policies within a single section of the Commission's rules
will increase significantly their accessibility and clarify their
As proposed by the Commission, the rules clarify several issues that
the policies do not address. First, the proposed rules make clear that
no speculative position limit or position accountability rule is
required for designated contract markets in major foreign currencies.
No such limitations are necessary because of the nearly inexhaustible
deliverable supply of the major foreign currencies. Such foreign
currencies are defined in the Commission's fast-track designation
rule as a foreign currency "for which there is no legal
impediment to delivery and for which there exists a liquid cash
market." 17 CFR 5.1(a)(2)(i). The Commission is proposing that
contract markets in other, less liquid foreign currencies be treated
as a futures or option contract on any other financial instrument or
The remaining position accountability categories are proposed to apply
only to existing futures and option contracts.(20) Consistent with the policies, under
the proposed rule, the type of position accountability rule that
applies to a particular contract market is determined by the liquidity
of the futures market, the liquidity of the cash market and the
Commission's oversight experience. The Commission is proposing,
however, to restate the criteria with greater clarity and precision,
particularly in measuring the necessary levels of liquidity of the
futures and option markets.(21)
The Commission is proposing to quantify the necessary levels of
futures market liquidity similar to its use of a formula to set (and
to increase) speculative position limits. That formula is based upon a
market's open interest, a measure of its overall relative size.(22) When substituting position
accountability rules for speculative position limits, however, the
liquidity of the futures and option market--measured by volume of
trading--is also particularly important.(23) Accordingly, the Commission is
proposing to restate the futures market liquidity criterion as a
required minimum level of open interest combined with specified,
increasing levels of trading volume. As the level of open interest
increases, the extent of the exemptive relief increases as well.
Specifically, the Commission is proposing that contract markets be
eligible for position accountability rules in the non-spot months if
they have a minimum month-end open interest of 50,000 contracts and an
average daily volume of 5,000 contracts, both measured in terms of all
months combined for the most recent calendar year. Financial futures
contracts, as well as contracts on tangible commodities having the
requisite cash market liquidity, are eligible for this proposed
exemptive treatment. Financial futures contracts having a minimum
month-end open interest of 50,000 contracts and an average daily
trading volume of 25,000 contracts need not impose a spot month limit,
but must have a position accountability rule that enables the exchange
to order traders not to increase further their positions. Financial
futures contracts having a minimum month-end open interest of 50,000
contracts and an average daily trading volume of 100,000 contracts may
have a position accountability rule which only requires that traders
provide specified information to the exchange if so ordered.
In addition to a liquid futures market, the Commission has looked to
the liquidity in the underlying cash market and to its administrative
experience in approving position accountability rules for particular
contract markets. The Commission is not proposing to quantify an
acceptable measure of cash market liquidity. Cash markets differ
greatly, and many are decentralized, making it difficult to propose a
uniform means of measuring their liquidity. Generally, however, in
assessing the liquidity of cash markets, the Commission looks to the
depth of the market and the tightness of bids and offers. The final
criterion--administrative experience--is based upon a contract
market's surveillance history, whether it has been subject to
problem expirations or liquidations and whether its terms or
conditions are consistent with current cash market conditions.
IV. Issues Relating to Aggregation and Exemptions for
Independently Controlled Accounts.
Section 4a of the Act provides that, in determining whether a position exceeds the speculative position 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
The Commission and its predecessor agency have interpreted the
"held or controlled" standard as applying both to ownership
of positions or to control of trading decisions. Each aggregation
criterion is applied separately.(24)
However, beginning in 1979, the Commission has recognized a number of
exceptions from the general principle. In its "Statement of
Policy on Aggregation of Accounts," 44 FR 83839 (June 13, 1979)
(1979 Aggregation Policy), the Commission determined that a futures
commission merchant (FCM) need not aggregate the discretionary trading
accounts or customer trading programs through which a trader
affiliated with, but independent of, the FCM directs trading of
customer-owned positions or accounts. To demonstrate the trader's
independence, the FCM must maintain only supervisory control over the
trader, and trading decisions in the discretionary account or program
must be made independently of trading decisions in all other accounts
held by the FCM.(25) Id. at
The 1979 Aggregation Policy was based in part on structural changes
made by the futures industry to respond to the increased acceptance of
professional management of trading accounts and the use of trading
programs. Id. at 83840. Further responding to this continuing
trend, the Commission in 1988 promulgated rule 150.3, 17 CFR 150.3, an
exemption from speculative position limits for commodity pools or
similar entities which use independent account controllers. 53 FR
41563 (October 24, 1988). Commodity pools, pension funds, and
other similar entities are required to aggregate their positions as
the owner of the trading accounts, even if those accounts are traded
independently by multiple independent account controllers. Commission
rule 150.3 exempted such entities which use independent account
controllers from speculative position limits outside of the
spot-month. The exemption permits the total positions of the trading
entity or vehicle to exceed speculative limits during non-spot months,
but requires that each independent account controller trading on the
entity's behalf comply with the applicable limits. During the spot
month, all positions of the entity are required to be aggregated and
are subject to the spot-month speculative position limit level. Under
the exemption as originally promulgated, those seeking exemptive
treatment were required to file an application with the Commission and
to document the independence of their account controllers.
