2011-1154

Federal Register, Volume 76 Issue 17 (Wednesday, January 26, 2011)[Federal Register Volume 76, Number 17 (Wednesday, January 26, 2011)]

[Proposed Rules]

[Pages 4752-4777]

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

[FR Doc No: 2011-1154]

[[Page 4751]]

Vol. 76

Wednesday,

No. 17

January 26, 2011

Part II

Commodity Futures Trading Commission

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17 CFR Parts 1, 150 and 151

Position Limits for Derivatives; Proposed Rule

Federal Register / Vol. 76 , No. 17 / Wednesday, January 26, 2011 /

Proposed Rules

[[Page 4752]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 150 and 151

RIN 3038-AD15 and 3038-AD16

Position Limits for Derivatives

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Title VII of the Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010 (``Dodd-Frank Act'') requires the Commodity

Futures Trading Commission (``Commission'' or ``CFTC'') to establish

position limits for certain physical commodity derivatives. The

Commission is proposing to simultaneously establish position limits and

limit formulas for certain physical commodity futures and option

contracts executed pursuant to the rules of designated contract markets

(``DCM'') and physical commodity swaps that are economically equivalent

to such DCM contracts. In compliance with the requirements of the Dodd-

Frank Act, the CFTC is also proposing aggregate position limits that

would apply across different trading venues to contracts based on the

same underlying commodity. The Commission is proposing to establish

position limits in two phases: The first phase would involve adopting

current DCM spot-month limits, while the second phase would involve

establishing non-spot-month limits based on open interest levels as

well as establishing Commission-determined spot-month limits. The

proposal includes exemptions for bona fide hedging transactions and for

positions that are established in good faith prior to the effective

date of specific limits that could be adopted pursuant to final

regulations. This notice of rulemaking also proposes new account

aggregation standards, visibility regulations that are similar to

current reporting obligations for large bona fide hedgers, and new

regulations establishing requirements and standards for position limits

and accountability rules that are implemented by registered entities.

The Commission solicits comment on any aspect of the proposal. The

Commission also solicits comment on particular issues throughout the

preamble.

DATES: Comments must be received on or before March 28, 2011.

ADDRESSES: You may submit comments, identified by RIN numbers 3038-AD15

and 3038-AD16, by any of the following methods:

Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

through the Web site.

Mail: David A. Stawick, 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

www.cftc.gov. You should submit only information that you wish to make

available publicly. If you wish the Commission to consider information

that is exempt from disclosure under the Freedom of Information Act, a

petition for confidential treatment of the exempt information may be

submitted according to the procedure established in Sec. 145.9 of the

Commission's regulations (17 CFR 145.9).

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, Acting Deputy

Director, Market Surveillance, (202) 418-5452, [email protected], or

Bruce Fekrat, Senior Special Counsel, Office of the Director, (202)

418-5578, [email protected], Division of Market Oversight, Commodity

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

NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Position Limits for Physical Commodity Futures and Swaps

A. Background

The Commodity Exchange Act (``CEA'' or ``Act'') of 1936,\1\ as

amended by Title VII of the Dodd-Frank Act,\2\ includes provisions

imposing clearing and trade execution requirements on standardized

derivatives as well as comprehensive recordkeeping and reporting

requirements that extend to all swaps, as defined in CEA section

1a(47). Newly amended section 4a(a)(1) of the Act authorizes the

Commission to extend position limits beyond futures and option

contracts to swaps traded on a DCM or swap execution facility

(``SEF''), swaps that are economically equivalent to DCM futures and

option contracts with position limits, and swaps not traded on a DCM or

SEF that perform or affect a significant price discovery function

(``SPDF'') with respect to regulated entities. Further, new section

4a(a)(5) of the Act requires aggregate position limits for swaps that

are economically equivalent to DCM futures and option contracts with

CFTC-set position limits. Similarly, new section 4a(a)(6) of the Act

requires the Commission to apply position limits on an aggregate basis

to contracts based on the same underlying commodity across: (1) DCMs;

(2) with respect to foreign boards of trade (``FBOTs''), contracts that

are price-linked to a DCM or SEF contract and made available from

within the United States via direct access; and (3) SPDF swaps.

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

\2\ See Dodd-Frank Wall Street Reform and Consumer Protection

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

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

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Sections 4a(a)(2)(B) and 4a(a)(3) of the Act charge the Commission

with setting spot-month, single-month and all-months-combined limits

for DCM futures and option contracts on exempt and agricultural

commodities \3\ within 180 and 270 days, respectively, of the Dodd-

Frank Act's enactment.\4\ In this notice of rulemaking, the Commission

is proposing to establish limits required by Congress in amended CEA

section 4a in two phases, which could involve multiple final

regulations or different implementation dates.\5\ In the first

[[Page 4753]]

transitional phase the Commission proposes to establish spot-month

position limits at the levels currently imposed by DCMs. This first

phase would include related provisions, such as proposed regulation

151.5, pertaining to bona fide hedging, and proposed Sec. 151.7,

pertaining to account aggregation standards. During the second phase

the Commission proposes to establish single-month and all-months-

combined position limits and to set Commission-determined spot-month

position limits.

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\3\ Section 1a(20) of the Act defines the term ``exempt

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

an agricultural commodity. Section 1a(19) defines the term

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

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

equity instrument, measure of inflation, or other macroeconomic

index or measure. Although the term ``agricultural commodity'' is

not defined in the Act, CEA section 1a(9) enumerates a non-exclusive

list of agricultural commodities. The Commission issued a notice of

rulemaking proposing a definition for the term ``agricultural

commodity'' on October 26, 2010. 75 FR 65586. Although broadly

defined, exempt commodity futures contracts are often viewed as

energy and metals products.

\4\ Section 737 of the Dodd-Frank Act, which amended section 4a

of the Act, became effective on July 21, 2010.

\5\ The Commission may implement the two phases in various ways.

It may, for example, pursuant to this notice of proposed rulemaking,

adopt a single final regulation with two implementation provisions,

or it may adopt two separate final regulations.

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As discussed in further detail below, phased implementation is

possible because spot-month position limits are based on available

information: DCMs currently set spot-month position limits based on

their own estimates of deliverable supply. Spot-month limits can,

therefore, be implemented by the Commission relatively expeditiously.

In contrast, most non-spot-month position limits, as set by the

Commission previously and as proposed herein, are based on open

interest levels. Because the Commission was barred under the Commodity

Futures Modernization Act of 2000 from collecting regular data or

regulating most swaps markets, the Commission does not currently have

the open interest and market structure data necessary to establish non-

spot-month position limits. The Commission has proposed regulations

that would permit it to gather positional data on physical commodity

swaps on a regular basis.\6\

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\6\ See Position Reports for Physical Commodity Swaps, 75 FR

67258, November 2, 2010 (proposing position reports on economically

equivalent swaps from clearing organizations, their members and swap

dealers).

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Because the Commission will not be able to implement a

comprehensive system for gathering swap positional data for some time,

this notice of proposed rulemaking does not propose to determine the

numerical non-spot-month position limits for exempt and agricultural

commodity derivatives resulting from the application of the open

interest formulas in proposed Sec. 151.4. Rather, this notice of

rulemaking provides for the determination of such limits when the

Commission receives data regarding the levels of open interest in the

swap markets to which these limits will apply.

The Commission anticipates fixing initial position limits pursuant

to the formulas proposed herein through the issuance of a Commission

order. As proposed, CFTC-set position limits after the transitional

period would be re-calculated every year based on the formulas set

forth in proposed Sec. 151.4, subject to any changes to the formulas

that may be proposed and adopted based on the Commission's surveillance

of the markets for referenced contracts. In this regard, as discussed

in further detail below, the proposed position visibility regulations,

which would effectuate reporting requirements that are similar to

current reporting requirements for large bona fide hedgers, may

facilitate evaluating the efficacy and appropriateness of the proposed

position limit framework if adopted.

B. Statutory Authority

1. Section 4a of the Act

The Dodd-Frank Act preserves the Commission's broad authority to

set position limits. Thus, for example, section 4a(a)(1) of the Act

expressly permits the Commission to set ``different limits for, among

other things, different commodities, markets, futures, or delivery

months * * *'' Under new CEA section 4a(a)(7), the Commission also has

authority to exempt persons or transactions from any position limits it

establishes.

New section 4a(a)(3) of the Act expressly directs the Commission to

set such limits at levels that would serve, to the maximum extent

practicable, in its discretion:

(i) To diminish, eliminate, or prevent excessive speculation as

described under this section;

(ii) To deter and prevent market manipulation, squeezes, and

corners;

(iii) To ensure sufficient market liquidity for bona fide

hedgers; and

(iv) To ensure that the price discovery function of the

underlying market is not disrupted.\7\

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\7\ 7 U.S.C. 6a(a)(3).

This provision incorporates the Commission's historical approach to

setting limits, and is harmonious with the congressional directive in

section 4a(a)(1) of the Act that the Commission set position limits to

prevent or minimize price disruptions that could be caused by excessive

speculative trading.

Section 4a(a)(5) of the Act requires the Commission to develop,

concurrently with position limits for DCM futures and option contracts,

position limits for swaps that are economically equivalent to such

contracts. Section 4a(a)(5) of the Act requires such position limits,

when developed, to be adopted simultaneously.\8\ The defined term

``referenced contract'' in proposed Sec. 151.1, through its reference

to the core futures contracts listed in proposed Sec. 151.2 (``core

referenced futures contracts'' or ``151.2-listed contract''),

identifies the ``economically equivalent'' derivatives that would be

subject to the concurrent development, simultaneous establishment and

aggregate implementation requirements of CEA section 4a. Referenced

contracts are defined as derivatives (1) that are directly or

indirectly linked to the price of a 151.2-listed contract, or (2) that

are based on the price of the same commodity for delivery at the same

location(s) as that of a 151.2-listed contract, or another delivery

location with substantially the same supply and demand fundamentals as

the delivery location of a 151.2-listed contract.\9\ The second part of

the definition of referenced contract therefore proposes to include

derivatives that are settled to a price series that is not based on,

but is nonetheless highly correlated to, the price of a 151.2-listed

contract. Proposed Sec. 151.2, in turn, enumerates 28 core physical

delivery DCM futures contracts that would be subject to the

Commission's proposed position limit framework. Generally, the 151.2-

listed contracts were selected either because such contracts have high

levels of open interest and significant notional value or because they

otherwise may provide a reference price for a significant number of

cash market transactions.\10\

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\8\ Unlike swaps that are economically equivalent to DCM futures

and option contracts with position limits, the Commission is not

required to develop or establish position limits for SPDF swaps at

the same time that it develops or establishes position limits for

DCM futures and option contracts. The Commission intends to propose

in a subsequent notice of rulemaking a process by which swaps that

perform or affect a significant price discovery function with

respect to regulated entities can be identified.

\9\ 75 FR 67258, at 67260 (discussing the scope of directly and

indirectly linked swaps).

\10\ See 75 FR 67258, at 62758.

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A primary mission of the CFTC is to foster fair, open and efficient

functioning of the commodity derivatives markets.\11\ Critical to

fulfilling this statutory mandate is protecting market users and the

public from undue burdens that may result from ``excessive

speculation.'' Specifically, section 4a of the Act, as amended by the

Dodd-Frank Act, provides that:

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\11\ See section 3 of the Act, 7 U.S.C. 5.

``Excessive speculation in any commodity under contracts of sale

of such commodity for future delivery [(or swaps traded on or

subject to the rules of a designated contract market or swap

execution facility, or swaps that perform a significant price

discovery function with respect to a registered entity)] * * *

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. For the purpose of

diminishing, eliminating, or preventing such

[[Page 4754]]

burden, the Commission shall * * * proclaim and fix such limits on

the amount of trading which may be done or positions which may be

held by any person * * * as the Commission finds are necessary to

diminish, eliminate or prevent such burden. * * *'' \12\

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\12\ Section 4a(a)(1) of the Act, 7 U.S.C. 6a(a)(1).

Congress has declared that sudden or unreasonable price

fluctuations attributable to ``excessive speculation'' create an

``undue and unnecessary burden'' on interstate commerce and directed

that the Commission shall establish limits on the amounts of positions

which may be held as it finds necessary to ``diminish, eliminate, or

prevent'' such burden. As the plain reading of the statutory text

indicates, the prevention of sudden or unreasonable changes in price

attributable to large speculative positions, even without manipulative

intent, is a congressionally-endorsed regulatory objective of the

Commission.

The Commission is not required to find that an undue burden on

interstate commerce resulting from excessive speculation exists or is

likely to occur in the future in order to impose position limits. Nor

is the Commission required to make an affirmative finding that position

limits are necessary to prevent sudden or unreasonable fluctuations or

unwarranted changes in prices or otherwise necessary for market

protection. Rather, the Commission may impose position limits

prophylactically, based on its reasonable judgment that such limits are

necessary for the purpose of ``diminishing, eliminating, or

preventing'' such burdens on interstate commerce that the Congress has

found result from excessive speculation. A more restrictive reading

would be contrary to the congressional findings and objectives as

embodied in section 4a of the Act.\13\

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\13\ Consistent with the congressional findings and objectives,

the Commission has previously set position limits without finding

that an undue burden of interstate commerce has occurred or is

likely to occur, and in so doing has expressly stated that such

additional determinations by the Commission were not necessary in

light of the congressional findings in section 4a of the Act. In its

1981 rulemaking to require all exchanges to adopt position limits

for commodities for which the Commission itself had not established

limits, the Commission stated:

``As stated in the proposal, the prevention of large and/or

abrupt price movements which are attributable to the extraordinarily

large speculative positions is a congressionally endorsed regulatory

objective of the Commission. Further, it is the Commission's view

that this objective is enhanced by the speculative position limits

since it appears that the capacity of any contract to absorb the

establishment and liquidation of large speculative positions in an

orderly manner is related to the relative size of such positions,

i.e., the capacity of the market is not unlimited.''

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

16, 1981 (adopting then regulation 1.61 (now part of regulation

150.5)).

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2. Legislative History and Discussion

The relevant legislative history, including the congressional

debates and studies preceding the enactment of the CEA, gives further

evidence to the broad mandate conferred on the Commission pursuant to

CEA section 4a. Throughout the 1920s and into the 1930s, a series of

studies and reports found that large speculative positions in the

futures markets for grain, even without manipulative intent, can cause

``disturbances'' and ``wild and erratic'' price fluctuations. To

address such market disturbances, Congress was urged to adopt position

limits to restrict speculative trading notwithstanding the absence of

``the deliberative purpose of manipulating the market.'' \14\ In 1936,

based upon such reports and testimony, Congress provided the Commodity

Exchange Authority (the predecessor of the Commission) with the

authority to impose Federal speculative position limits. In doing so,

Congress expressly acknowledged the potential for market disruptions

resulting from excessive speculative trading and the need for measures

to prevent or minimize such occurrence.\15\

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\14\ See 7, U.S. Fed. Trade Commission, Report of the Federal

Trade Commission on the Grain Trade: Effects of Future Trading 293-

94 (1926). For example, the Federal Trade Commission concluded:

The very large trader by himself may cause important

fluctuations in the market. If he has the necessary resources,

operations influenced by the idea that he has such power are bound

to cause abnormal fluctuations in prices. Whether he is more often

right than wrong and more often successful than unsuccessful, and

whether influenced by a desire to manipulate or not, if he is large

enough he can cause disturbances in the market which impair its

proper functioning and are harmful to producers and consumers.

The FTC recommended that limits be placed on trading,

particularly on the amount of open interest that could be held by

any one trader. Similarly, based on its study of price fluctuations

in the wheat market, the Department of Agriculture urged Congress to

provide the Grain Futures Administration (GFA), which had been

created by the Grain Futures Act, with the authority to impose

position limits. See Fluctuations in Wheat Futures, S. Doc. No. 69-

135 (1st Sess. 1926); see also Speculative Position Limits in Energy

Futures Markets: Hearing Before the U.S. Commodity Futures Trading

Commission (July 28, 2009) (statement of Dan M. Berkovitz, General

Counsel, U.S. Commodity Futures Trading Commission), available at

http://www.cftc.gov/PressRoom/SpeechesTestimony/2009/berkovitzstatement072809.html.