In 1991, the Commission extended eligibility for this exemption to commodity trading advisors and greatly streamlined the application procedure. Subsequently, in 1992 the Commission made the exemption self-executing. 57 FR 44492 (September 28, 1992). Commenters on both the 1991 and 1992 amendments suggested that, in addition to commodity trading advisors, the exemption should be extended to others, including investment banks, other financial intermediaries, parent/affiliate firms, corporate divisions, commercial banks, merchant banks, and insurance companies. The Commission declined to do so, saying that it:
is aware of no adverse market effects resulting from the exemptions
granted so far.
Nevertheless, . . . [t]he current exemption and the proposed expansion are limited to those who trade professionally for others. . . . The classes of trader suggested by commenters for inclusion in the exemption differ from this pattern. The Commission will undertake further expansion of the exemption after it has had an opportunity to assess the impact of the current expansion and has gained a better understanding of the characteristics of the market user who might benefit from, and their need for, such an exemption.
56 FR 14308, 14312 (April 9, 1991).
Commission rule 150.3 generally has worked well. It has provided
flexibility to the markets, accommodating the continuing trend toward
professional management of speculative trading accounts, while at the
same time protecting the markets from the undue accumulation of large
speculative positions owned by a single person or entity in the spot
month. Since its amendment in 1991, most questions concerning rule
150.3 have related to its application to integrated financial services
companies. The number and complexity of these companies has grown in
the intervening years, a consequence of mergers and consolidation in
the financial services sector. Such companies generally may include
affiliated futures commission merchants (FCMs), commodity pool
operators, and non-Commission registrants which may also trade futures
and option contracts for their own accounts. They may grant their
affiliates or subsidiaries independent trading authority with
appropriate safeguards to maintain the affiliates' independence
and the confidentiality of the affiliates' trading decisions.
However, presently only affiliated commodity pool operators and
commodity trading advisors meet the rule's eligibility
The Commission is proposing to amend rule 150.3 better to reflect the
continuing trend to greater complexity in the structure of financial
services companies. Such companies, as a matter of business
preference, may provide their affiliates with independent trading
authority and are structured in a manner which meets the policies of
rule 150.3. The Commission is proposing to include the separately
incorporated affiliates of a commodity pool operator, commodity
trading advisor or futures commission merchant as eligible entities
for the exemptive relief of rule 150.3.(27)
The Commission is also proposing to expand the classes of entities
which are eligible for the exemption in response to the continuing
trend toward greater professional management of trading funds.
Single-investor commodity pools or commodity pools having a very
limited number of participants have been created as part of this
trend. Often these pools are organized as limited partnerships, and in
many cases, the limited partner or partners, who may also trade
professionally, provide almost all of the trading capital. The
operators of such commodity pools generally, by virtue of having fewer
than fifteen participants in the pools and less than $200,000 in
capital contributions, would be exempt from registration under
Commission rule 4.13. As discussed in greater detail below, the
Commission is of the view that the trading of these limited
partnerships should not be disaggregated from trading by such a
limited partner. However, because these commodity pools may provide
for the pool's trading by an independent account controller, the
Commission believes that they appropriately can be included within the
exemption from speculative position limits for the non-spot month
limits under Commission rule 150.3.
The Commission is also proposing to include within the exemption
banks, trust companies, savings and loan associations, insurance
companies and the separately incorporated affiliates of any of the
above entities. These additional classes of eligible entity were
suggested for inclusion by some commenters when the Commission last
proposed to revise the rule 150.3 exemption. In light of the
successful operation of the exemption during the intervening years,
the Commission believes that it should now consider extending the
exemption to these entities. Accordingly, the Commission is proposing
that any of the above entities that grants its affiliates or
subsidiaries independent trading authority, maintains only the
supervisory authority over their trading activity consistent with its
fiduciary, statutory and regulatory responsibilities(28) and creates a system of controls to
ensure that it or its affiliates have no knowledge of the trading
decisions of other of its affiliates can exceed speculative position
limits outside of the spot month. During the spot month, all of the
affiliates' accounts, except for those of an affiliated FCM
qualifying under the 1979 Aggregation Policy, must be aggregated for
speculative position purposes as positions belonging to a single
The Commission is proposing to codify in rule 150.4 the substance of
its policies on aggregation, particularly its 1979 Aggregation Policy.
The substance of its aggregation policies currently is contained in
rules 17.00 and 18.01, 17 CFR 17.00 and 18.01, which specify the
manner of identifying accounts for reporting purposes. The Commission
is of the view that its rules on aggregating positions for speculative
limit compliance should be codified as such, rather than be drawn by
inference from the Commission's large-trader reporting
In codifying these policies, the Commission also is proposing to amend
the limited partner exception of Commission rule 18.01.(29) Commission rule 18.01 governs the
Commission's reporting requirements and parallels the 1979
Aggregation standard. It defines an account owner as a person or
entity having a 10% or greater financial interest in the account,
except for limited partners. Limited partners had been exempt from
definitions of ownership beginning with the Commission's
predecessor agency, the Commodity Exchange Authority, based upon the
assumption that limited partners by definition were required to be
passive investors and were prohibited from exercising control over the
trading activities of the partnership. However, the degree to which
limited partners can be involved in the operation of a partnership
varies under state law. Although limited partners generally are
precluded from "controlling" the business of the
partnership, they may not be precluded from being involved to some
degree in the partnership's trading decisions.(30)
The Commission has become aware of, and concerned by, trading by
single-investor commodity pools. In these commodity pools, a single
limited partner may contribute virtually all of the pool's trading
capital, relying upon the general partner to control trading in the
account. Previously, persons with this type of ownership interest may
not have aggregated the pool's positions with their own in
reliance on the exception under Commission rule 18.01 for limited
partners in a commodity pool.(31)
In light of the possibility that limited partners may be less than
wholly passive investors, the likelihood that limited partners may be
involved to some degree in the trading decisions of the
partnership's trading activity rises as the overall number of
limited partners in a commodity pool decreases, such as in the single
or limited-number investor pool or when a small number of limited
partners have a relatively dominant ownership interest. Accordingly,
the Commission is proposing to require a limited partner, shareholder
or other type of pool participant (such as a member of a limited
liability company), to aggregate the pool's positions with the
trader's other positions if the trader has as an ownership
interest of 25% or greater in the pooled account or if the pool has
ten or fewer participants.(32)
The Commission does not intend by this proposal to modify the general
treatment of limited partners or shareholders in commodity pools, but
rather intends to require aggregation by limited partners or
shareholders in unusual or atypical arrangements.(33) The Commission requests commenters
specifically to address the typical organization for pools and whether
levels proposed are appropriate for reaching only unusual ownership
The Commission is proposing an additional revision to the existing
limited partnership exemption to clarify its application to commodity
pool operators. Currently, commodity pools are excluded from the
limited partnership exemption. Accordingly, commodity pool operators
which are also a limited partner have a financial interest which
causes them to aggregate their positions if their ownership interest
is ten percent or greater. This is apart from the requirement that
they aggregate positions based upon trading control. The question has
arisen whether the commodity pool operator's principals or
affiliates, if investing as limited partners, are covered by the ten
percent interest requirement. The Commission is of the view that
principals and affiliates of the commodity pool operator were intended
to be treated under the rule the same as the commodity pool operator
itself. This would be consistent with the explicit treatment of FCMs
investing in customer trading programs or pools under the 1979
Aggregation Policy. The Commission is proposing to amend the limited
partner exception to make explicit its understanding of the rule's
application to the principals and affiliates of the pool
III. Other matters
A. Paperwork Reduction Act
When publishing proposed rules, the Paperwork Reduction Act of 1995
(Pub. L. 104-13 (May 13, 1996)) imposes certain requirements on
federal agencies (including the Commission) in connection with their
conducting or sponsoring any collection of information as defined by
the Paperwork Reduction Act. In compliance with the Act, the
Commission, through this rule proposal, solicits comments to:
(1) evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including the validity of the methodology and assumptions used; (2)
evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information including the validity of the
methodology and assumptions used; (3) enhance the quality, utility,
and clarity of the information to be collected; and (4) minimize the
burden of the collection of the information on those who are to
respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques
or other forms of information technology, e.g., permitting electronic
submission of responses.
The Commission has submitted the proposed rule and its associated
information collection requirements to the Office of Management and
Budget. The proposed rules are part of two approved information
collections. The burdens associated with these rules are as
COLLECTION NUMBER (3038-0013)
Average burden hours per response 6
Number of respondents 12
Frequency of response On occasion
COLLECTION NUMBER 3038-0009
Average burden hours per response 4.74
Number of respondents 3709
Frequency of response On occasion
Persons wishing to comment on the information which would be required
by this proposed/amended rule should contact the Desk Officer, CFTC,
Office of Management and Budget, Room 10202, NEOB, Washington, DC
20503, (202) 395-7340. Copies of the information collection submission
to OMB are available from the CFTC Clearance Officer, 1155 21st St
N.W., Washington, DC 20581, (202) 418-5160.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) 5 U.S.C. 601 et
seq., requires that agencies, in proposing rules, consider the
impact of those rules on small businesses. The Commission has
previously determined that large traders are not small entities for
purposes of the RFA.(34) The
Commission believes that the proposed rule amendments to raise
Commission speculative position limits would only impact large
traders. In addition, the Commission is of the opinion that the
proposed amendments to Commission rule 150.3, under which certain
eligible entities will be exempted from speculative limits (except in
the spot-month) would apply exclusively to large traders, as would the
proposal to codify in rule 150.4 its policies on aggregation.
Similarly, the Commission's proposal to aggregate the positions of
participants in pooled accounts with a greater than 25 percent
ownership interest in the accounts is not expected to impact a
significant number of small entities. The Chairperson, on behalf of
the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that
the action taken herein will not have a significant economic impact on
a substantial number of small entities. This certification is based on
the fact that the proposed rules will lift speculative limit levels,
extend exemptive relief from speculative limits (except in the
spot-month) to certain eligible entities and codify the Commission
policies on aggregation, including its rules on aggregating positions
for speculative limit compliance. The proposed rules permitting such
transactions subject to the specified conditions, therefore, remove a
burden for all entities, regardless of size.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements, Segregation requirements.