\15\ The report accompanying the 1935 bill that became the Act

stated ``the fundamental purposes of the measure is to insure fair

practice and honest dealing on the commodity exchanges and to

provide a measure of control over those forms of speculative

activity which too often demoralize the markets to the injury of

producers and consumers and the exchanges themselves. H.R. Rep. No.

74-421, at 1 (1935), accompanying H.R. 6772.

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The basic statutory mandate in section 4a of the Act to establish

position limits to prevent ``undue burdens'' associated with

``excessive speculation'' has remained unchanged--and has been

reaffirmed by Congress several times--over the past seven decades. In

1974, when Congress created the Commission as an independent regulatory

agency, it reiterated the purpose of the Act to prevent fraud and

manipulation and to control speculation.\16\ In connection with another

major overhaul of the Act, the Commodity Futures Modernization Act of

2000, Congress expressly authorized exchanges to use position

accountability as an alternative means to limit speculative positions.

However, Congress did not alter the Commission's mandate in CEA section

4a to establish position limits to prevent such undue burdens on

interstate commerce. Then, in the CFTC Reauthorization Act of

[[Page 4755]]

2008,\17\ Congress, among other things, expanded the Commission's

authority to set position limits to significant price discovery

contracts on exempt commercial markets.

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\16\ S. Rep. No. 93-1131, 93rd Cong., 2d Sess. (1974).

\17\ Food, Conservation and Energy Act of 2008, Public Law 110-

246, 122 Stat. 1624 (June 18, 2008).

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Finally, as outlined above, pursuant to the Dodd-Frank Act,

Congress significantly expanded the Commission's authority and mandate

to establish position limits beyond futures and option contracts to

include, for example, economically equivalent derivatives.\18\ Congress

expressly directed the Commission to set limits in accordance with the

standards set forth in sections 4a(a)(1) and 4a(a)(3) of the Act,\19\

thereby reaffirming the Commission's authority to establish position

limits as it finds necessary in its discretion to address excessive

speculation.\20\ As noted earlier, section 4a(a)(3) of the Act

expressly sets forth the Commission's broad discretion in setting

position limits under section 4a(a)(1), and the necessary

considerations in setting such limits. Section 4a(a)(3) effectively

incorporates the Commission's historical approach to setting

limits,\21\ and is harmonious with the congressional directive in

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

its discretion to prevent or minimize burdens that could be caused by

excessive speculative trading.

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\18\ Dodd-Frank Act, Public Law 111-203, 737, 124 Stat. 1376

(2010). The Dodd-Frank Act amendments to section 4a of the Act

became effective upon the date of enactment of the Dodd-Frank Act.

\19\ Section 4a(a)(2) of the Act provides that the Commission,

in setting position limits, must do so in accordance with the

standards set forth in CEA section 4a(a)(1). 7 U.S.C. 6a(a)(2).

\20\ Senator Lincoln (then the Chair to the Senate Agriculture

Committee) stated that amended section 4a ``will grant broad

authority to the [Commission] to once and for all set aggregate

position limits across all markets on non-commercial market

participants * * * I believe the adoption of aggregate position

limits will help bring some normalcy back to our markets and reduce

some of the volatility we have witnessed over the last few years.''

156 Cong. Rec. S5919 (daily ed. July 15, 2010) (statement of Sen.

Lincoln).

\21\ See 46 FR 50938.

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Large concentrated positions in the physical commodity markets can

potentially facilitate price distortions given that the capacity of any

market to absorb the establishment and liquidation of large positions

in an orderly manner is related to the size of such positions relative

to the market and the market's structure and is, therefore, not

unlimited.\22\ Concentration of large positions in one or a few

traders' accounts can also create the unwarranted appearance of

appreciable liquidity and market depth which, in fact, may not exist.

Trading under such conditions can result in sudden changes to commodity

prices that would otherwise not prevail if traders' positions were more

evenly distributed among market participants.\23\ Position limits

address these risks through ensuring the participation of a minimum

number of traders that are independent of each other and have different

trading objectives and strategies.

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\22\ See Fluctuations in Wheat Futures, S. Doc. No. 69-135 (1st

Sess. 1926); and 7 U.S. Fed. Trade Commission, Report of the Federal

Trade Commission on the Grain Trade: Effects of Future Trading 293-

94 (1926); see also Thomas A. Hieronymus, Economics of Futures

Trading 313 (1971) (``Limits on speculative positions have met with

a high degree of trade acceptance and only recently has the size of

some of the limits began to be called into question. The general

notion is that no one man should be allowed to have such a position

or trade in such volume that he could push the price around with his

sheer bulk'').

\23\ By way of illustration, after the silver futures market

crisis during late 1979 to early 1980, commonly referred to as ``the

Hunt Brothers silver manipulation,'' the Commission concluded that

``[t]he recent events in silver suggest that the capacity of any

futures market to absorb large positions in an orderly manner is not

unlimited.'' Subsequently, the Commission adopted regulation 1.61,

which required all exchanges to adopt and submit for Commission

approval position limits in active futures markets for which no

exchange or Commission limits were then in effect. More recently,

Congress, in response to high prices and volatility in commodity

prices generally, and energy prices in particular, extended the

Commission's authority to set limits to significant price discovery

contracts traded on exempt commercial markets. Food, Conservation

and Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,

2008).

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The Commission currently sets and enforces position limits with

respect to certain agricultural products. For metals and energy

commodities, in 1981 the Commission began to require exchange-set

limits, with a Commission approval process, for any active futures

markets without existing Commission or exchange limits.\24\ This

framework was significantly scaled back in 1991, after which the

Commission began to approve exchange accountability provisions in place

of position limits.\25\ Such accountability provisions took effect with

respect to certain metals derivatives in 1992, and with respect to

energy and soft agricultural derivatives in 2001. Currently, the

Commission authorizes DCMs to set position limits and accountability

rules to protect against manipulation and congestion and price

distortions. The proliferation of economically-equivalent instruments

trading in multiple trading venues, however, warrants extension of the

Commission-set position limits beyond agricultural products to metals

and energy commodities. The Commission anticipates that this market

trend will continue as, consistent with the regulatory structure

established by the Dodd-Frank Act, economically equivalent derivatives

based on exempt and agricultural commodities are executed pursuant to

the rules of multiple DCMs and SEFs and other Commission registrants.

Under these circumstances, uniform position limits should be

established across such venues to prevent regulatory arbitrage and

ensure a level playing field for all trading venues. Because it has the

authority to gather data and impose regulations across trading venues,

the Commission is uniquely situated to establish uniform position

limits and related requirements for all economically equivalent

derivatives.\26\ A uniform approach would also encourage better risk

management and could reduce systemic risk. Despite centralized clearing

arrangements employed by DCMs to reduce systemic risk, a levered market

participant can still take a very large speculative position across

multiple venues. The proposed position limit framework would reduce the

ability of such levered entities to take such positions and to cause

systemic risk.

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\24\ 46 FR 50938.

\25\ See Speculative Position Limits--Exemptions from Commission

Rule 1.61, 56 FR 51687, October 15, 1991; and Speculative Position

Limits--Exemptions from Commission Rule 1.61, 57 FR 29064, June 30,

1992.

\26\ Because individual markets have knowledge of positions on

their own facilities, it is difficult for them to assess the full

impact of a trader's positions on the greater market.

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As noted above, in setting position limits to guard against

excessive speculation, the Commission, pursuant to the factors

enumerated in section 4a(a)(3) of the Act, has endeavored to maximize

the objectives of preventing excessive speculation, deterring and

preventing market manipulation, and ensuring that markets remain

sufficiently liquid so as to afford end users and producers of

commodities the ability to hedge commercial risks and to promote

efficient price discovery.

C. Public Comments in Advance of Commission Action

As with other forthcoming notices of rulemaking proposing

regulations to implement the Dodd-Frank Act, the Commission accepted

public comments in advance of issuing this release. The Commission has

received approximately 350 public comments as of December 16, 2010.\27\

The Commission has reviewed these comments and considered them in

drafting the

[[Page 4756]]

proposed regulations. The majority of commenters submitted letters

advocating the view that position limits should be set at one percent

of the total annual world production for a given commodity. Several

expressed views on a single issue, notably the importance of preventing

market manipulation.

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\27\ These comments may be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/OTC_26_PosLimits.html.

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The view most commonly expressed by certain other commenters,

including the CME Group, Electric Power Supply Association, Futures

Industry Association, Morgan Stanley, and National Gas Supply

Association, was opposition to a provision that resulted in the

``crowding out'' of speculative positions. A ``crowding out'' provision

would have limited the ability of a trader that hedges or acts as a

swap dealer to take on speculative positions once certain positional

thresholds were exceeded.\28\ A concern raised by the commenters was

related to the unintended consequence of excluding knowledgeable

traders, or traders that needed to hold speculative positions, from the

commodity derivatives markets. The Commission has determined to not

propose a ``crowding out'' provision at this time.

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\28\ See Federal Speculative Position Limits for Referenced

Energy Contracts and Associated Regulations, 75 FR 4144, at 4146,

January 26, 2010, withdrawn 75 FR 50950, August 18, 2010.

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Several commenters addressed bona fide hedging exemptions to

position limits. Some of these commenters, for example the CME Group,

presented the view that the Commission should adopt a broad definition

for bona fide positions that would cover ``all non-speculative''

positions. Morgan Stanley recommended that the Commission ``exercise

its discretion to interpret [s]ection 4(a)(c)(2), including the term

`economically appropriate', broadly to permit products and services

similar to [risk management products offered by swap dealers] to

qualify as bona fide hedging transactions or positions.'' The National

Grain and Feed Association (``NGFA'') presented the view that the

Commission ``should use its authority to grant hedge exemptions to

financial institutions, index funds, hedge funds or other

nontraditional participants in agricultural futures markets extremely

sparingly and only if it can be demonstrated clearly that such

exemptions will not harm contract performance for traditional

hedgers.'' The NGFA further recommended that the Commission ```look

through' swap transactions and allow hedge exemptions to be granted

only for that portion of swap dealers' business where the swap dealers'

counterparties are entities that otherwise would have qualified for a

hedge exemption.'' The Commission has seriously considered these views

on the bona fide hedging exemption in light of the express language of

the Act. The Commission has accordingly determined to propose a

definition of bona fide hedging in proposed Sec. 151.5(a)(1)(iv) that

provides for an exemption for a non-bona fide swap counterparty only if

such swap transaction or position represents cash market transactions

and offsets its bona fide counterparty's cash market risks.

Several commenters, including the CME Group, Electric Power Supply

Association, Futures Industry Association, GDF Suez Energy, Morgan

Stanley, and NextEra Energy Power Marketing, expressed concerns

relating to the potential for overly strict account aggregation

standards. The aggregation standards of the proposed regulations

attempt to address some of these concerns by including exemptions for

passive investments in independently controlled and managed commercial

entities as well as exemptions for certain positions held with futures

commission merchants and for traders that are passive pool

participants. The law firm Akin Gump Strauss Hauer & Feld LLP, on

behalf of a commodity trading advisor, specifically argued for the

retention of the independent account controller exemption currently in

force in part 150 of the Commission's regulations, echoing the views of

numerous commenters to the January 2010 proposed rulemaking for

position limits on certain energy contracts. As explained in more

detail in the aggregation section of this preamble, the proposed

regulations address the concern of not having an independent account

controller exemption by establishing the owned non-financial entity

exemption. Some commenters, for example the Electric Power Supply

Association, Futures Industry Association and Morgan Stanley, argued

that aggregation should be based solely on common control, with no

consideration given to common ownership. At this time, the Commission

does not see sufficient justification to change its longstanding

approach of considering both control and ownership in its aggregation

policy. The traditional ten percent ownership standard has proven to be

a useful measure in conjunction with the control standard. In addition,

the proposed owned non-financial entity exemption addresses situations

in which the 10 percent ownership standard has been exceeded but a lack

of common control over trading decisions and strategies warrants

disaggregation.

The CME Group also argued that position limits should not be

imposed until the Commission has gathered sufficient data on the

physical commodity swap markets. In order to address similar concerns,

the Commission proposed regulations in November 2010 that are

specifically designed to gather positional data on physical commodity

swaps.\29\ The Commission anticipates the collection of positional data

to begin during the third quarter of 2011. Furthermore, the Commission

is proposing to fix specific position limits pursuant to formulas

proposed herein (and making other aspects of the proposed regulations

effective) only after collecting positional data on physical commodity

swaps and through the issuance of a Commission order during the first

quarter of 2012, unless the Commission determines that there are

certain commodities for which data is sufficient to implement limits

sooner.

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\29\ See 75 FR 67258.

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In addition to review and consideration of public comments,

Commission staff has held 32 meetings with a variety of market

participants, including bona fide hedgers, swap dealers, hedge funds

and several industry groups, to discuss position limits and in

particular to gather information about the potential impact of

limits.\30\ The Commission has considered information obtained in these

meetings in drafting the proposed regulations.

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\30\ The Commission has made public all meetings that Commission

staff has held with outside organizations in connection with the

implementation of the Dodd-Frank Act, including, for each meeting, a

list of attendees and a summary of the meeting. This information may

be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/otc_meetings.html.

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II. The Proposed Regulations

A. Spot-Month Position Limits

The Commission proposes definitions in Sec. 151.3 that identify

the spot month \31\ for referenced contracts in the same commodity that

would be subject to the proposed position limit framework. These

definitions reference the dates on which a spot month commences and

terminates. The definitions for the spot period are based on existing

spot-month definitions set forth by DCMs for 151.2-listed contracts.

These periods, as defined by the Commission, would

[[Page 4757]]

continue into the delivery period for the core referenced futures

contracts, which in turn determine the spot month for all referenced

contracts in the same commodity.

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\31\ The term ``spot month'' does not refer to a month of time.

Rather, it is the trading period immediately preceding the delivery

period for a physically-delivered futures contract and cash-settled

swaps and futures contracts that are linked to the physically-

delivered contract. The length of this period may thus vary

depending on the referenced contract, as described in proposed

regulation 151.3.

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With three exceptions, the 151.2-listed contracts with DCM-defined

spot months are currently subject to exchange-set spot-month position

limits.\32\ Proposed Sec. 151.4 would impose and aggregately apply

spot-month position limits for the referenced contracts. Consistent

with the Commission's longstanding policy regarding the appropriate

level of spot-month limits for physical delivery contracts, these

position limits would be set at 25 percent of estimated deliverable

supply. The spot-month limits would be adjusted annually thereafter.

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\32\ The only contracts based on a physical commodity that

currently do not have spot-month limits are the COMEX mini-sized

gold, silver, and copper contracts that are cash-settled based on

the futures settlement prices of the physical-delivery contracts.

The cash-settled contracts have position accountability provisions

in the spot month rather than outright spot-month limits. These

cash-settled contracts have relatively small levels of open

interest.

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The proposed deliverable supply formula narrowly targets the

trading that may be most susceptible to, or likely to facilitate, price

disruptions. The formula seeks to minimize the potential for corners

and squeezes by facilitating the orderly liquidation of positions as

the market approaches the end of trading and by restricting the swap

positions which may be used to influence the price of referenced

contracts that are executed centrally. Referenced contracts that are

based on the price of the same commodity but where delivery is at a

location that is different than the delivery location of a 151.2-listed

contract would not be subject to the proposed Federal spot-month

position limit. Because the potential incentive and ability to

manipulate the spot-month delivery process to benefit a derivatives

position providing for delivery at a different delivery location is

less, Federal spot-month limits would apply only to futures, options

and swaps that are directly price-linked to a 151.2-listed core

referenced contract or that settle to a price series that prices the

same commodity at the same delivery location. Finally, the proposed

spot-month limits would apply on an aggregate basis, thereby subjecting

these economically equivalent derivatives to the same spot-month

limits, whether or not they are listed for trading on a DCM, cleared,

or uncleared.

Proposed Sec. 151.4 would apply spot-month position limits

separately for physically-delivered contracts and all cash-settled

contracts, including cash-settled futures and swaps. A trader may

therefore have up to the spot-month position limit in both the

physically-delivered and cash-settled contracts. For example, if the

spot-month limit for a referenced contract is 1,000 contracts, then a

trader may hold up to 1,000 contracts long in the physically-delivered

contract and 1,000 contracts long in the cash-settled contract. A

trader's cash-settled contract position would separately be a function

of the trader's position in referenced contracts based on the same

commodity that are cash-settled futures and swaps.\33\

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\33\ For purposes of applying the limits, a trader would convert

and aggregate positions in swaps on a futures equivalent basis.

Guidance on futures equivalency is provided in Appendix A to the

Commission's proposed part 20 rulemaking on position reports for

physical commodity swaps. 75 FR 67258, at 67269.

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The proposed spot-month position limit formula is based on the

Commission's longstanding approach to setting and overseeing spot-month

limits and is consistent with industry practice and the goals of

preventing manipulation through corners or squeezes. Core Principles 3

and 5 for DCMs address congressional concerns regarding potential

manipulation of the futures market, and the Commission has typically

evaluated compliance with these core principles in tandem. Core

Principle 3 specifies that a board of trade shall list only contracts

that are not readily susceptible to manipulation, while Core Principle

5 obligates a DCM to establish position limits and position

accountability provisions where necessary and appropriate ``to reduce

the threat of market manipulation or congestion, especially during the

delivery month.''

In determining whether a physical delivery contract complies with

Core Principle 3, the Commission considers whether the specified terms

and conditions, considered as a whole, result in a deliverable supply

that is sufficient to ensure that the contract is not conducive to

price manipulation or distortion. In general, the term ``deliverable

supply'' means the quantity of the commodity meeting a derivative

contract's delivery specifications that can reasonably be expected to

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

its market value in normal cash marketing channels at the derivative

contract's delivery points during the specified delivery period,

barring abnormal movement in interstate commerce. The establishment of

a spot-month limit pursuant to Core Principle 5 is made based on the

analysis of deliverable supplies, and the Acceptable Practices for this

Core Principle state that, for physically delivered contracts, the

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

deliverable supply. Likewise, the guidance for DCMs in Commission Sec.

150.5(b) provides that for physical delivery contracts, the spot-month

limit level must be no greater than 25 percent of the estimated spot-

month deliverable supply, calculated separately for each month to be

listed.

In Sec. 151.4, the Commission proposes spot-month limits, for not

only referenced contracts that are futures but also referenced

contracts that are economically equivalent swaps, that would, during

the initial implementation period, be set at the spot-month limit

levels determined by DCMs to be equal to 25 percent of estimated

deliverable supply.\34\ In the second phase of implementation, these

spot-month limits would be based on 25 percent of estimated deliverable

supply as determined by the Commission, which could choose to adopt

exchange-provided estimates or, for example, in the case of

inconsistent estimates from exchanges, issue its own estimates.

Pursuant to current exchange procedures for updating the spot-month

limits, exchanges initially establish and periodically update their

limits through rule amendments that are filed with the Commission under

self-certification or approval procedures. As part of the initial

filing, or in response to subsequent inquiries from the Commission, the

exchanges provide information showing how the spot-month limits comply

with the Commission's regulations and acceptable practices.

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\34\ For the ICE Futures U.S. Sugar No. 16 (SF) and Chicago

Mercantile Exchange Class III Milk (DA), the Commission proposes to

adopt the DCM single-month limits for the nearby month or first-to-

expire referenced contract as spot-month limits. These contracts

currently have single-month limits which are enforced in the spot

month.

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With respect to the existing spot-month limits that currently are

in effect for referenced contracts, the Commission notes that,

irrespective of the manner in which a rule amendment is filed (by self-

certification or for approval), Commission staff currently evaluates

the limits for compliance with the requirements of Core Principle 5 and

the criteria set out in the Commission's Acceptable Practices. For

physically delivered contracts, staff evaluates the information

supplied by the exchange and other available information regarding the

underlying commodity to ensure that the spot-month limit does not

exceed 25 percent of the estimated deliverable supplies. For cash-

settled

[[Page 4758]]

contracts, staff evaluates the information supplied by the exchanges

and independently assesses the nature of the market underlying the

cash-settlement calculation, including the depth and breadth of trading

in that market, to determine the ability of a trader to exert market

power and influence the cash-settlement price, with the aim of having a

spot-month limit level that effectively limits a trader's incentive to

exercise such market power.

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

incorporates a conditional-spot-month limit that permits traders

without a hedge exemption to acquire position levels that are five

times the spot-month limit if such positions are exclusively in cash-

settled contracts and the trader holds physical commodity positions

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

supply. The proposed limit maximizes the objectives, enumerated in

section 4a(a)(3) of the Act, of deterring manipulation and excessive

speculation while ensuring market liquidity and efficient price

discovery by establishing a higher limit for cash-settled contracts as

long as such positions are decoupled from large physical commodity

holdings and the positions in physical delivery contracts which set or

affect the value of cash-settled positions. The conditional-spot-month

position limit generally tracks exchange-set position limits currently

implemented for certain cash-settled energy futures and swaps. For

example, the NYMEX Henry Hub Natural Gas Last Day Financial Swap, the

NYMEX Henry Hub Natural Gas Look-Alike Last Day Financial Futures, and

the ICE Henry LD1 swap are all cash-settled contracts subject to a

conditional-spot-month limit that, with the exception of the

requirement that a trader not hold large cash commodity positions, is

identical in structure to the limit proposed herein.

This proposed conditional spot-month position limit formula is

consistent with Commission guidance. The Acceptable Practices for Core

Principle 5 state that a spot-month position limit may be necessary if

the underlying cash market is small or illiquid such that traders can

disrupt the cash market or otherwise influence the cash-settlement

price to profit on a futures position. In these cases, the limit should

be set at a level that minimizes the potential for manipulation or

distortion of the futures contract or the underlying commodity's price.

With respect to cash-settled contracts where the underlying product is

a physical commodity with limited supplies where a trader can exert

market power (including agricultural and exempt commodities), the

Commission has viewed the specification of a spot-month limit to be an

essential term and condition of such contracts in order to ensure that

they are not readily susceptible to manipulation, which is the Core

Principle 3 requirement, and to satisfy the requirements of Core

Principle 5 and the Acceptable Practices thereunder. In practice, for

cash-settled contracts on agricultural and exempt commodities where a

trader's market power is of concern, the practice has been to set the

spot-month limit at some percentage of calculated deliverable supply.

Limiting a trader's position at the expiration of cash-settled

contracts diminishes the incentive to exert market power to manipulate

the cash-settlement price or index to advantage a trader's position in

the cash-settlement contract. Accordingly, the Commission has viewed

the presence of a spot-month speculative limit as a key feature of such

cash-settlement contracts, along with the design of the cash-settlement

index, in ensuring that such contracts are not readily susceptible to

manipulation and thus satisfy the requirements of Core Principles 3 and

5.

In view of the above, the Commission generally has required that,

to comply with Core Principles 3 and 5, all futures contracts based on

agricultural or exempt commodities, because they have finite supplies

and are subject to price distortion and manipulation, must have a spot-

month limits, irrespective of whether the contract specifies physical

delivery or cash settlement. In addition, the establishment of position

limits on swaps is consistent with congressional guidance in the CFTC

Reauthorization Act of 2008.\35\ That legislation amended the CEA by,

among other things, adding core principles in new section 2(h)(7)

governing swaps that were significant price discovery contracts traded

on electronic trading facilities operating in reliance on the exemption

in section 2(h)(3) of the Act. The 2008 legislation amended the Act to

impose certain self-regulatory responsibilities with respect to such

swaps through core principles, including a core principle that required

the adoption of position limits or position accountability levels where

necessary and appropriate. The CFTC Reauthorization Act, thus,

recognized the appropriateness of treating certain swaps and futures

contracts in the same manner, thereby authorizing the imposition of

position limits on such swaps (which are cash-settled contracts).

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\35\ Food, Conservation and Energy Act of 2008, Public Law 110-

246, 122 Stat. 1624 (June 18, 2008).

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In order to facilitate the annual calculations of spot-month

position limits, the Commission proposes to require each DCM that lists

a referenced physical delivery contract to submit, on an annual basis,

an estimate of deliverable supply to the Commission. This estimate

would include supplies that are available through standard marketing

channels at market prices prevailing during the relevant spot months.

Deliverable supply would not include supplies that could be procured at

unreasonably high prices or diverted from non-standard locations.

Deliverable supply would also not include supply that is committed for

long-term agreements and would therefore not be available to fulfill

the delivery obligations arising from current trading. The Commission

would consider the DCM's estimate in conjunction with analyzing its own

data and reviewing position limit related DCM filings, and make a final

determination as to deliverable supply. In making this determination,

the Commission would weigh more heavily the highest monthly values of

past deliverable supply, provided it did not occur in particularly

unusual market conditions, over a reasonable time period to estimate

the largest deliverable supply.

The Commission invites comments on all aspects of its proposed

spot-month position limit framework. For example, how broadly or

narrowly should the Commission consider what constitutes deliverable

supply? Should the Commission adopt the proposed conditional-spot-month

limits or adopt a uniform spot-month limit? Alternatively, should the

conditional-spot-month limit be set at a higher level relative to the

level of deliverable supply? If so, why?

B. Non-Spot-Month Position Limits

1. Open Interest Formula

While the Commission proposes to set spot-month limits in the

transitional implementation period, the Commission would impose non-

spot-month position limits only in the second phase of implementation.

In contrast to spot-month position limits which are set as a function

of deliverable supply, the class and aggregate single-month and all-

months-combined position limits, as proposed, would be tied to a

specific percentage of overall open interest for a particular

referenced contract in the aggregate or on a per class basis. Under the

proposed regulations, there are two classes of contracts in connection

with

[[Page 4759]]

non-spot-month limits. One class is comprised of all futures and option

contracts executed pursuant to the rules of a DCM. The second class is

comprised of all swaps.

In addition to an aggregate single-month and all-months-combined

position limit that would apply across classes, the proposed

regulations would apply single-month and all-months-combined position

limits to each class separately. Class limits would ensure that market

power is not concentrated in any one submarket, and that a trader is

not flat in the aggregate while holding excessively large offsetting

positions in any one submarket. Class and aggregate position limits

based on a percentage of open interest may help prevent any single

speculative trader from acquiring excessive market power. The formula

proposed herein is intended to ensure that no single speculator can

constitute more than 10 percent of a market, as measured by open

interest, up to 25,000 contracts of open interest, and 2.5 percent

thereafter.\36\

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\36\ See Revision of Federal Speculative Position Limits, 57 FR

12766, April 13, 1992; and Revision of Federal Speculative Position

Limits and Associated Rules, 64 FR 24038, at 24039, May 5, 1999.

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Proposed Sec. 151.4 proposes to use the futures position limits

formula (the 10, 2.5 percent formula) to determine non-spot-month

position limits for referenced contracts. The 10, 2.5 percent formula

is identified in current Commission Sec. 150.5(c)(2). Given the level

of open interest in the futures markets and the likely level of open

swaps based on data available to the Commission, this formula would

yield high position limits that nonetheless would prevent a speculative

trader from acquiring excessively large positions and thereby would

help prevent excessive speculation and deter and prevent market

manipulation, squeezes, and corners. The resultant limits are purposely

designed to be high in order to ensure sufficient liquidity for bona

fide hedgers and avoid disrupting the price discovery process given the

limited information the Commission has with respect to the size of the

physical commodity swap markets.\37\

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\37\ See 57 FR 12766, at 12771.

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As discussed further below, for the agricultural futures contracts

enumerated in current Sec. 150.2, the Commission is proposing legacy

limits that would retain the all-months-combined limits for such

contracts and would make the single-month limits equal to the all-

months-combined limits.

The Commission emphasizes that market data can support a range of

acceptable speculative position limits. The Commission currently

obtains DCM futures and option positional data under parts 15 through

19 and 21 of its regulations, which derive their statutory authority in

significant part from sections 4a, 4g and 4i of the CEA. With regard to

swaps, the Commission receives limited positional data for cleared

swaps that are significant price discovery contracts under part 36 of

its regulations and limited positional data on certain swaps that are

cleared, but not traded, by registered derivatives clearing

organizations. While the Commission requires additional, reliable, and

verifiable swaps data to enforce the position limits proposed herein,

the Commission believes that it has sufficient data to set the overall

concentration-based percentages for the position limits. The Commission

intends to finalize regulations that would provide it with

comprehensive positional data on physical commodity swaps, and would

use such data to fix numerical position limits through the application

of the proposed open-interest-based position limit formula.\38\

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\38\ See 75 FR 67258.

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The trader visibility requirements of Sec. 151.6, as described

below, establish levels that trigger reporting requirements similar to

reports that certain hedgers currently submit pursuant to '04 reports

under part 19 of the Commission's regulations. These reporting

requirements aim to make the physical and derivatives portfolios of the

largest traders in referenced contracts visible to the Commission. This

information would generally allow the Commission to understand large

traders' trading activities and to assess the appropriateness of the

speculative position limits set forth in the proposed part 151. The

Commission would then potentially be able to, among other things, more

readily identify instances where a trader's large positions create an

ability to manipulate the market and cause sudden price changes or

distortions. Moreover, the position visibility-related reports could

potentially enable the Commission to perform some econometric analyses

of the impact of speculative positions on price formation in referenced

contracts. The position visibility levels that trigger reporting

obligations are not intended to function as safe harbors from any

charge of manipulation or excessive speculation. Visibility levels are

in no way intended to imply that positions at or near such levels

cannot constitute excessive speculation or be used to manipulate prices

or for other wrongful purposes.

The Commission solicits comment as to whether the traditional 10,

2.5 percent formula should be uniformly applied to all referenced

contracts as is being proposed. If not, why? In particular, given that

single-month and all-months-combined position limits are not currently

in place for energy and metals markets, should the Commission consider

setting limits initially on these commodities at some higher level,

such as a 10, 5 percent formula based on open interest, in order to

best ensure that hedging activities or price discovery are not

negatively affected? With respect to class limits, the Commission

specifically solicits comment on whether additional classes, such as

separate class categories for cleared and uncleared swaps, should be

adopted to ensure that large positions that result in excessive

concentration of positions in a submarket are not acquired?

2. Calculation of Open Interest

Under the proposed position limit framework, there are six possible

non-spot-month position limits: Aggregate all-months-combined and

single-month limits; futures class all-months-combined and single-month

limits; and swaps class all-months-combined and single-month limits. In

each case, single-month limits are proposed to equal all-months-

combined limit levels. The Commission is proposing this approach in

order to lessen the complexity of the limits and hence compliance

burdens. The Commission is also proposing this approach, which would

result in higher single-month limits, to incorporate a calendar spread

exemption within the single-month limits (including an across crop year

spread exemption) and remove the calendar spread exemption which would

no longer be needed.

As discussed above, the Commission proposes to set non-spot-month

position limits as a function of open interest. The general formula

would set non-spot-month position limits as the sum of 10 percent of

the first 25,000 contracts of open interest base and 2.5 percent of the

open interest base beyond 25,000 contracts. All open interest base

calculations would be derived from month-end open interest values. The

open interest bases would be utilized to determine the average all-

months-combined open interest which, in turn, would be the basis for

the six non-spot-month position limits. Under proposed Sec. 151.4(e),

the average all-months-combined open interest would be the average of

the relevant all-months open interest base for a calendar year. The

open interest base levels would be

[[Page 4760]]

calculated in the same manner described in the Commission's January

2010 release proposing position limits for certain referenced energy

contracts.\39\

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\39\ See 75 FR 4144, at 4153. A list of contracts that

illustrate how open interest values would be calculated is available

at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_26_PosLimits/index.htm. The list enumerates the types of referenced

contracts' open interest that would roll up into a 151.2-listed

contract's open interest for the purpose of determining overall open

interest levels. Once swap open interest data for swaps that are

referenced contracts is collected, the open interest value for such

swaps would also be rolled up into the related 151.2-listed futures

contract's open interest along with the open interest of other

related referenced contracts.