17 CFR Part 17
Brokers, Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 18
Brokers, Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 150
Agricultural commodities, Bona fide hedge positions, Position limits,
In consideration of the foregoing, and pursuant to the authority
contained in the Act, and in particular sections 2(a)(1), 2(a)(2), 4a,
4c, 4f, 4g, 4i, 4n, 5, 5a, 6b, 6c, 8a, and 15, 7 U.S.C. 2, 6a, 6c, 6f,
6g, 6i, 6n, 7, 7a, 12a 13a, 13a-1, and 19, the Commission hereby
proposes to amend parts 1, 17, 18, and 150 of chapter I of title 17 of
the Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority 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, 61, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9,
12, 12a, 12c, 13a, 13a-l, 16, 16a, 19, 21, 23, and 24.
2. Section 1.61 is proposed to be removed and reserved.
PART 17--REPORTS BY FUTURES COMMISSION MERCHANTS, MEMBERS OF
CONTRACT MARKETS AND FOREIGN BROKERS.
3. The authority citation for part 17 continues to read as follows:
Authority: 7 U.S.C. 6a, 6d, 6f, 6g, 6i, 7, and 12a.
4. Section 17.00 is proposed to be amended by renumbering paragraph
(b)(1) as (b) and revising it, by removing paragraphs (b)(2) and (c),
by renumbering paragraphs (b)(1)(i) and (b)(1)(ii) as (b)(1) and
(b)(2), respectively, and by adding paragraph (b)(3), to read as
§17.00 Information to be furnished by futures commission merchants, clearing members and foreign brokers.
* * * * *
(b) Interest in or control of several accounts. Except as otherwise instructed by the Commission or its designee and as specifically provided in §150.4 of this chapter, if any person holds or has a financial interest in or controls more than one account, all such accounts shall be considered by the futures commission merchant, clearing member or foreign broker as a single account for the purpose of determining special account status and for reporting purposes. For purposes of this section, the following shall apply:
(1) * * *
(3) Account ownership.-- Multiple accounts owned by a trader
shall be considered a single account as provided under
§§150.4(b), (c) and (d) of this chapter.
PART 18--REPORTS BY TRADERS
5. The authority citation for part 18 continues to read as follows:
Authority: 7 U.S.C. 2, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m,
6n, 12a, and 19; 5 U.S.C. 552 and 552(b) unless otherwise noted.
6. Section 18.01 is proposed to be revised to read as follows:
§18.01 Interest in or control of several accounts.
If any traders holds, has a financial interest in or controls
positions in more than one account, whether carried with the same or
with different futures commission merchants or foreign brokers, all
such positions and accounts shall be considered as a single account
for the purpose of determining whether such trader has a reportable
position and, unless instructed otherwise in the special call to
report under §18.00 of this part, for the purpose of
PART 150--LIMITS ON POSITIONS
6. The authority citation for part 150 continues to read as follows:
Authority: 7 U.S.C. 6a, 6c and 12a(5).
7. In §150.1 the introductory text of paragraph (d), and
paragraphs (d)(2), (e)(2) and (e)(5) are proposed to be revised to
read as follows:
* * * * *
(d) Eligible entity means--
A commodity pool operator, the operator of a trading vehicle which is excluded or who itself has qualified for exclusion from the definition of the term "pool" or commodity pool operator," respectively, under §4.5 of this chapter; the limited partner or shareholder in a commodity pool the operator of which is exempt from registration under §4.13 of this chapter; a commodity trading advisor; a bank or trust company; a savings and loan association; an insurance company; or the separately incorporated affiliates of a futures commission merchant or of any of the above entities:
(1) * * *
(2) Which maintains: (i) only such minimum control over the
independent account controller as is consistent with its fiduciary
responsibilities and necessary to fulfill its duty to supervise
diligently the trading done on its behalf; or (ii) if a limited
partner or shareholder of a commodity pool exempt from registration
under §4.13 of this chapter, only such limited control as is
consistent with its status.
(e) Independent Account Controller means a person--
(1) * * *
(2) Over whose trading the eligible entity maintains only such minimum control as is consistent with its fiduciary responsibilities to fulfill its duty to supervise diligently the trading done on its behalf or as is consistent with such other legal rights or obligations which may be incumbent upon the eligible entity to fulfill;
(3) * * *
(5) Who is registered as a futures commission merchant, introducing broker, commodity trading advisor or an associated person of any such registrant or a commodity pool operator that is exempt from registration under §4.13 of this chapter.
8. Section 150.2 is proposed to be revised to read as follows:
§150.2 Position limits.