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Cleared referenced swap contract open interest would be based on

month-end open interest figures provided to the Commission by clearing

organizations. The Commission proposes to determine the uncleared swap

open interest based on the month-end average for the sum of swap dealer

positions in all months in uncleared referenced swap contracts. In

order to determine a swap dealer's position in all months in uncleared

referenced swap contracts, the Commission would undertake a four-step

process. First, the Commission would determine a single swap dealer's

net exposure by counterparty by referenced contract month. Second, the

Commission would add the swap dealer's net counterparty exposures in

the same referenced contract month on an absolute basis to determine

the swap dealer's open interest for the referenced contract single

month. Third, the Commission would combine the swap dealer's positions

in the referenced contract month in order to determine its contribution

to the uncleared swap single-month open interest. Finally, the

Commission would combine the swap dealer's positions in single

referenced contract months. At month end, this sum would constitute

that swap dealer's contribution to the uncleared referenced swap

contract all-months open interest (and the aggregate all-months

referenced contract open interest). For example, a swap dealer with the

following referenced contract portfolio would contribute 2,000

contracts to the all-months uncleared swap open interest, 1,000 from

each counterparty, based on positions of 1,100, 500, and 400 contracts

for the January, February, and March referenced single contract months

respectively:

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

Net position January Net position February Net position March

referenced contract referenced contract referenced contract

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

Counterparty 1....................... -600 -200 -200

Counterparty 2....................... +500 -300 -200

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

3. Legacy Position Limits

The proposed regulations would retain the all-months-combined

position limits for enumerated agricultural commodities in current

Sec. 150.2 as an exception to the general open interest based formula.

The single-month limit would be increased to the same level as the

legacy all-months-combined limit, with the elimination of the calendar

month spread exemption.

The Commission requests comment on whether the legacy position

limits should be retained or treated as other derivatives are treated

under this proposal, and if so, whether the levels should be increased,

to the following amounts requested in an April 6, 2010 petition to the

Commission by the Chicago Board of Trade \40\:

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\40\ CME Group Petition for Amendment of Commodity Futures

Trading Commission Regulation (April 6, 2010), available at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_26_PosLimits/index.htm. The CME petition was premised on the

Commission's past reliance on open interest levels for setting

position limits and the increase in open interest levels of the

contracts listed in the petition.

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

Single All

Contract month months

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

Corn (and Mini-Corn).............................. 20,500 33,000

Soybeans (and Mini-Soybeans)...................... 10,000 15,000

Wheat (and Mini-Wheat)............................ 9,000 12,000

Soybean Oil....................................... 6,500 8,000

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

If so adopted, should the limits on wheat at the Minneapolis Grain

Exchange and the Kansas City Board of Trade also be increased to the

level proposed for the wheat contract at the Chicago Board of Trade,

consistent with the Commission's historical approach to setting limits

for wheat contracts?

C. Exemptions for Referenced Contracts

Proposed Sec. 151.5 establishes exemptions from position limits

for bona fide hedging transactions or positions as directed by the

Dodd-Frank Act specifically for exempt and agricultural commodities.

The referenced contracts subject to the proposed position limit

framework would be subject to the bona fide provisions of proposed

Sec. 151.5 and would no longer be subject to Sec. 1.3(z), which would

be retained only for excluded commodities. Sec. 1.47 and Sec. 1.48

would be removed by this notice of proposed rulemaking.

Section 4a(c)(1) of the Act authorizes the Commission to define

bona fide hedging transactions or positions ``consistent with the

purposes of the Act.'' By its terms, the section places no restriction

on the Commission's ability to define bona fide hedging for swaps.

Congress also directed the Commission, in amended CEA section 4a(c)(2),

to adopt a definition for bona fide hedging transactions or positions

for purposes of setting position limits pursuant to section 4a(a)(2),

which refers only to futures contracts or options.\41\ A definition of

bona fide hedging that would exclude swaps would deny a commercial end-

user the option of offsetting price risks with swaps (as opposed to

futures) pursuant to a bona fide hedge exemption. Accordingly, pursuant

to section 4a(c)(1) and (c)(2), the Commission is proposing a

definition for bona fide hedging transactions and positions that would

apply to all referenced contracts, including swaps, as opposed to

referenced futures and option contracts only.

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\41\ The scope of contracts subject to position limits under

section 4a(a)(2) includes physical commodity futures and options

contracts traded on a DCM, other than excluded commodities.

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The statutory definition of a bona fide hedge in section 4a(c)(2)

generally follows the existing definition in Commission Sec.

1.3(z)(1), except: (1) The directive requires all bona fide hedging

transactions and positions to represent a substitute for a physical

market transaction; and (2) as discussed above, the directive provides

an explicit exemption for a trader to reduce the risks of swap

positions, provided the counterparty to the swap transaction would have

qualified for a bona fide hedging transaction exemption or the risk

reducing positions offset a swap that qualifies as a bona fide hedging

transaction.

The definition of bona fide hedging in Sec. 1.3(z) of the Act

provides that a bona fide hedging transaction or position in a futures

contract normally represents a substitute for a physical market

[[Page 4761]]

transaction; thus, the current definition is no longer consistent with

amended CEA section 4a(c)(2). The plain text of the new statutory

definition of bona fide hedging recognizes bona fide hedging for

derivatives that are subject to this rulemaking only if such

transactions or positions represent cash market transactions and offset

cash market risks, as opposed to the acceptance of bona fide hedging

transactions and positions as activity that normally, but not

necessarily, represents a substitute for cash market transactions or

positions.

Proposed Sec. 151.5(a)(2) incorporates the current requirements of

Commission Sec. 1.3(z)(2) for enumerated hedging transactions.

Proposed Sec. 151.5(a)(2)(iv) also provides an exemption for agents

contractually responsible for the merchandising of cash positions with

a person who owns the commodity or holds the cash market commitment

being offset. This agent provision is consistent with Commission Sec.

1.3(z)(3) and Sec. 1.47.

In this regard, should the Commission grant an exemption to an

agent that is not responsible for the merchandising of the cash

positions, but is linked to the production of the physical commodity,

for example, if the agent is the provider of crop insurance?

Proposed Sec. 151.5(b) establishes reporting requirements for a

trader upon exceeding a position limit. The trader is required to

submit information not later than 9:00 a.m. on the business day

following the day the limits were exceeded. The reports would support

hedgers' need for large referenced contract positions and would give

the Commission the ability to verify the positions were a bona fide

hedge.

With respect to the frequency of filing such reports, should the

Commission only require reports to be submitted either when a trader's

position either first exceeds a limit or when a trader's hedging need

increases, with a monthly summary while the trader's position remains

in excess of the limit?

Proposed Sec. 151.5(c) specifies application and approval

requirements for traders seeking an anticipatory hedge exemption,

incorporating the current requirements of Commission Sec. 1.48. As is

the case under current Sec. 1.48, a trader's maximum sales and

purchases shall not exceed the lesser of the approved exemption amount

or the trader's current actual unsold anticipated production or current

unfilled anticipated requirements. In addition, the proposed

regulations require an anticipatory hedger to file a supplement to an

application at least annually or whenever the anticipatory hedging

needs increase beyond that in the most recent filing.

Proposed Sec. 151.5(d) establishes additional reporting

requirements for a trader that exceeds the position limits to reduce

the risks of certain swap transactions, discussed above. Should the

Commission only require such reports to be submitted when the trader's

position either first exceeds a limit or the hedging need increases,

with a monthly summary while the trader's position remains in excess of

the limit?

Proposed Sec. 151.5(e) specifies recordkeeping requirements for

traders that acquire positions in reliance on bona fide hedge

exemptions, as well as for swap counterparties for which a counterparty

represents that the transaction would qualify as a bona fide hedging

transaction. Swap dealers availing themselves of a hedge exemption

would be required to maintain a list of such counterparties and make

that list available to the Commission upon request. Proposed Sec.

151.5(g) and (h) provide procedural documentation requirements for such

swap participants.

Proposed Sec. 151.5(f) requires a cross hedger to provide

conversion information, as well as an explanation of the methodology

used to determine such conversion information, between the commodity

exposure and the referenced contracts used in hedging.

Proposed Sec. 151.5(i) requires reports by bona fide hedgers to be

filed for each business day, up to and including the day after the

trader's position level is below the position limit that was exceeded.

Proposed Sec. 151.5(j) provides that a swap counterparty with

respect to bona fide hedging transactions may establish a position in

excess of the position limits, offset that position, and then re-

establish a position in excess of the position limits. For example,

this provision permits a swap participant who has reduced the risk of

swaps using a position in futures contracts (that would otherwise

violate a position limit) to offset those futures contracts and

subsequently, if necessary, re-establish a position in excess of class

position limits in another venue in order to once again reduce the risk

of the swap transactions.

D. Position Visibility

Based on its analysis of the proposed limits as applied to futures

and option contract positions and cleared swaps for which the

Commission has open interest data, the Commission does not anticipate

that the number of traders with positions in referenced base and

precious metals and referenced energy contracts, as further discussed

below in the Cost-Benefit and Paperwork Reduction Act sections of this

release, would constitute a significant segment of the affected

markets, in contrast to the number of traders with positions in

referenced agricultural contracts. Recognizing this, the Commission

proposes to establish, in addition to the position limits discussed

above, position visibility regulations for referenced contracts other

than referenced agricultural contracts, pursuant to the Commission's

authority to establish reporting requirements under section 4t of the

Act, as added by the Dodd-Frank Act, and reporting requirements

necessary for the establishment and enforcement of position limits

under sections 4a and 8a(5) of the Act. The proposed visibility

regulations would set position visibility reporting levels and

establish reporting requirements for all traders exceeding those

levels. The reporting regulations aim to make the physical and

derivatives portfolios of the largest traders in referenced contracts

visible to the Commission.

The position visibility regime would improve the Commission's

ability to monitor the positions of the largest traders in the markets

for referenced base and precious metals and referenced energy contracts

and the effects on the markets of those large positions and their

associated physical commodity and derivatives portfolios. The data for

referenced contracts and related portfolios that the Commission would

receive pursuant to the position visibility regulations would allow the

Commission to better analyze the nature of the largest traders'

positions in referenced contracts.

The Commission has set the visibility levels and its estimates on

the number of traders they would capture based on data it currently

receives on the futures and swaps markets. The Commission may revisit

these levels as it begins to receive more data on the swaps markets.

The Commission proposes to set the visibility reporting levels for

referenced base and precious metals and referenced energy contracts

where it anticipates approximately 20 unique owners over the course of

a year would exceed such levels. Given their importance to the national

economy, the Commission proposes to set visibility levels for the NYMEX

Light Sweet Crude Oil (CL) and Henry Hub Natural Gas (NG) referenced

contracts at a relatively lower level designed to capture approximately

30 unique owners over the course of a year.

Proposed Sec. 151.6 would require traders with positions above

visibility

[[Page 4762]]

levels in referenced base and precious metals and energy commodities to

submit additional information about cash market and derivatives

activity, including data relating to substantially the same commodity,

such as commodities that are different grades or formulations of the

same basic commodity. Proposed Sec. 151.6(c) would require additional

information, through a 402S filing, on a trader's uncleared swaps in

substantially the same commodity. Proposed Sec. 151.6(d) would require

the reportable trader to submit information about cash market positions

in substantially the same commodity, as described in proposed Sec.

151.5(b), through 404 and 404A filings.

The Commission solicits comment on whether position visibility

requirements should also be imposed on referenced agricultural

contracts.

E. Aggregation of Accounts

Proposed Sec. 151.7 would establish account aggregation standards

specifically for positions in referenced contracts. Under the proposed

standards, the Federal position limits in referenced contracts would

apply to all positions in accounts in which any trader, directly or

indirectly, has an ownership or equity interest of 10 percent or

greater or, by power of attorney or otherwise, controls trading. These

standards for aggregation are consistent with the standards delineated

in the Acceptable Practice to DCM Core Principle 5 in Appendix B to

part 38 of the Commission's regulations. Proposed Sec. 151.7 would

also treat positions held by two or more traders acting pursuant to an

express or implied agreement or understanding the same as if the

positions were held by, or the trading of the positions were done by, a

single trader. Proposed Sec. 151.7 would require a trader to aggregate

positions in multiple accounts or pools, including passively managed

index funds, if those accounts or pools had identical trading

strategies.

Proposed Sec. 151.7(c) establishes a limited exemption for

positions in pools in which a person that is a limited partner,

shareholder or similar person has an ownership or equity interest of

between 10 percent and 25 percent, if the person does not have control

over or knowledge of the pool's trading. Proposed Sec. 151.7(e)

establishes a limited exemption for the positions of futures commission

merchants in certain discretionary accounts, if they maintain only

minimum control over trading in the relevant account and if the trading

decisions of that account are independent from trading decisions in the

futures commission merchants' other accounts. Finally, proposed Sec.

151.7(f) establishes a limited exemption for entities to disaggregate

the positions of an independently controlled and managed trader that is

not a financial entity, defined as an owned non-financial entity, in

which it has an ownership or equity interest of 10 percent or greater,

and it provides a non-exhaustive description of indicia that

demonstrate independent control and management to the Commission. In

all three cases, the exemption would only become effective upon the

Commission's approval of an application described in proposed Sec.

151.7(g).

In the aggregation standards currently in force in part 150 of the

Commission's regulations, eligible entities (a broad group that

includes banks, insurance companies, mutual funds, commodity pool

operators and commodity trading advisors) are permitted to disaggregate

positions pursuant to a self-executing independent account controller

framework. Part 150 also provides expansive disaggregation provisions

for commodity pool operators, limited partners and other pool

participants as well as for futures commission merchants.

These disaggregation exceptions may be incompatible with the

proposed Federal position limit framework and used to circumvent its

requirements. Given that the proposed framework sets high position

levels that are reflective of the largest positions held by market

participants, permits for the netting of positions for like referenced

contracts within each applicable position limit, and includes a

conditional-spot-month limit for cash-settled contracts and exemptions

for bona fide hedging (either directly or as a result of the look-

through provision), allowing traders to establish a series of positions

each near a proposed position limit, without aggregation, may not be

appropriate. In addition, the self-executing nature of the exemptions

creates an insufficient and inefficient verification regime and

ultimately diminishes the Commission's ability to properly perform its

market surveillance responsibilities.

Thus, the proposed aggregation standards differ in several respects

from the current standards in part 150. The proposed regulations would

require aggregation for a passive pool participant with a 10 percent or

greater ownership or equity interest (unless the pool operator had

proper information barriers in place and the pool participant did not

have control over the pool's trading decisions). By comparison, under

current part 150, a passive pool participant would aggregate its

positions only if it was also a principal or affiliate of the pool

operator. The proposed regulations would require aggregation for any

passive pool participant with a 25 percent or greater ownership or

equity interest, with no possibility for disaggregation, whereas

current part 150 only follows such an approach for pools with operators

that are exempt from registration under Sec. 4.13. The proposed

regulations would also require aggregation for positions in accounts or

pools with identical trading strategies, which part 150 currently

lacks, in order to prevent circumvention of the aggregation

requirements by, for example, a trader seeking a large long-only

position in a given commodity through specific positions in multiple

pools.

In addition, the proposed regulations do not retain the independent

account controller exemption of part 150. The regulations proposed in

January of 2010 to establish position limits for referenced energy

contracts also did not include an independent account controller

framework; they included only a very narrow exemption thereto for

certain passive pool participants.\42\ Many commenters to the January

2010 proposed regulations expressed opposition to such strict

standards, arguing that they would force aggregation of positions in

situations where meaningful control, management and information

barriers demonstrated sufficient independence to warrant

disaggregation. The current regulations address some of these concerns

by establishing a limited exemption for owned non-financial entities.

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\42\ See 75 FR 4144, at 4146.

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The owned non-financial entity exemption would allow an entity to

disaggregate (1) the positions of a non-financial entity in which it

owns a 10 percent or greater ownership or equity interest from (2) its

own directly held or controlled positions and the positions attributed

to it (through the general 10 percent ownership standard or other

aggregation requirements of the proposed regulations), if it can

demonstrate that the owned non-financial entity is independently

controlled and managed. This limited exemption aims to allow

disaggregation primarily in the case of a conglomerate or holding

company that merely has a passive ownership interest in one or more

non-financial operating companies. In such cases, the operating

companies may have complete trading and management independence and

operate at such a distance from the holding company that it would not

be

[[Page 4763]]

appropriate to aggregate positions. Two of the criteria proposed as

indicia of independence are similar to those currently contained in

part 150, namely the requirements that the entity have no knowledge of

the owned non-financial entity's trading decisions (along with, in the

proposed regulations, the reverse requirement that the owned non-

financial entity have no knowledge of the entity's trading decisions)

and that the owned non-financial entity have written policies and

procedures to protect such knowledge. Two other proposed indicia not

found in current part 150, requiring separate employees and risk

management systems, would provide further evidence of the owned non-

financial entity's independence. As mentioned above, the indicia

described in proposed Sec. 151.7(f) are not meant to form an

exhaustive list; under the proposed application process described in

151.7(g), a departure from the self-executing exemption of part 150,

the applying entity could describe for the Commission any other

relevant circumstances that would warrant disaggregation.