No person may hold or control positions, separately or in combination,
net long or net short, for the purchase or sale of a commodity for
future delivery or, on a futures-equivalent basis, options thereon, in
excess of the following:
SPECULATIVE POSITION LIMITS
LIMITS BY NUMBER OF CONTRACTs
|CHICAGO BOARD OF TRADE|
|MIDAMERICA COMMODITY EXCHANGE|
|MINNEAPOLIS GRAIN EXCHANGE|
|Hard Red Spring Wheat||600||3,000||4,000|
|NEW YORK COTTON EXCHANGE|
|Cotton No. 2||300||2,500||3,500|
|KANSAS CITY BOARD OF TRADE|
|Hard Winter Wheat||600||3,000||4,000|
9. Section 150.4 is proposed to be revised to read as follows:
150.4 Aggregation of positions.
(a) Positions to be aggregated. The position limits set forth
in §150.2 of this part shall apply to all positions in accounts
for which any person by power of attorney or otherwise directly or
indirectly holds positions or controls trading or to positions held by
two or more persons acting pursuant to an expressed or implied
agreement or understanding the same as if the positions were held by,
or the trading of the position were done by, a single
(b) Ownership of accounts. For the purpose of applying the
position limits set forth in §150.2, except for the ownership
interest of limited partners or shareholders as set forth in paragraph
(c) of this section, any trader holding positions in more than one
account, or holding accounts or positions in which the trader by power
of attorney or otherwise directly or indirectly has a 10 percent or
greater ownership or equity interest, must aggregate all such accounts
(c) Ownership by limited partners, shareholders or other pool participants. For the purpose of applying the position limits set forth in §150.2, any trader having a 25 percent or greater ownership or equity interest in an account or positions as a limited partner, shareholder or other category of pool participant must aggregate those accounts or positions with all other accounts or positions owned or controlled by the trader; Provided however, that:
(1) a limited partner, shareholder or other pool participant that is also a principal or affiliate of the commodity pool operator must aggregate the pooled account or positions with all other accounts or positions owned or controlled by that trader if the trader's ownership or equity interest in the pooled accounts or positions is 10 percent or greater; or
(2) each limited partner, shareholder or other pool participant having
an ownership interest in a pooled account or positions with ten or
fewer partners or shareholders must aggregate the pooled account or
positions with all other accounts or positions owned or controlled by
that trader if the trader's ownership or equity interest in the
pooled accounts or positions is 10 percent or greater.
(d) Trading Control by Futures Commission Merchants. The position limits set forth in §150.2 of this part shall be construed to apply to all positions held by a futures commission merchant 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, unless:
(1) A trader other than the futures commission merchant directs trading in such an account;
(2) The futures commission merchant maintains only such minimum control over the trading in such an account as is necessary to fulfill its duty to supervise diligently trading in the account; and
(3) Each trading decision of the discretionary account or the customer
trading program is determined independently of all trading decisions
in other accounts which the futures commission merchant holds, has a
financial interest of 10 percent or more in, or controls.
10. New §150.5 is proposed to be added to read as follows:
§150.5 Exchange-set speculative position
(a) Exchange limits. Each contract market, as a condition of
designation under Part 5, Appendix A of this chapter, shall by bylaw,
rule, regulation, or resolution limit the maximum number of contracts
a person may hold or control, separately or in combination, net long
or net short, for the purchase or sale of a commodity for future
delivery or, on a futures equivalent basis, options thereon. This
section shall not apply to a contract market for which position limits
are set forth in §150.2 of this part or for a futures or option
contract market on a major foreign currency for which there is no
legal impediment to delivery and for which there exists a highly
liquid cash market. Nothing in this section shall be construed to
prohibit a contract market from fixing different and separate position
limits for different types of futures contracts based on the same
commodity, different position limits for different futures or for
different delivery months, or from exempting positions which are
normally known in the trade as "spreads, straddles, or
arbitrage," or from fixing limits which apply to such positions
which are different from limits fixed for other positions.
(b) Levels at designation. At the time of its initial designation, a contract market must provide for speculative position limit levels as follows:
(1) the spot month limit level for physical delivery contracts must be no greater than one-quarter of the estimated spot month deliverable supply calculated separately for each month to be listed and for cash-settled contracts based on a small or not highly liquid underlying cash market must be at a level that will tend to prevent or diminish price manipulation;
(2) individual non-spot month or all-months-combined levels must be no greater than 1,000 contracts for tangible commodities other than energy products;
(3) individual non-spot month or all-months-combined levels must be no
greater than 5,000 contracts for energy products and non-tangible
commodities, including contracts on financial products.
(c) Adjustments to levels. Twelve months after a contract market's initial listing for trading, or at any time thereafter, contract markets may adjust their speculative limit levels as follows:
(1) the spot month limit level for physical delivery contracts must be no greater than one-quarter of the estimated spot month deliverable supply calculated separately for each month to be listed and for cash-settled contracts based on a small or not highly liquid underlying cash market must be at a level that will tend to prevent or diminish price manipulation; and
(2) individual non-spot month or all-months-combined levels must be no
greater than 10 percent of the average combined futures and
delta-adjusted option month-end open interest for the most recent
calendar year up to 25,000 contracts with a marginal increase of 2.5
percent thereafter, or be based on position sizes customarily held by
speculative traders on the contract market, which shall not be
extraordinarily large relative to total open positions in the
contract, the breadth and liquidity of the cash market underlying each
delivery month and the opportunity for arbitrage between the futures
market and cash market in the commodity underlying the futures
(d) Hedge exemption. (1) No exchange bylaw, rule, regulation, or resolution adopted pursuant to this section shall apply to bona fide hedging positions as defined by a contract market in accordance with §1.3(z)(1) of this chapter. Provided, that the contract market may limit bona fide hedging positions or any other positions which have been exempted pursuant to paragraph (e) of this section which it determines are not in accord with sound commercial practices or exceed an amount which may be established and liquidated in an orderly fashion.