The Commission solicits comments on all aspects of its account

aggregation regulations. In particular, the Commission solicits

comments on the appropriateness of the definition of owned non-

financial entities and the criteria used to determine the independence

of such entities. The Commission also solicits comments on whether and

under what circumstances the Commission should grant exemptions from

account aggregation under its exemptive authority under section

4a(a)(7) of the Act.

F. Preexisting Positions and Exemptions

Consistent with the good faith exemption in section 4a(b)(2) of the

Act, the Commission will provide a limited exemption for positions in

DCM contracts for future delivery or option contracts that are in

excess of a position limit in proposed Sec. 151.2, provided that they

were established in good faith prior to the effective date of a

position limit set by rule, regulation or order. Such persons would not

be allowed to enter into new, additional contracts in the same

direction but could take up offsetting positions and thus reduce their

total combined net position.\43\ Persons who established a net position

below the speculative limit for a contract for future delivery prior to

the enactment of a regulation would be permitted to acquire new

positions. However, consistent with Commission practice, the Commission

would calculate the combined position of a person based on any position

established prior to enactment of a position limit rule, regulation or

order plus any new position.

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\43\ The Commission understands that changes in option deltas

could increase the net level of a person's pre-enactment position.

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In contrast to futures and option contracts, the proposed

regulations would not apply position limits to Dodd-Frank Act pre-

effective date swaps. The Commission is proposing this broad exemption

since swaps generally may be appreciably longer lived than futures

contracts thereby giving rise to concerns that position limits

affecting pre-effective date swaps may unnecessarily disrupt position

hedging through swap positions. The Commission would allow pre-

effective date swaps to be netted with post-effective date swaps for

the purpose of complying with position limits.

The Commission has previously granted certain swap dealers hedge

exemptions under current Sec. 1.47, without regard to the purposes or

hedging needs of swap dealer counterparties. The Commission intends to

permit such swap dealers to continue to manage the risk of a swap

portfolio that exists at the time of implementation of the proposed

regulations. No new swaps will be covered by the exemption.

In this regard, the Commission seeks comment on what additional

reporting requirements, if any, it should impose on swap dealers that

were granted a hedge exemption.

G. Foreign Boards of Trade

Proposed Sec. 151.8 would provide that the aggregate position

limits in proposed Sec. 151.4 apply to a trader's positions in

referenced contracts executed on, or pursuant to the rules of, a

foreign board of trade, subject to the following conditions. First, the

FBOT contract, agreement, or transaction must settle against the price

of a contract executed or cleared pursuant to the rules of a registered

entity. Second, the FBOT must make such linked contracts available to

its members or other participants located in the United States by

direct access to its electronic trading and order matching system.

H. Registered Entity Position Limits

Proposed Sec. 151.11 requires registered entities \44\ to

establish position limits for reference contracts that are at a level

no higher than the position limits specified in proposed Sec. 151.4.

Proposed Sec. 151.11(c) and (d)(1)(i) would require registered

entities to follow the same account aggregation and bona fide exemption

standards set forth by proposed Sec. 151.5 and Sec. 151.7 with

respect to exempt and agricultural commodities.

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\44\ Relevant for these purposes, CEA section 1a(40), as amended

by the Dodd-Frank Act, would define registered entity to include

DCMs and SEFs.

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For excluded commodities,\45\ consistent with current DCM practice,

registered entities would have the discretion to establish position

accountability levels in lieu of position limits. Registered entities

may impose position accountability rules in lieu of position limits

only if either: The open interest in a contract is less than 5,000; or

the contract involves a major currency; or involves an excluded

commodity that has the following three characteristics: (1) An average

daily open interest of 50,000 or more contracts, (2) an average daily

trading volume of 100,000 or more contracts, and (3) a highly liquid

cash market.

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\45\ See section 1a(19) of the Act.

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With respect to excluded commodities, consistent with the current

DCM practice, registered entities may provide for exemptions from their

position limits for ``bona fide hedging.'' The term ``bona fide

hedging,'' as used with respect to excluded commodities, shall be

defined in accordance with amended CFTC Sec. 1.3(z).\46\ Additionally,

consistent with the current DCM practice, registered entities may

continue to provide exemptions for ``risk-reducing'' and ``risk-

management'' transactions or positions consistent with existing

Commission guidelines.\47\ Finally, though the Commission is removing

the procedure to apply to the Commission for bona fide hedge exemptions

for non-enumerated transactions or positions under Sec. 1.3(z)(3), the

Commission will continue to recognize prior Commission determinations

under that section, and registered entities may recognize non-

enumerated hedge transactions subject to Commission review.

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\46\ See Section 151.11(d)(1)(ii) of these proposed regulations.

As explained in section C of this release, the definition of bona

fide hedge transaction or position contained in section 4a(c)(2) of

the Act does not, by its terms, apply to excluded commodities.

\47\ See Clarification of Certain Aspects of Hedging Definition,

52 FR 27195, Jul. 20, 1987; and Risk Management Exemptions From

Speculative Position Limits Approved under Commission Regulation

1.61, 52 FR 34633, Sept. 14, 1987.

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I. Delegation

Proposed Sec. 151.12 delegates certain of the Commission's

proposed part 151 authority to the Director of the Division of Market

Oversight and to other employee or employees as designated by the

Director. The delegated authority

[[Page 4764]]

extends to: (1) Determining open interest levels for the purpose of

setting non-spot-month position limits; (2) granting an exemption

relating to bona fide hedging transactions; and (3) providing

instructions or determining the format, coding structure, and

electronic data transmission procedures for submitting data records and

any other information required under proposed part 151. The purpose of

this delegation provision is to facilitate the ability of the

Commission to respond to changing market and technological conditions

and thus ensure timely and accurate data reporting. In this regard, the

Commission specifically requests comments on whether determinations of

open interest or deliverable supply should be adopted through

Commission orders.

III. Related Matters

A. Cost-Benefit Analysis

Section 15(a) of the Act requires that the Commission, before

promulgating a regulation under the Act or issuing an order, consider

the costs and benefits of its action. By its terms, CEA section 15(a)

does not require the Commission to quantify the costs and benefits of a

new regulation or determine whether the benefits of the regulation

outweigh its costs. Rather, CEA section 15(a) simply requires the

Commission to ``consider the costs and benefits'' of its action.

CEA section 15(a) specifies that costs and benefits shall be

evaluated in light of the following considerations: (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. Accordingly, the Commission could, in its discretion,

give greater weight to any of the five considerations and could, in its

discretion, determine that, notwithstanding its costs, a particular

regulation was necessary or appropriate to protect the public interest

or to effectuate any of the provisions or to accomplish any of the

purposes of the Act.

The proposed position limits and their concomitant limitation on

trading activity could impose certain general but significant costs.

Overly restrictive position limits could cause unintended consequences

by decreasing speculative activity and therefore liquidity in the

markets for the referenced contracts, impairing the price discovery

process in these markets, and encouraging the migration of speculative

activity and perhaps price discovery to markets outside of the

Commission's jurisdiction. The outside spot-month position limits that

would likely result from the application of the 10, 2.5 percent open

interest formula, as proposed, are intended as high levels that

speculators are likely to acquire in order to avoid disrupting or

interfering with beneficial speculative trading.

Congress has charged the Commission with establishing position

limits on traders in certain physical commodity derivatives. In CEA

section 4a(a)(3), Congress directed the Commission to establish such

position limits in order to achieve, to the maximum extent practicable,

in the Commission's discretion, the following objectives: To diminish,

eliminate, or prevent excessive speculation; to deter and prevent

market manipulation; while ensuring sufficient market liquidity for

bona fide hedgers and protecting the price discovery function of

commodity derivatives. Insofar as the provisions of the proposed part

151 effectuate these goals, then the market and the public as a whole

would benefit.

In section 4a of the Act, Congress determined that excessive

speculation in ``any commodity under contracts of sale of such

commodity for future delivery * * * or swaps that perform a significant

price discovery function with respect to regulated entities causing

sudden or unreasonable fluctuations or unwarranted changes in the price

of such commodity, is an undue and unnecessary burden on interstate

commerce.'' In section 4a(a)(3) of the Act, Congress charged the

Commission with the task of setting position limits designed to

diminish, eliminate, or prevent ``excessive speculation.'' Accordingly,

the speculative position limit framework established by the Commission

would be expected to benefit the public and the markets regulated by

the Commission by diminishing, eliminating, or preventing the undue

burdens on interstate commerce that result from excessive speculation

in markets regulated by the Commission.

In addition, the proposed visibility levels and associated

reporting requirements of proposed Sec. 151.6 would enable the

Commission to better understand generally the portfolio compositions,

including bona fide hedging needs, of the largest position holders of

referenced contracts. This data would enable the Commission to

determine whether to readjust the speculative position limits to

continue to ensure the statutory objectives are met. Visibility reports

would allow the Commission to have a better sense of the relative

distribution of speculative versus non-speculative positions and

activity, as well as the nature and effect of the largest speculative

traders in referenced contracts.

Section 4a(a)(3) of the Act also charges the Commission with

setting position limits designed to ``deter and prevent market

manipulation.'' The limitation on a trader's ability to take a very

large position, not justified by a bona fide hedging need, may reduce a

trader's ability to manipulate a market. By reducing a trader's ability

to manipulate a market, a position limit regime would prevent

manipulation and therefore avoid the resulting price distortions,

economic harm, and misallocation of resources. In addition, the

visibility levels and associated reporting obligations, as proposed in

Sec. 151.6, would provide the Commission greater visibility into the

portfolios of large speculative traders, thereby potentially

facilitating early regulatory intervention when potential manipulative

conduct or price distortions are detected.

In addition to reducing the undue burdens arising from excessive

speculation and manipulation, by reducing the ability of a market

participant to gain very large speculative exposure in referenced

contracts, proposed part 151 would encourage better risk management,

reduce the likelihood of default, and may thereby reduce systemic risk.

Although futures markets employ centralized clearing arrangements that

reduce systemic risk, a very large speculative position taken by a

levered participant across futures markets, other trading facilities,

and in over-the-counter derivatives can result in a default risk not

properly accounted for by any one trading venue or counterparty. The

proposed regulations may therefore promote the financial integrity of

the markets and protect the public by reducing systemic risk insofar as

the provisions of the proposed part 151 would reduce the likelihood of

such levered entities to generate systemic risk by either limiting

their ability to amass a very large speculative position or by making

such entities more visible to the Commission pursuant to proposed Sec.

151.6.

The Commission invites public comment on its cost-benefit

considerations. Commenters are also invited to submit any data or other

information that they may have quantifying or qualifying the costs and

benefits of proposed part 151.

[[Page 4765]]

B. The Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,

requires that agencies consider the impact of their regulations on

small businesses. The requirements related to the proposed amendments

fall mainly on registered entities, exchanges, futures commission

merchants, swap dealers, clearing members, foreign brokers, and large

traders. The Commission has previously determined that exchanges,

futures commission merchants and large traders are not ``small

entities'' for the purposes of the RFA.\48\ Similarly, swap dealers,

clearing members, foreign brokers and traders would be subject to the

proposed regulations only if carrying or holding large positions.

Accordingly, the Chairman, on behalf of the Commission, hereby

certifies, 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.

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\48\ 44 U.S.C. 601 et seq.

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C. Paperwork Reduction Act

1. Overview

The Paperwork Reduction Act (``PRA'') \49\ imposes certain

requirements on Federal agencies in connection with their conducting or

sponsoring any collection of information as defined by the PRA. Certain

provisions of the proposed regulations would result in new collection

of information requirements within the meaning of the PRA. An agency

may not conduct or sponsor, and a person is not required to respond to,

a collection of information unless it displays a currently valid

control number. The Office of Management and Budget (``OMB'') has not

yet assigned a control number to the new collections associated with

these proposed regulations. Therefore, the Commission is submitting

this proposal to OMB for review in accordance with 44 U.S.C. 3507(d)

and 5 CFR 1320.11. The title for this proposed collection of

information is ``Part 151--Position Limit Framework for Referenced

Contracts'' (OMB control number 3038-NEW).

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\49\ 44 U.S.C. 3501 et seq.

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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.'' \50\ The Commission also is required

to protect certain information contained in a government system of

records pursuant to the Privacy Act of 1974.\51\

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\50\ 7 U.S.C. 12(a)(1).

\51\ 5 U.S.C. 552a.

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Under the proposed regulations, market participants with positions

in referenced contracts, as defined in proposed Sec. 151.2, would be

subject to the position limit framework established by proposed part

151. Proposed part 151 prescribes reporting requirements for traders

claiming compliance with the conditional spot-month position limit

(proposed Sec. 151.4(a)(2)), reporting requirements for DCMs that list

a referenced contract (proposed Sec. 151.4(c)), traders claiming a

bona fide hedging exemption (proposed Sec. 151.5(b) and (c)), traders

claiming a bona fide hedge that does not involve the same quantity or

commodity as the quantity or commodity associated with positions in

referenced contracts that are used to hedge risk (proposed Sec.

151.5(f)), traders claiming a bona fide swap counterparty exemption

(proposed Sec. 151.5(d)), traders with positions above a visibility

level (proposed Sec. 151.6(a)), and entities seeking an exemption to

mandatory account aggregation regulations (proposed Sec. 151.7(g)). In

addition to these reporting requirements, proposed Sec. 151.5(e) and

(g) specify recordkeeping requirements for traders who receive bona

fide hedge exemptions, as well as for swap counterparties for which the

transaction would qualify as a bona fide hedging transaction.

2. Information Provided and Recordkeeping Duties

Proposed Sec. 151.4(a)(2) provides for a special conditional spot-

month limit for traders under certain conditions, including the

submission of a certification that the trader meets the required

conditions. These certifications would be filed within a day after the

trader exceeds a conditional spot-month limit.

The Commission anticipates that approximately one-hundred traders a

year will submit conditional spot-month limit certifications. The

Commission estimates that these one-hundred entities would incur a

total burden of 2,400 annual labor hours resulting in a total of

$189,000 in annual labor costs \52\ and $1 million in annualized

capital and start-up costs \53\ and annual total operating and

maintenance costs.

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\52\ The Commission staff's estimates concerning the wage rates

are based on salary information for the securities industry compiled

by the Securities Industry and Financial Markets Association

(``SIFMA''). The $78.61 per hour is derived from figures from a

weighted average of salaries and bonuses across different

professions from the SIFMA Report on Management & Professional

Earnings in the Securities Industry 2010, modified to account for an

1800-hour work-year and multiplied by 1.3 to account for overhead

and other benefits. The wage rate is a weighted national average of

salary and bonuses for professionals with the following titles (and

their relative weight): ``programmer (senior)'' (30% weight);

``programmer'' (30%); ``compliance advisor (intermediate);'' (20%),

``systems analyst;'' (10%); and ``assistant/associate general

counsel'' (10%).

\53\ The capital/start-up cost component of ``annualized

capital/start-up, operating, and maintenance costs'' is based on an

initial capital/start-up cost that is straight-line depreciated over

five years.

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Proposed Sec. 151.4(c) requires that DCMs submit an estimate of

deliverable supply by the 31st of December of each calendar year for

each referenced contract that is subject to a spot-month position limit

and listed or executed pursuant to the rules of the DCM. The Commission

estimates that this proposed reporting regulation will affect

approximately six entities annually resulting in a total marginal

burden, across all of these entities, of 6,000 annual labor hours and

$55,000 in annualized capital and start-up costs and annual total

operating and maintenance costs.