(2) Traders must apply to the contract market for exemption from its
speculative position limit rules. In considering whether to grant such
an application for exemption, contract markets must take into account
the factors contained in paragraph (d)(1) of this section.
(e) Trader accountability exemption. Twelve months after a contract market's initial listing for trading, or at any time thereafter, contract markets may submit for Commission approval under section 5a(a)(12) of the Act and §1.41(b) of this chapter, a bylaw, rule, regulation, or resolution, substituting for the position limits required under paragraphs (a),(b) and (c) of this section, an exchange rule requiring traders to be accountable for large positions as follows:
(1) for futures and option contracts on a financial instrument or product having an average month-end open interest of 50,000 contracts and an average daily trading volume of 100,000 contracts and a very highly liquid cash market, an exchange bylaw, regulation or resolution requiring traders to provide information about their position upon request by the exchange;
(2) for futures and option contracts on a financial instrument or product or on an intangible commodity having an average month-end open interest of 50,000 and an average daily volume of 25,000 contracts and a highly liquid cash market, an exchange bylaw, regulation or resolution requiring traders to provide information about their position upon request by the exchange and to consent to halt increasing further the trader's positions if so ordered by the exchange;
(3) for futures and option contracts on a tangible commodity, including but not limited to metals, energy products, or international soft agricultural products, having an average month-end open interest of 50,000 contracts and an average daily volume of 5,000 contracts and a liquid cash market, an exchange bylaw, regulation or resolution requiring traders to provide information about their position upon request by the exchange and to consent to halt increasing further the trader's positions if so ordered by the exchange, provided, however, such contract markets are not exempt from the requirement of paragraphs (b) or (c) that they adopt an exchange bylaw, regulation or resolution setting a spot month speculative position limit with a level no greater than one-quarter of the estimated spot month deliverable supply;
(4) for purposes of this paragraph, trading volume and month-end open
interest shall be calculated based upon the futures contract and its
related option contract, on a delta-adjusted basis, for all trading
months listed during the most recent twelve month period.
(f) Other exemptions. Exchange speculative position limits
adopted pursuant to this section shall not apply to any position
acquired in good faith prior to the effective date of any bylaw, rule,
regulation, or resolution which specifies such limit or to a person
that is registered as a futures commission merchant or as a floor
broker under authority of the Act except to the extent that
transactions made by such person are made on behalf of or for the
account or benefit of such person. In addition to the express
exemptions specified in this section, a contract market may propose
such other exemptions from its position limits consistent with the
purposes of this section and shall submit such rules for Commission
review under section 5a(a)(12) of the Act and §1.41(b) of this
(g) Aggregation. In determining whether any person has exceeded
the limits established under this section, all positions in accounts
for which such person by power of attorney or otherwise directly or
indirectly controls trading shall be included with the positions held
by such person; such limits upon positions shall apply to positions
held by two or more person acting pursuant to an expressed or implied
agreement or understanding, the same as if the positions were held by
a single person.
Issued by the Commission this ___ day of July, 1998, in Washington, D.C..
Jean A. Webb
Secretary of the Commission
July 15, 1998
TO: The Commission
FROM: The Division of Economic Analysis
RE: Speculative Position Limits; (17 C.F.R. Parts 1,
17, 18 and 150.)
RECOMMENDATION: That the Commission publish in the
Federal Register the attached notice of proposed
CONSULTED: Office of the General Counsel
Office of the Executive Director
Division of Trading and Markets
Division of Enforcement
For the reasons explained therein, the staff recommends that the
Commission publish in the Federal Register the attached notice
of proposed rulemaking. The Commission, in 1993, promulgated the
current speculative position limits as interim final rules at levels
lower than originally proposed. The Division recommends that the
Commission propose raising the levels of Commission-set speculative
position limits for the deferred trading months to the levels
In addition, the Division recommends that the Commission codify
various policies relating to the requirement that exchanges set
speculative position limits as required by rule 1.61, 17
CFR 1.61. These relate to the levels which the Commission has
approved for such rules, and to various exemptions from the general
requirement that exchanges set speculative position limits which the
Commission has approved over the years. The Division further
recommends that the Commission amend the applicability of the limited
exemption from non-spot month speculative position limits under
Commission rule 150.3, 17 CFR 150.3, for entities that authorize
independent account controllers to trade on their behalf, and that the
Commission propose clarifying amendments to its rule on aggregating
The Division also recommends that this notice of proposed rulemaking be submitted for publication in the Federal Register with a companion notice relating to Guideline No.1, which has been forwarded for Commission consideration under separate cover.
1. See, H.R. Rep. No. 421, 74th
Cong., 1st Sess. 1 (1935); See also, H.R. Rep. No. 624,
99th Cong., 2d Sess. 44 (1986). Section 4a(1) of the Commodity
Exchange Act, 7 U.S.C. 6a(1), makes the explicit finding that:
[e]xcessive speculation in any commodity under contracts of sale of such commodity for future delivery made on or subject to the rules of contract markets causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.