Proposed Sec. 151.5 sets forth the application procedure for bona

fide hedgers and counterparties to bona fide hedging swap transactions

that seek an exemption from the proposed Commission-set federal

position limits for referenced contracts. If a bona fide hedger seeks

to claim an exemption from position limits because of cash market

activities, then the hedger would submit a 404 filing pursuant to

proposed Sec. 151.5(b). The 404 filing would be submitted when the

bona fide hedger claims an exemption or when its hedging needs

increase. Parties to bona fide hedging swap transactions would be

required to submit a 404S filing to qualify for a hedging exemption,

which would also be submitted when the bona fide hedger claims an

exemption or when its hedging needs increase. If a bona fide hedger

seeks an exemption for anticipated commercial production or

anticipatory commercial requirements, then the hedger would submit a

404A filing pursuant to proposed Sec. 151.5(c). The 404A filing would

be submitted at least ten days in advance of the date that transactions

and positions would be established that would exceed a position limit.

Further, on an annual basis or whenever a trader's anticipated hedge

requirements exceed the amount of the most recent 404A filing,

[[Page 4766]]

whichever is earlier, the trader would be required to file a

supplemental report updating the information provided in the most

recent 404A filing. Traders hedging commercial activity (or hedging

swaps that in turn hedge commercial activity) that does not involve the

same quantity or commodity as the quantity or commodity associated with

positions in referenced contracts that are used to hedge shall submit

the conversion methodology and information along with the appropriate

404, 404A, or 404S filing. The Commission anticipates that the

compliance cost associated with all of these filings will be

substantial, particularly in the case of the 404S filings, which may

require the collection and storage of information on counterparties

that firms have hitherto not conducted.

The Commission estimates that these bona fide hedging-related

reporting requirements would affect approximately two hundred entities

annually and result in a total burden of approximately $37.6 million

across all of these entities, of 168,000 annual labor hours resulting

in a total of $13.2 million in annual labor costs and $25.4 million in

annualized capital and start-up costs and annual total operating and

maintenance costs. 404 filings proposed reporting regulations would

affect approximately ninety entities annually resulting in a total

burden, across all of these entities, of 108,000 total annual labor

hours and $11.7 million in annualized capital and start-up costs and

annual total operating and maintenance costs. 404A filings proposed

reporting regulations would affect approximately sixty entities

annually resulting in a total burden, across all of these entities, of

6,000 total annual labor hours and $4.2 million in annualized capital

and start-up costs and annual total operating and maintenance costs.

404S filings proposed reporting regulations would affect approximately

forty-five entities annually resulting in a total burden, across all of

these entities, of 54,000 total annual labor hours and $9.5 million in

annualized capital and start-up costs and annual total operating and

maintenance costs.

Proposed Sec. 151.5(e) specifies recordkeeping requirements for

traders who claim bona fide hedge exemptions. These recordkeeping

requirements include ``complete books and records concerning all of

their related cash, futures, and swap positions and transactions and

make such books and records, along with a list of swap

counterparties.'' Proposed Sec. 151.5(g) and (h) provide procedural

documentation requirements for those availing themselves of a bona fide

hedging transaction exemption. These firms would be required to

document a representation and confirmation by at least one party that

the swap counterparty is relying on a bona fide hedge exemption, along

with a confirmation of receipt by the other party to the swap.

Paragraph (h) of Section 151.5 also requires that the written

representation and confirmation be retained by the parties and

available to the Commission upon request. The marginal impact of this

requirement is limited because of its overlap with existing

recordkeeping requirements under Sec. 15.03. The Commission estimates

that bona fide hedging-related proposed recordkeeping regulations would

affect approximately one-hundred and sixty entities resulting in a

total burden, across all of these entities, of 40,000 total annual

labor hours and $10.4 million in annualized capital and start-up costs

and annual total operating and maintenance costs.

Proposed Sec. 151.6 would require those traders with positions

exceeding visibility levels in referenced base and precious metals and

energy commodities to submit additional information about cash market

and derivatives activity in substantially the same commodity. Proposed

Sec. 151.6(b) would require the submission of a 401 filing which would

provide basic position information on the position exceeding the

visibility level. Proposed Sec. 151.6(c) would require additional

information, through a 402S filing, on a trader's uncleared swaps in

substantially the same commodity. Proposed Sec. 151.6(d) would require

the reportable trader to submit information about cash market positions

or anticipated commercial requirements or production in substantially

the same commodity, as described in proposed Sec. 151.5(b) and (c),

through a 404 or 404A filing, respectively. All of the proposed 151.6

reports would be submitted on a monthly basis for as long as a trader

exceeds a visibility level.

The Commission estimates that visibility level-related proposed

reporting regulations will affect approximately one-hundred and forty

entities annually resulting in a total burden, across all of these

entities, of 30,400 annual labor hours resulting in a total of $2.4

million in annual labor costs and $27.3 million in annualized capital

and start-up costs and annual total operating and maintenance costs.

Proposed 401 filing reporting regulations would affect approximately

one-hundred and forty entities annually resulting in a total burden,

across all of these entities, of 168,000 total annual labor hours and

$15.4 million in annualized capital and start-up costs and annual total

operating and maintenance costs. Proposed 402S filing reporting

regulations would affect approximately seventy entities annually

resulting in a total burden, across all of these entities, of 5,600

total annual labor hours and $4.9 million in annualized capital and

start-up costs and annual total operating and maintenance costs.

Proposed visibility level-related 404 filing reporting regulations \54\

would affect approximately sixty entities annually resulting in a total

burden, across all of these entities, of 4,800 total annual labor hours

and $4.2 million in annualized capital and start-up costs and annual

total operating and maintenance costs. Proposed visibility level-

related 404A filing reporting regulations would affect approximately

forty entities annually resulting in a total burden, across all of

these entities, of 3,200 total annual labor hours and $2.8 million in

annualized capital and start-up costs and annual total operating and

maintenance costs.

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

\54\ For the visibility level-related 404 and 404A filing

requirements, the estimated burden is based on reporting duties not

already accounted for in the burden estimate for those submitting

404 or 404A filings pursuant to proposed regulation 151.5. For many

of these firms, the experience and infrastructure developed

submitting or preparing to submit a 404 or 404A filing under

proposed regulation 151.5 would reduce the marginal burden imposed

by having to submit filings under proposed regulation 151.6.

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

Proposed Sec. 151.7 concerns the aggregation of trader accounts.

Proposed Sec. 151.7(g) would provide for a disaggregation exemption

for: (1) A limited partner, shareholder or similar person with an

ownership or equity interest of between 10 percent and 25 percent in a

pool, if the trader does not have control over or knowledge of a pool's

trading; (2) futures commission merchants that meet certain independent

trading requirements; and (3) an independently controlled and managed

trader, that is not a financial entity, in which another entity has an

ownership or equity interest of 10 percent or greater. In all three

cases, the exemption would become effective upon the Commission's

approval of an application described in proposed Sec. 151.7(g). These

applications for exemptions would be submitted at the time a trader

claims an exemption and within thirty calendar days of January 1 of

each year following the initial application for exemption. The

Commission estimates that these proposed reporting regulations will

affect approximately sixty entities resulting in a total burden, across

all of these entities, of 300,000 annual labor

[[Page 4767]]

hours and $9.9 million in annualized capital and start-up costs and

annual total operating and maintenance costs.

3. 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 e-mail at OIRA-submiss[email protected] 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.

List of Subjects

17 CFR Part 1

Brokers, Commodity futures, Consumer protection, Reporting and

recordkeeping requirements.

17 CFR Part 150

Commodity futures, Cotton, Grains.

17 CFR Part 151

Position limits, Bona fide hedging, Referenced contracts.

In consideration of the foregoing, pursuant to the authority

contained in the Commodity Exchange Act, the Commission hereby proposes

to amend 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 citation for part 1 is revised to read as follows:

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,

13a-1, 16, 16a, 19, 21, 23, and 24, as amended by Title VII of the

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.

111-203, 124 Stat. 1376 (2010).

2. Amend Sec. 1.3(z) as follows:

a. Amend the heading in paragraph (z) by adding ``for excluded

commodities'' after the phrase ``positions.''

b. Amend paragraph (z)(1) introductory text by removing the phrase

``transactions or positions in a contract for future delivery on any

contract market, or in a commodity option'' after the phrase ``Bona

fide hedging transactions or positions shall mean,'' and by adding, in

its place, the phrase ``any agreement, contract or transaction in an

excluded commodity on a registered entity, as that term is defined in

Section 1a(40) of the Act.''

c. Amend paragraph (z)(1) concluding text by removing ``and

Sec. Sec. 1.47 and 1.48 of the regulations.''

d. Amend paragraph (z)(2)(i) by removing the phrase ``commodity for

future delivery on a contract market'' after ``Sales of any'' and by

adding, in its place, the phrase ``agreement, contract or transaction

in a excluded commodity on a registered entity.''

e. Amend paragraph (z)(2)(i)(B) by removing the phrase ``future

during the five last trading days of that future'' and by adding, in

its place, the phrase ``agreement, contract or transaction during the

five last trading days.''

f. Amend paragraph (z)(2)(ii) by removing the phrase ``commodity

for future delivery on a contract market'' after ``Purchases of any''

and by adding, in its place, the phrase ``agreement, contract or

transaction in a excluded commodity on a registered entity.''

g. Amend paragraph (z)(2)(ii)(C) by removing the phrase ``one

future'' and by adding, in its place, the phrase ``agreement, contract

or transaction.''

h. Amend paragraph (z)(2)(iii) by removing the phrase ``for future

delivery on a contract market'' after ``Offsetting sales and

purchases'' and by adding, in its place, the phrase ``in any agreement,

contract or transaction in a excluded commodity on a registered

entity.''

i. Amend paragraph (z)(2)(iii) by removing the phrase ``future

during the five last trading days of that future'' and by adding, in

its place, the phrase ``agreement, contract or transaction during the

five last trading days.''

j. Redesignate paragraph (z)(2)(iv) as paragraph (z)(2)(v).

k. Amend newly redesignated paragraph (z)(2)(v) by removing the

phrase ``for future delivery described in paragraphs (z)(2)(i),

(z)(2)(ii) and (z)(2)(iii)'' and by adding, in its place, the phrase

``described in paragraphs (z)(2)(i), (z)(2)(ii), (z)(2)(iii) and

(z)(2)(iv).''

l. Amend newly redesignated paragraph (z)(2)(v) by removing the

phrase ``for future delivery'' after the phrase ``fluctuations in value

of the position'' and by adding, in its place, the phrase ``in any

agreement, contract or transaction.''

m. Amend newly redesignated paragraph (z)(2)(v) by removing the

phrase ``positions in any one future shall not be maintained during the

five last trading days of that future'' and by adding, in its place,

the phrase ``positions in any agreement, contract or transaction shall

not be maintained during the five last trading days.''

n. Add new paragraph (z)(2)(iv) and revise paragraph (z)(3) to read

as follows:

Sec. 1.3 Definitions.

* * * * *

(z) * * *

(2) * * *

(iv) Purchases or sales by an agent who does not own or has not

contracted to sell or purchase the offsetting cash commodity at a fixed

price, provided that the person is responsible for the merchandising of

the cash positions which is being offset and the agent has a

contractual arrangement with the person who owns the commodity or holds

the cash market commitment being offset.

* * * * *

(z)(3) Non-Enumerated cases. A registered entity may recognize,

consistent with the purposes of this section, transactions and

positions other than those enumerated in paragraph (2) of this section

as bona fide hedging. Prior to recognizing such non-enumerated

transactions and positions, the registered entity shall submit such

rules for Commission review under section 5c of the Act and Sec. 40 of

this chapter.

* * * * *

Sec. 1.47 [Removed and Reserved]

3. Remove and reserve Sec. 1.47.

Sec. 1.48 [Removed and Reserved]

4. Remove and reserve Sec. 1.48.

[[Page 4768]]

PART 150--[REMOVED AND RESERVED]

5. Remove and reserve part 150.

6. Add part 151 to read as follows:

PART 151--LIMITS ON POSITIONS

Sec.

151.1 Definitions.

151.2 Core referenced futures contracts.

151.3 Referenced contract spot months.

151.4 Position limits for referenced contracts.

151.5 Exemptions for referenced contracts.

151.6 Position visibility.

151.7 Aggregation of positions.

151.8 Foreign boards of trade.

151.9 Preexisting positions.

151.10 Form and manner of reporting and submitting information or

filings.

151.11 Registered entity position limits.

151.12 Delegation of authority to the Director of the Division of

Market Oversight.

Appendix A to Part 151

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 6g, 6t, 12a, 19, as

amended by Title VII of the Dodd-Frank Wall Street Reform and

Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

Sec. 151.1 Definitions.

As used in this part--

Basis contract means an agreement, contract or transaction that is

cash settled based on the difference in price of the same commodity (or

substantially the same commodity) at different delivery points;

Calendar spread contract means a cash settled agreement, contract

or transaction that represents the difference between the settlement

price in one or a series of contract months of an agreement, contract

or transaction and another contract month's or another series of

contract months' settlement price for the same agreement, contract or

transaction.

Contracts of the same class mean referenced contracts based on the

same commodity that are:

(1) Futures or option contracts executed pursuant to the rules of a

designated contract market; or

(2) Cleared or uncleared swaps.

Commodity index contract means an agreement, contract or

transaction that is not a basis or spread contract, based on an index

comprised of prices of commodities that are not the same nor

substantially the same, provided that, a commodity index contract that

incorporates the price of a commodity underlying a referenced

contract's commodity which is used to circumvent speculative position

limits shall be considered to be a referenced contract for the purpose

of applying the position limits of Sec. 151.4.

Core referenced futures contract means a futures contract that is

listed in Sec. 151.2.

Entity means a ``person'' as defined in section 1a of the Act.

Excluded commodity means an ``excluded commodity'' as defined in

section 1a of the Act.

Financial entity means any entity that, regardless of any asset or

capital threshold or any other condition in section 1a(18) of the Act,

is an entity identified in section 1a(18)(A)(i) through (iv), (vi),

(viii) through (x) and (B)(ii) of the Act.

Futures contract class means referenced contracts that are based on

the same commodity and are futures and option contracts executed

pursuant to the rules of a designated contract market.

Intercommodity spread contract means a cash-settled agreement,

contract or transaction that represents the difference between the

settlement price of a referenced contract and the settlement price of

another contract, agreement, or transaction that is based on a

different commodity.

Owned non-financial entity means any entity that is not a financial

entity and in which another entity directly or indirectly has a 10

percent or greater ownership or equity interest.

Referenced contract means, on a futures equivalent basis with

respect to a particular core referenced futures contract, a futures

listed in Sec. 151.2, or a referenced paired futures contract, option

contract, swap or swaption, other than a basis contract or contract on

a commodity index.

Referenced paired futures contract, option contract, swap or

swaption means, respectively, an open futures contract, option

contract, swap or swaption that is:

(1) Directly or indirectly linked, including being partially or

fully settled on, or priced at a differential to, the price of any core

referenced futures contract; or

(2) Directly or indirectly linked, including being partially or

fully settled on, or priced at a differential to, the price of the same

commodity for delivery at the same location, or at locations with

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

core referenced futures contract.

Spot month means, for referenced contracts based on a commodity

identified in Sec. 151.3, the spot month corresponding to the spot

month of the core futures contract that overlies the same commodity.

Spot-month, single-month, and all-months-combined position limits

mean, for referenced contracts based on a commodity identified in Sec.

151.3, the position limit corresponding to the position limit of the

core futures contract that overlies the same commodity.

Spread contract means either a calendar spread contract or an

intercommodity spread contract.

Swap means ``swap'' as defined in section 1a of the Act and as

further defined by the Commission.

Swap contract class means referenced contracts that are based on

the same commodity and are swaps.

Swaption means an option to enter into a swap or a physical

commodity option.

Swap dealer means ``swap dealer'' as that term is defined in

section 1a of the Act and as further defined by the Commission.

Trader means a person that, for its own account or for an account

that it controls, makes transactions in referenced contracts or has

such transactions made.

Sec. 151.2 Core referenced futures contracts.