2. Commission rule 1.61, 17 CFR 1.61, requires that, absent an exemption, exchanges adopt and enforce speculative position limits for all contract markets which are not subject to Commission-set limits. In addition, Commission rule 1.61 permits exchanges to adopt and enforce their own speculative position limits for those contracts which have Commission speculative position limits, as long as the exchange limits are not higher than the Commission's.
3. Section 4a(e) provides that a violation of a speculative position limit established by a Commission-approved exchange rule is also a violation of the Act. Thus, the Commission can enforce directly violations of exchange-set speculative position limits as well as those provided under Commission rules.
4. Initially, for example, the Commission
redefined "hedging" (42 FR 42748 (August 24, 1977)), raised
speculative position limits in wheat (41 FR 35060 (August 19, 1976)),
and in 1979 issued its statement of policy on aggregation of accounts
and adoption of related reporting rules (1979 Aggregation Policy), 44
FR 33839 (June 13, 1979).
Subsequently, the Commission modified and updated speculative position
limits by issuing a clarification of its hedging definition with
regard to the "temporary substitute" and
"incidental" tests (52 FR 27195 (July 20, 1987)) and
guidelines regarding the exemption of risk-management positions from
exchange-set speculative position limits in financial futures
contracts. 52 FR 34633 (September 14, 1987). Moreover, in 1988, the
Commission promulgated Commission rule 150.3(a)(4), an exemption from
speculative position limits for the positions of multi-advisor
commodity pools and other similar entities which use independent
account controllers. The Commission subsequently amended Commission
rule 150.3(a)(4), broadening its applicability to commodity trading
advisors and simplifying and streamlining the application process. 56
FR 14308 (April 12, 1991).
In 1991, the Commission solicited public comment on, and subsequently approved, exchange requests for exemptions for futures and option contracts on certain financial instruments from the Commission rule 1.61 requirement that speculative position limits be specified for all contracts. 56 FR 51687 (October 15, 1991).
5. However, the Commission did set
stepped increases for the cotton contract. Those commenting on the
grain and soybean complex limits opposed telescoping limits, in part,
in an attempt to promote greater liquidity in the back months. In
contrast, those commenting on the proposed speculative position limits
in cotton did not object to the higher single-month limit level. 52 FR
In light of the strong preferences expressed by the commenters at that time, and the range of acceptable solutions which the data supported, the Commission acceded to the views of the commenters. Subsequently, as it expected, the Commission's experience monitoring both Commission and exchange-set limits with stepped increases was favorable. None of the adverse consequences hypothesized by the opposing commenters occurred.
6. These petitions requested that the Commission amend its rules to increase Commission speculative position limits in the CBT corn, wheat, oats, soybeans, soybean oil, and soybean meal futures contracts, in the NYCE's cotton No. 2 futures contract, and in the KCBT's and MGE's wheat futures contracts. The CBT also requested that the Commission expand the current exemption for spread positions between months within the same crop year to an exemption for spread positions between any months, outside of the spot month, regardless of the crop year and to increase the overall level of this exemption. The CBT separately sought Commission approval for increases to the exchange-set speculative position limits on these commodities.
7. Providing for a marginal increase to the speculative position limit of 2.5% was "based upon the universal observation that the size of the largest individual positions in a market do not continue to grow in proportion with increases in the overall open interest of the market." Id. The Commission also proposed a minimum level of 1,000 contracts.
8. Those commenters included three futures exchanges; a broad-based futures industry association; four futures commission merchants; 26 commodity pool operators, commodity trading advisors or associations of such entities; 20 groups or firms representing agricultural interests; eight individual agricultural producers; and one exchange member. In addition, the proposed rules were a topic of discussion at the October 19, 1992, meeting of the Commission's Agricultural Advisory Committee.
9. In its interim final rulemaking, the Commission determined to maintain a parity of limit levels for wheat traded on the CBT, KCBT, and MGE. 58 FR 17979-179080. Accordingly, only data from the larger CBT wheat market were analyzed.
10. The Commission originally proposed to increase the spot month limit in oats based upon changes in the cash market. See, 57 FR at 12770, n. 17. The increases noted at the time have since reversed. Accordingly, the Commission is not proposing any change to the current spot month limit for oats.
11. The limits are shown here in terms of the contract size traded on each exchange. The size of the speculative position limit being proposed is based upon the current contract size. Any subsequent change in contract size would require a conforming adjustment to the limit. For comparative purposes, the MCE limits are expressed here as though its contracts were for 5,000 bushels, the contract size traded on the CBT. MCE contracts are actually for 1,000 bushels, and its limits therefore would be five times the size shown on the table.
12. The CME and the Philadelphia Board of Trade (PBOT), as a matter of exchange choice, have not included their foreign currency contracts in this category, instead applying to them a position accountability rule.
13. As noted above, the CME and the PBOT voluntarily apply a "category 2" position accountability rule to their foreign currency contracts.
14. The Commission also noted that all such exemptions under rule 1.61(e) must include appropriate plans for the continued surveillance and exchange supervision of trading in these contract markets and for monitoring and review of the operation of the exemption.
15. Although the Commission cited certain energy contracts as eligible for such treatment, the New York Mercantile Exchange (NYMEX) has not sought such treatment for its contract markets. COMEX was acquired by NYMEX and is now a division of NYMEX.
16. Although the Commission exempted foreign currency contracts from the requirement for position accountability rules based upon the recognized liquidity of the underlying cash markets in the major foreign currencies, it has also approved, as a matter of exchange preference, "category 2" position accountability rules (a purely informational provision) for a number of such contracts. Futures and option contracts based on a non-major foreign currency, which are required to include position accountability rules, have been approved for "category 4" position accountability rules with spot-month speculative position limits.
17. However, the Commission did approve for position accountability rules several newly designated contracts which are spreads between existing contracts on financial instruments that are the subject of contracts already having position accountability rules. These spread contracts, the CBT Yield Curve Spreads, were approved for the "category 4" position accountability exception.
18. In addition, in reviewing applications for contract designation for tangible commodities, the staff has relied upon the Commission's formulation providing for a minimum level of 1,000 contracts for non-spot-month speculative position limits. Moreover, the Commission has routinely approved a level of 5,000 contracts for non-spot months in applications for designation of financial futures and energy contracts and that level has become a rule of thumb as a matter of administrative practice.
19. Although the Commission approved an exchange proposal to apply "category 2" position accountability rules, which is a purely informational provision, to its futures and option contracts on major foreign currencies, the Commission does not require any position accountability rule for such contracts. Futures and option contracts on non-major foreign currencies are required to include a position accountability rule. Accordingly, the Commission approved a "category 4" position accountability exception (spot month limit and a provision enabling the exchange to order a trader not to increase further a position) for such a non-major foreign currency.
20. As explained above, the only instances where position accountability rules were permitted in the absence of prior trading history was where the contracts were closely related to existing contracts for which position accountability rules had already been approved.
21. The policy provided that position accountability could be based on either a liquid futures or cash market. The Commission is proposing to require that both the cash and futures markets be liquid. Accordingly, no futures contract can meet the proposed rule's requirement at the time of its initial designation and must first establish a trading history. The Commission will apply the rule prospectively, and any designated contracts or pending designation applications that have position accountability rules in place in reliance on the liquidity of the cash market alone may continue to rely on the policy. The Commission is seeking comment specifically on this proposed change, its proposed application only to designation applications filed after the effective date of the rule and whether the proposed rule would entail any adverse consequences.
22. The rationale for this criterion is that, as a market's overall size grows, the size of the individual speculative positions that it can absorb and carry without adverse impact increases.
23. A liquid market is one which has sufficient trading activity to enable individual trades coming to a market to be transacted without significantly affecting the price. A high degree of liquidity in the futures and option market better enables traders to arbitrage these markets with the underlying cash markets. Where the underlying cash markets in turn are very liquid and have extremely large deliverable supplies, the threat of market manipulation or distortions caused by large speculative positions is lessened. See, 56 FR at 51689.
24. See, e.g., Commission rule 18.01 ("holds, has a financial interest in or controls"). Using two independent criteria may lead to positions being aggregated in more than one manner. Although the Commission's large trader reporting system routinely aggregates positions reported by FCMs on the basis of the control criterion, Commission staff may direct FCMs to report particular accounts on the basis of ownership, as well. In addition, the Commission may require by special call that individual traders file large-trader reports for all positions which they own or control.
25. The 1979 Aggregation Policy offered guidance on the criteria considered in determining whether the FCM exercises control over the trading decisions of the customer discretionary accounts or trading programs. These included the customer account agreement, advertising, the agreements between the FCM and its employee or other trader, the degree of supervision, the confidentiality of the program's trading decisions, reliance on the FCM for market information, and financial investment by the FCM in the program greater than 10% and common trading patterns. Id. at 33844.
26. FCMs have similar but not identical relief under the 1979 Aggregation Policy discussed above.
27. Affiliated companies are generally understood to include one company that owns, or is owned by, another or companies that share a common owner.
28. See e.g., sections 2(a)(1)(A)(iii) and 4f(c) of the Act and Commission rule 166.3.
29. As discussed above, the Commission is proposing to include within the exemption from speculative position limits under Commission rule 150.3 the operators of commodity pools which are exempt from registration under Commission rule 4.13.
30. Section 303(b) of the Revised
Uniform Limited Partnership Act provides in part that:
A limited partner does not participate in the control of the business . . . solely by . . .(2) consulting with and advising a general partner with respect to the business of the limited partnership. . . .
31. Commission rule 18.01 provides, in
If any trader holds, has a financial interest in or controls more than one account, . . . all such accounts shall be considered as a single account for . . . the purpose of reporting. For the purpose of §18.01, except for the interest of a limited partner or shareholder (other than the CPO) in a commodity pool, the term "financial interest" shall mean an interest of 10 percent or more in ownership or equity of an account.
32. It should be noted that, while such positions must be aggregated, the Commission has also proposed to include such entities within the exemption of rule 150.3. Accordingly, where the limited partners in fact treat the partnership as an independent trader, they qualify for an exemption from speculative position limits for non-spot months. During the spot month, however, the limited partners or shareholders would be required to aggregate the partnership positions.
33. The Commission is proposing to clarify that participants in additional categories of limited-liability business organizations, such as members of limited liability companies, for the purpose of these rules, are treated the same as limited partners or shareholders.
34. 47 FR 18618 (April 30, 1982).