(a) Agricultural commodities. The core referenced futures contracts

include:

(1) ICE Futures U.S. Cocoa (CC) contract based on a trading unit of

10 metric tons delivered at licensed warehouses in the Port of New York

District, Delaware River Port District, Port of Hampton Roads, Port of

Albany, or Port of Baltimore;

(2) ICE Futures U.S. Coffee C (KC) contract based on a trading unit

of 37,500 pounds delivered at the Port of New York District, the Port

of New Orleans, the Port of Houston, the Port of Bremen/Hamburg, the

Port of Antwerp, the Port of Miami, or the Port of Barcelona;

(3) Chicago Board of Trade Corn (C) contract based on a trading

unit of 5,000 bushels delivered at Chicago and Burns Harbor, Indiana

Switching District, Lockport-Seneca Shipping District, Ottawa-

Chillicothe Shipping District, or Peoria-Pekin Shipping District;

(4) ICE Futures U.S. Cotton No. 2 (CT) contract based on a trading

unit of 50,000 pounds net weight delivered at Galveston, Texas;

Houston, Texas; New Orleans, Louisiana; Memphis, Tennessee, or

Greenville/Spartanburg, South Carolina;

(5) Chicago Mercantile Exchange Feeder Cattle (FC) contract based

on a trading unit of 50,000 pounds priced based on the CME Feeder

Cattle Index or any other contract based on a sample of feeder cattle

sales transactions in Colorado, Iowa, Kansas, Missouri, Montana,

Nebraska, New Mexico, North

[[Page 4769]]

Dakota, Oklahoma, South Dakota, Texas, and Wyoming;

(6) ICE Futures U.S. FCOJ-A (OJ) contract based on a trading unit

of 15,000 pounds delivered at licensed warehouses in Florida, New

Jersey, and Delaware;

(7) Chicago Mercantile Exchange Lean Hog (LH) contract based on a

trading unit of 40,000 pounds priced based on the CME Lean Hog Index;

(8) Chicago Mercantile Exchange Live Cattle (LC) contract based on

a trading unit of 40,000 pounds delivered at livestock yards in Wray,

Colorado, Worthing, South Dakota; Syracuse, Kansas; Tulia, Texas;

Columbus, Nebraska; Dodge City, Kansas; Amarillo, Texas; Norfolk,

Nebraska; North Platte, Nebraska; Ogallala, Nebraska; Pratt, Kansas;

Texhoma, Oklahoma; or Clovis, New Mexico;

(9) Chicago Mercantile Exchange Class III Milk (DA) contract based

on a trading unit of 200,000 pounds priced based on the USDA Class III

price for milk;

(10) Chicago Board of Trade Oats (O) contract based on a trading

unit of 5,000 bushels delivered at Chicago Switching District, the

Burns Harbor, Indiana Switching District, Minneapolis, St. Paul,

Minnesota Switching Districts, Duluth Minnesota, or Superior,

Wisconsin;

(11) Chicago Board of Trade Rough Rice (RR) contract based on a

trading unit of 200,000 pounds delivered at warehouses in the Arkansas

counties of Craighead, Jackson, Poinsett, Woodruff, Cross, St. Francis,

Lonoke, Prairie, Monroe, Jefferson, Arkansas, or DeSha;

(12) Chicago Board of Trade Soybeans (S) contract based on a

trading unit of 5,000 bushels delivered at Chicago and Burns Harbor,

Indiana Switching District, Lockport-Seneca Shipping District, Ottawa-

Chillicothe Shipping District, Peoria-Pekin Shipping District, Havana-

Grafton Shipping District, or St. Louis-East St. Louis and Alton

Switching Districts;

(13) Chicago Board of Trade Soybean Meal (SM) contract based on a

trading unit of 100 short tons shipped from plants located in the

Central Territory, Northeast Territory, Mid South Territory, Missouri

Territory, Eastern Iowa Territory, or Northern Territory;

(14) Chicago Board of Trade Soybean Oil (BO) contract based on a

trading unit of 60,000 pounds delivered at warehouses located in the

Illinois Territory, Eastern Territory, Eastern Iowa Territory,

Southwest Territory, Western Territory or Northern Territory;

(15) ICE Futures U.S. Sugar No. 11 (SB) contract based on a trading

unit of 112,000 pounds delivered at a port in the country of origin or

in the case of landlocked countries, at a berth or anchorage in the

customary port of export for the countries of Argentina, Australia,

Barbados, Belize, Brazil, Colombia, Costa Rica, Dominican Republic, El

Salvador, Ecuador, Fiji Islands, French Antilles, Guatemala, Honduras,

India, Jamaica, Malawi, Mauritius, Mexico, Mozambique, Nicaragua, Peru,

Republic of the Philippines, South Africa, Swaziland, Taiwan, Thailand,

Trinidad, United States, and Zimbabwe;

(16) ICE Futures U.S. Sugar No. 16 (SF) contract based on a trading

unit of 112,000 pounds delivered at New York, Baltimore, Galveston, New

Orleans, or Savannah;

(17) Chicago Board of Trade Wheat (W) contract based on a trading

unit of 5,000 bushels delivered at Chicago Switching District, the

Burns Harbor, Indiana Switching District, the Northwest Ohio Territory,

on Ohio River, on Mississippi River or the Toledo, Ohio Switching

District, or the St. Louis-East St. Louis and Alton Switching

Districts;

(18) Minneapolis Grain Exchange Hard Red Spring Wheat (MWE)

contract based on a trading unit of 5,000 bushels delivered at

elevators located in Minneapolis/St. Paul, Red Wing, Duluth/Superior,

Minnesota;

(19) Kansas City Board of Trade Hard Winter Wheat (KW) contract

based on a trading unit of 5,000 bushels delivered at elevators in

Kansas City, Missouri/Kansas; Hutchinson, Kansas; Salina/Abilene,

Kansas; or Wichita, Kansas.

(b) Metals. The core referenced futures contracts include:

(1) Commodity Exchange, Inc. Gold (GC) contract based on a trading

unit of 100 troy ounces delivered at Exchange-licensed warehouses;

(2) Commodity Exchange, Inc. Silver (SI) contract based on a

trading unit of 5,000 troy ounces delivered at Exchange-licensed

warehouses;

(3) Commodity Exchange, Inc. Copper (HG) contract based on a

trading unit of 25,000 pounds delivered at licensed warehouses;

(4) New York Mercantile Exchange Palladium (PA) contract based on a

trading unit of 100 troy ounces delivered at licensed warehouses; and

(5) New York Mercantile Exchange Platinum (PL) contract based on a

trading unit of 50 troy ounces pounds delivered at licensed warehouses.

(c) Energy commodities. The core referenced futures contracts

include:

(1) New York Mercantile Exchange Light Sweet Crude Oil (CL)

contract based on a trading unit of 1,000 U.S. barrels (42,000 gallons)

delivered at the Cushing crude oil storage complex in Cushing,

Oklahoma;

(2) New York Mercantile Exchange New York Harbor No. 2 Heating Oil

(HO) contract based on a trading unit of 1,000 U.S. barrels (42,000

gallons) delivered at an ex-shore facility in New York Harbor;

(3) New York Mercantile Exchange New York Harbor Gasoline

Blendstock (RB) contract based on a trading unit of 1,000 U.S. barrels

(42,000 gallons) delivered at an ex-shore facility in New York Harbor;

and

(4) New York Mercantile Exchange Henry Hub Natural Gas (NG)

contract based on a trading unit of 10,000 million British thermal

units (mmBtu) delivered at the Henry Hub pipeline interchange in Erath,

Louisiana.

Sec. 151.3 Referenced contract spot months.

(a) Agricultural commodities. For referenced contracts based on

agricultural commodities, the spot month shall be the period of time

commencing:

(1) At the close of business on the business day prior to the first

notice day for any delivery month and terminating at the end of the

delivery month for the following contracts:

(i) ICE Futures U.S. Cocoa (CC) contract;

(ii) ICE Futures U.S. Coffee C (KC) contract;

(iii) ICE Futures U.S. Cotton No. 2 (CT) contract;

(iv) ICE Futures U.S. FCOJ-A (OJ) contract;

(2) At the close of business three business days prior to the first

trading day in the delivery month and terminating at the end of the

delivery month for the following contracts:

(i) Chicago Board of Trade Corn (C) contract;

(ii) Chicago Board of Trade Oats (O) contract;

(iii) Chicago Board of Trade Rough Rice (RR) contract;

(iv) Chicago Board of Trade Soybeans (S) contract;

(v) Chicago Board of Trade Soybean Meal (SM) contract;

(vi) Chicago Board of Trade Soybean Oil (BO) contract;

(vii) Chicago Board of Trade Wheat (W) contract;

(viii) Minneapolis Grain Exchange Hard Red Spring Wheat (MW)

contract;

(ix) Kansas City Board of Trade Hard Winter Wheat (KW) contract;

(3) At the close of business two business days after the fifteenth

calendar day of the contract month or the first business day after the

fifteenth should the fifteenth day be a non-business day and

terminating at the end

[[Page 4770]]

of the delivery month for the following contracts:

(i) ICE Futures U.S. Sugar No. 11 (SB) contract;

(ii) ICE Futures U.S. Sugar No. 16 (SF) contract;

(4) At the close of business on the business day immediately

preceding the last five business days of the contract month and

terminating at the end of the delivery month for the Chicago Mercantile

Exchange Live Cattle (LC) contract;

(5) At the close of business on the eleventh day prior to the last

trading day and terminating on the last day of trading for the contract

month for the following contracts:

(i) Chicago Mercantile Exchange Feeder Cattle (FC) contract;

(ii) Chicago Mercantile Exchange Class III Milk (DA) contract;

(6) At the period commencing at the close of business on the fifth

day prior to the last trading day and terminating at the end of the

delivery month for the Chicago Mercantile Exchange Lean Hog (LH)

contract.

(b) Metals. The spot month shall be the period of time commencing

at the close of business on the business day prior to the first notice

day for any delivery month and terminating at the end of the delivery

month for the following contracts:

(1) Commodity Exchange, Inc. Gold (GC) contract; and

(2) Commodity Exchange, Inc. Silver (SI) contract.

(3) Commodity Exchange, Inc. Copper (HG) contract;

(4) New York Mercantile Exchange Palladium (PA) contract; and

(5) New York Mercantile Exchange Platinum (PL) contract.

(c) Energy commodities. The spot month shall be the period of time

commencing at the close of business three business days prior to the

last day of trading in the underlying referenced futures contract and

terminating at the end of the delivery period for the following

contracts:

(1) New York Mercantile Exchange Light Sweet Crude Oil (CL)

contract;

(2) New York Mercantile Exchange New York Harbor No. 2 Heating Oil

(HO) contract;

(3) New York Mercantile Exchange New York Harbor Gasoline

Blendstock (RB) contract; and

(4) New York Mercantile Exchange Henry Hub Natural Gas (NG)

contract.

Sec. 151.4 Position limits for referenced contracts.

(a) Spot-month position limits. Except as provided in paragraph (h)

of this section for initial spot-month position limits, or as otherwise

authorized by Sec. 151.5, no trader may hold or control positions,

separately or in combination, net long or net short, in referenced

contracts in the same commodity when such positions are in excess of:

(1) For physical delivery referenced contracts, a spot-month

position limit that shall be one-quarter of the estimated spot-month

deliverable supply for a core referenced futures contract in the same

commodity as fixed by the Commission pursuant to paragraph (c) of this

section; or

(2) For cash-settled referenced contracts, a spot-month position

limit, equal to the level fixed by paragraph (a)(1) of this section, or

a conditional-spot-month position limit, that is five times the spot-

month position limit fixed by paragraph (a)(1) of this section,

provided that the trader:

(i) For cash-settled contracts in the spot month, shall not hold or

control positions exceeding the level of any single month position

limit;

(ii) Does not hold or control positions in the physical delivery

referenced contract based on the same commodity that is in such

contract's spot month;

(iii) Does not hold or control cash or forward positions in the

referenced contract's spot month in an amount that is greater than one-

quarter of the deliverable supply in the referenced contract's

underlying commodity deliverable at the location or locations specified

in the core referenced futures contract in the same commodity; and

(iv) Has submitted a certification to the Commission, in the form

and manner provided for in Sec. 151.10, that the trader meets the

conditions of paragraphs (a)(2)(ii) and (iii) of this section.

(b) Limited application of spot-month position limits. Spot-month

position limits shall only apply to positions in physical delivery or

cash settled referenced contracts with delivery locations that match

the delivery locations of a core referenced futures contracts in the

same commodity.

(c) Deliverable supply.

(1) For the purpose of applying the spot-month position limit or

conditional spot-month-position limit in paragraph (a) of this section,

the Commission shall set the levels of deliverable supply in accordance

with the procedure in paragraph (h) of this section.

(2) Each designated contract market shall submit to the Commission

an estimate of deliverable supply by the 31st of December of each

calendar year for each physical delivery referenced contract that is

subject to a spot-month position limit and listed or executed pursuant

to the rules of the designated contract market.

(3) The estimate submitted under paragraph (c)(2) of this section

shall be accompanied by a description of the methodology used to derive

the estimate along with any statistical data supporting the designated

contract market's estimate of deliverable supply.

(4) In fixing spot-month position limits under paragraph (a)(1) of

this section, the Commission shall rely on the estimate provided under

paragraph (c)(2) of this section unless the Commission determines to

rely on its own estimate of deliverable supply.

(d) Non-spot position limits. Except as otherwise authorized in

Sec. 151.5, no person may hold or control positions, separately or in

combination, net long or net short, in referenced contracts in the same

commodity when such positions, in all months combined (including the

spot month) or in a single month, are in excess of:

(1) An all-months-combined aggregate and single-month position

limits, fixed by the Commission at 10 percent of the first 25,000

contracts of average all-months-combined aggregated open interest, as

calculated by the Commission pursuant to paragraph (e) of this section,

with a marginal increase of 2.5 percent thereafter;

(2) A class all-months-combined and single-month position limit,

fixed by the Commission, for referenced contracts that are contracts of

the same class, at a level equal to the all-months-combined aggregate

position limit.

(3) Legacy position limits. Except as otherwise authorized by Sec.

151.5, no trader may hold or control positions, separately or in

combination, net long or net short, in referenced contracts in the same

commodity for the commodities enumerated below, when such positions, in

all-months-combined or in a single-month, are in excess of the

following position limits:

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

Position

Referenced contract limits

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

Chicago Board of Trade Corn (C) contract................ 22,000

Chicago Board of Trade Oats (O) contract................ 2,000

Chicago Board of Trade Soybeans (S) contract............ 10,000

Chicago Board of Trade Wheat (W) contract............... 6,500

Chicago Board of Trade Soybean Oil (BO) contract........ 6,500

Chicago Board of Trade Soybean Meal (SM) contract....... 6,500

Minneapolis Grain Exchange Hard Red Spring Wheat (MW) 6,500

contract...............................................

ICE Futures U.S. Cotton No. 2 (CT) contract............. 5,000

[[Page 4771]]

Kansas City Board of Trade Hard Winter Wheat (KW) 6,500

contract...............................................

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

(e) Aggregated open interest calculations. For the purpose of

determining the speculative position limits in paragraph (d) of this

section and in accordance with the procedure in paragraph (h) the

Commission shall determine:

(1) For determining aggregate and class all-month-combined and

single-month position limits under paragraph (d) of this section, the

average all-months-combined aggregate open interest, is the sum for a

calendar year of values obtained under paragraphs (e)(2) and (e)(3) of

this section, then divided by 12, for the twelve months prior to the

effective date.

(2) The all-months futures open interest is, at month end, the sum

of all of a referenced contract's all-months-combined open futures and

option contract (on a delta adjusted basis) open interests across all

designated contract markets;

(3) The all-months swaps open interest, at month end, the sum of

all of a referenced contract's all-months-combined open swaps and

swaptions open interest, combining, open interest attributed to cleared

and uncleared swaps and swaptions, where the uncleared all-months-

combined swap open interest shall be the absolute sum of all swap

dealers' net uncleared open swaps and swaptions exposures by

counterparty and by single referenced contract month.

(f) Netting of positions. (1) For referenced contracts in the spot

month, a trader's positions in physical delivery and cash-settled

contracts are calculated separately and traders can have up to the

spot-month position limit in both the physically delivered and cash

settled contracts unless the cash settled contract positions are held

pursuant to the conditional-spot-month position limit.

(2) For the purpose of applying non-spot-month position limits, a

trader's position shall be combined and the net resulting position

shall be applied towards determining the trader's aggregate single-

month and all-months-combined position.

(3) For the purpose of applying non-spot-month class limits, a

trader's position in contracts of the same class shall be combined and

the net resulting position shall be applied towards determining the

trader's class single-month and all-months-combined position.

(g) Additional provisions. In determining or calculating all levels

and limits under this section, a resulting number shall be rounded up

to the nearest hundred contracts.

(h) Process for fixing and publishing position limits. (1) With the

exception of initial position limits, the Commission shall fix position

limits under this part by January 31st of each calendar year;

(2) The initial spot-month position limits for referenced contracts

shall be as provided in Appendix A to this part.

(3) The initial spot-month, single-month and all-months-combined

position limits must be made effective pursuant to a Commission order

and may be made on any date.

(4) The Commission shall publish position limits on the

Commission's Web site at http://www.cftc.gov prior to making such

limits effective, and such limits, other than initial limits, shall

become effective on the 1st day of March immediately following the

fixing date and shall remain effective up until and including the last

day of the immediately following February.

Sec. 151.5 Exemptions for referenced contracts.

(a) Bona fide hedging transactions or positions.

(1) Any trader that complies with the requirements of this section

may exceed the position limits set forth in Sec. 151.4 to the extent

that a transaction or position in a referenced contract:

(i) Represents a substitute for transactions made or to be made or

positions taken or to be taken at a later time in a physical marketing

channel;

(ii) Is economically appropriate to the reduction of risks in the

conduct and management of a commercial enterprise; and

(iii) Arises from the potential change in the value of--

(A) Assets that a person owns, produces, manufactures, processes,

or merchandises or anticipates owning, producing, manufacturing,

processing, or merchandising;

(B) Liabilities that a person owns or anticipates incurring; or

(C) Services that a person provides or purchases, or anticipates

providing or purchasing; or

(iv) Reduces risks attendant to a position resulting from a swap

that--

(A) Was executed opposite a counterparty for which the transaction

would qualify as a bona fide hedging transaction pursuant to paragraph

(a)(1)(i) through (a)(1)(iii) of this section; or

(B) Meets the requirements of paragraphs (a)(1)(i) through

(a)(1)(iii) of this section. Notwithstanding the foregoing, no

transactions or positions shall be classified as bona fide hedging for

purposes of Sec. 151.4 unless such transactions or positions are

established and liquidated in an orderly manner in accordance with

sound commercial practices and the provisions of paragraph (a)(2) of

this section have been satisfied.

(2) Enumerated Hedging Transactions. The definition of bona fide

hedging transactions and positions in paragraph (a)(1) of this section

includes the following specific transactions and positions:

(i) Sales of any commodity underlying referenced contracts which do

not exceed in quantity:

(A) Ownership or fixed-price purchase of the contract's underlying

cash commodity by the same person; or

(B) Unsold anticipated production of the same commodity, which may

not exceed one year for referenced agricultural contracts, by the same

person provided that no such position is maintained in any referenced

contract during the five last trading days of that referenced contract.

(ii) Purchases of referenced contracts which do not exceed in

quantity:

(A) The fixed-price sale of the contract's underlying cash

commodity by the same person;

(B) The quantity equivalent of fixed-price sales of the cash

products and by-products of such commodity by the same person; or

(C) Unfilled anticipated requirements of the same cash commodity,

which may not exceed one year for referenced agricultural contracts,

for processing, manufacturing, or feeding by the same person, provided

that such transactions and positions in the five last trading days of

any referenced contract do not exceed the person's unfilled anticipated

requirements of the same cash commodity for that month and the next

succeeding month.

(iii) Offsetting sales and purchases in referenced contracts which

do not exceed in quantity that amount of the same cash commodity which

has been bought and sold by the same person at unfixed prices basis

different delivery months of the referenced contract, provided that no

such position is maintained during the five last trading days of any

referenced contract.

(iv) Purchases or sales by an agent who does not own or has not

contracted to sell or purchase the offsetting cash commodity at a fixed

price, provided that the person is responsible for the merchandising of

the cash positions which is being offset and the agent has a

contractual arrangement with the person who owns the commodity or

[[Page 4772]]

holds the cash market commitment being offset.

(v) Sales and purchases in referenced contracts described in

paragraphs (a)(2)(i), (a)(2)(ii), (a)(2)(iii), and (a)(2)(iv) of this

section may also be offset other than by the same quantity of the same

cash commodity, provided that the fluctuations in value of the position

in referenced contracts are substantially related to the fluctuations

in value of the actual or anticipated cash position, and provided that

the positions shall not be maintained during the five last trading days

of any referenced contract.

(b) Information on cash market commodity activities. Any trader

with a position that exceeds the position limits set forth in Sec.

151.4 pursuant to paragraph (a) of this section shall submit to the

Commission a 404 filing, in the form and manner provided for in Sec.

151.10, containing the following information with respect to such

position:

(1) The cash market commodity hedged, the units in which it is

measured, and the corresponding referenced contract that is used for

hedging the cash market commodity;

(2) The number of referenced contracts used for hedging;

(3) The entire quantity of stocks owned of the cash market

commodity that is being hedged by a position in a referenced contract;

(4) The entire quantity of open fixed price purchase commitments in

the hedged commodity outside of the spot month of the corresponding

referenced contract;

(5) The entire quantity of open fixed price purchase commitments in

the hedged commodity in the spot month of the corresponding referenced

contract;

(6) The entire quantity of open fixed price sale commitments in the

hedged commodity outside of the spot month of the corresponding

referenced contract; and

(7) The entire quantity of open fixed price sale commitments in the

hedged commodity in the spot month of the corresponding referenced

contract.

(c) Anticipatory hedge exemptions. (1) Initial statement. Any

trader who wishes to exceed the position limits set forth in Sec.

151.4 pursuant to paragraph (a) of this section in order to hedge

unsold anticipated commercial production or unfilled anticipated

commercial requirements connected to a commodity underlying a

referenced contract, shall submit to the Commission a 404A filing at

least ten days in advance of the date that such transactions or

positions would be in excess of the position limits set forth in Sec.

151.4. The 404A filing shall be made in the form and manner provided in

Sec. 151.10 and shall contain the following information with respect

to such position:

(i) The cash market commodity and units for which the anticipated

production or requirements pertain;

(ii) The dates for the beginning and end of the period for which

the person claims the anticipatory hedge exemption is required, which

may not exceed one year;

(iii) The production or requirement of that cash market commodity

for the three complete fiscal years preceding the current fiscal year;

(iv) The anticipated production or requirements for the period

hedged, which may not exceed one year;

(v) The unsold anticipated production or unfilled anticipated

requirements across the period hedged, which may not exceed one year;

(vi) The referenced contract that the trader will use to hedge the

unfilled, anticipated production or requirements; and

(vii) The number of referenced contracts that will be used for

hedging.

(2) Approval. All or a specified portion of the unsold anticipated

production or unfilled anticipated requirements described in these

filings shall not be considered as offsetting positions for bona fide

hedging transactions or positions if such person is so notified by the

Commission within ten days after the Commission is furnished with the

information required under this paragraph (c).

(i) The Commission may request the person so notified to file

specific additional information with the Commission to support a

determination that the statement filed accurately reflects unsold

anticipated production or unfilled anticipated requirements.

(ii) The Commission shall consider all additional information filed

and, by notice to such person, shall specify its determination as to

what portion of the production or requirements described constitutes

unsold anticipated production or unfilled anticipated requirements for

the purposes of bona fide hedging.

(3) Supplemental reports. Whenever the sales or purchases which a

person wishes to consider as bona fide hedging of unsold anticipated

production or unfilled anticipated requirements shall exceed the

amounts in the most recent filing or the amounts determined by the

Commission to constitute unsold anticipated production or unfilled

anticipated requirements pursuant to paragraph (c)(2) of this section,

such person shall file with the Commission a statement which updates

the information provided in the person's most recent filing, and for

instances anticipated needs exceed the amounts in the most recent

filing, at least ten days in advance of the date that person wishes to

exceed these amounts.

(d) Additional information from swap counterparties to bona fide

hedging transactions. All persons that enter into swap transactions or

maintain swap positions pursuant to paragraph (a)(1)(iv) of this

section shall also submit to the Commission a 404S filing not later

than 9:00 a.m. on the business day following that to which the

information pertains. The 404S filing shall be done in the form and

manner provided for in Sec. 151.10 and shall contain the following

information:

(1) The commodity reference price for the swaps that would qualify

as a bona fide hedging transaction or position;

(2) The entire gross long and gross short quantity underlying the

swaps that were executed in a transaction that would qualify as a bona

fide hedging transaction, and the units in which the quantity is

measured;

(3) The referenced contract that is used to offset the exposure

obtained from the bona fide hedging transaction or position of the

counterparty;

(4) The gross long or gross short size of the position used to

offset the exposure obtained from a bona fide hedging transaction or

position of the counterparty;

(5) The gross long or gross short size of the position used to

offset the exposure obtained from a bona fide hedging swap transaction

or position that is in the spot month.

(e) Recordkeeping. Traders who qualify for bona fide hedge

exemptions for cash market positions, anticipatory hedging, and swaps

opposite counterparties that would qualify as bona fide hedging

transactions or positions shall maintain complete books and records

concerning all of their related cash, futures, and swap positions and

transactions and make such books and records, along with a list of swap

counterparties, available to the Commission upon request.

(f) Conversion methodology for swaps not involving the same

commodity. In addition to the information required under this section,

traders engaged in the hedging of commercial activity or positions

resulting from swaps that are used for the hedging of commercial

activity that does not involve the same quantity or commodity as the

quantity or commodity associated with positions in referenced contracts

that are used to hedge shall submit to the Commission a 404, 404A, or

404S filing, as

[[Page 4773]]

appropriate, containing the following information:

(1) Conversion information both in terms of the actual quantity and

commodity used in the trader's normal course of business and in terms

of the referenced contracts that are sold or purchased; and

(2) An explanation of the methodology used for determining the

ratio of conversion between the actual or anticipated cash positions

and the trader's positions in referenced contracts.

(g) Requirements for bona fide hedging swap counterparties. Upon

entering into a swap transaction where at least one party is relying on

a bona fide hedge exemption to exceed the position limits of Sec.

151.4 with respect to such a swap:

(1) The party not hedging a cash market commodity risk, or both

parties to the swap if both parties are hedging a cash market commodity

risk, shall:

(i) Ask for a written representation from its counterparty

verifying that the swap qualifies as a bona fide hedging transaction

under paragraph (a)(1)(iv) of this section; and

(ii) Upon receipt of such written representation from the

counterparty, provide written confirmation of such receipt to the

counterparty.

(2) The party relying on the bona fide hedging exemption to enter

into the swap transaction shall submit a written representation to its

counterparty verifying that the swap qualifies as a bona fide hedging

transaction, as defined in paragraph (a)(1)(iv) of this section.

(h) The written representation and receipt confirmation described

in paragraph (g) of this section shall be retained by the parties to

the swap and provided to the Commission upon request.

(i) Filing requirement for bona fide hedgers. Any party with cash

market commodity risk relying on a bona fide hedging exemption to enter

into and maintain a referenced contract position shall submit to the

Commission a 404S filing, in the form and manner provided for in Sec.

151.10, containing the information in paragraphs (b) and (c) of this

section, for each business day on which such position was maintained,

up to and including the day after the trader's position level is below

the position limit that was exceeded.

(j) Positions that are maintained. For a swap that satisfies the

requirements of paragraph (a) of this section, the party to whom the

cash market commodity risk is transferred may itself establish, lift

and re-establish a position in excess of the position limits of Sec.

151.4 provided that:

(1) The party and its counterparty comply with the requirements of

paragraphs (g) through (i) of this section; and

(2) The party may only exceed such position limit to the extent and

in such amounts that the qualifying swap directly offsets, and

continues to offset, the cash market commodity risk of a bona fide

hedging counterparty.

Sec. 151.6 Position visibility.

(a) Visibility levels. A trader holding or controlling, separately

or in combination, net long or net short, referenced contracts in the

following commodities when such positions in all months or in any

single month (including the spot month) are in excess of the following

position levels, shall comply with the reporting requirements of

paragraphs (b) through (d) of this section:

Visibility Levels for Referenced Metals Contracts

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

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

New York Mercantile Exchange Copper (HG)..................... 4,200

New York Mercantile Exchange Palladium (PA).................. 900

New York Mercantile Exchange Platinum (PL)................... 1,400

New York Mercantile Exchange Gold (GC)....................... 10,700

New York Mercantile Exchange Silver (SI)..................... 4,500

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

Visibility Levels for Referenced Energy Contracts

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

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

New York Mercantile Exchange Light Sweet Crude Oil (CL)...... 22,500

New York Mercantile Exchange New York Harbor Gasoline 7,800

Blendstock (RB).............................................

New York Mercantile Exchange Henry Hub Natural Gas (NG)...... 21,000

New York Mercantile Exchange New York Harbor No. 2 Heating 9,900

Oil (HO)....................................................

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

(b) Statement of trader exceeding visibility level. Upon acquiring

a position in referenced contracts in the same commodity that reaches

or exceeds a visibility level, a trader shall submit to the Commission

a 401 filing for the position in a referenced contract, separately by

futures, options, swaps, or swaptions that comprise the position in the

form and manner provided for in Sec. 151.10, and shall containing the

following information:

(1) The date on which the trader's position initially reached or

exceeded the visibility level;

(2) Gross long and gross short positions on an all-months-combined

basis (using economically reasonable and analytically supported

deltas);

(3) If the visibility levels are reached or exceeded in any single

month, the contract month and the trader's gross long and short

positions in the relevant single month (using economically reasonable

and analytically supported deltas); and

(4) If applicable, the trader shall also certify that they do not

hold or control positions subject to the filing requirements of

paragraphs (c) and (d) of this section.

(c) Related uncleared swaps position report. Upon acquiring a

position in referenced contracts in the same commodity that reaches or

exceeds a visibility level, a trader shall submit to the Commission a

402S filing for any uncleared swap positions that are based on

substantially the same commodity as that which underlies the referenced

contract. The 402S filing shall be done in the form and manner provided

for in Sec. 151.10 and shall contain the following information for the

date on which the trader's position initially reached or exceeded the

visibility level:

(1) By commodity reference price;

(2) By swaps or swaptions;

(3) By open swap end dates within 30 days, 90 days, one year or

outside of one year from the date on which the trader's position

initially reached or exceeded the visibility level; and

(4) Gross long and gross short positions on a futures equivalent

basis in terms of the referenced contract; or

(5) With the express written permission of the Commission or its

designees, the submission of a swaps portfolio summary statement

spreadsheet in digital format, only insofar as the spreadsheet provides

at least the same data as that required by the 402S filing, may be

substituted for the reporting requirements of the 402S filing.

(d) Any trader above a visibility level that holds or controls cash

market commodity positions or has anticipated commercial requirements

or unsold anticipated commercial production in the same or

substantially the same commodity shall submit to the Commission 404 and

404A filings respectively. Such 404 and 404A filings shall be done in

the form and manner provided for in Sec. 151.10 and shall contain

information regarding such positions as described in Sec. 151.5(b) and

(c). Notwithstanding this requirement, a visible trader may

alternatively, upon written permission by the Commission or its

designees, submit in digital format a physical commodity portfolio

[[Page 4774]]

summary statement spreadsheet, provided that such spreadsheet contains

at least the same data as that required by the 404 or 404A filing.

(e) Reporting obligations imposed by regulations other than those

contained in this section shall supersede the reporting requirements of

paragraphs (b), (c), and (d) of this section but only insofar as other

reporting obligations provide at least the same data and are submitted

to the Commission or its designees at least as often as the reporting

requirements of paragraphs (b), (c), and (d) of this section.

Sec. 151.7 Aggregation of positions.

(a) Positions to be aggregated. The position limits set forth in

Sec. 151.4 shall apply to all positions in accounts for which any

trader by power of attorney or otherwise directly or indirectly holds

positions or controls trading and to positions held by two or more

traders acting pursuant to an expressed or implied agreement or

understanding the same as if the positions were held by, or the trading

of the position were done by, a single individual.

(b) Ownership of accounts generally. For the purpose of applying

the position limits set forth in Sec. 151.4, 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 or positions.

(c) Ownership by limited partners, shareholders or other pool

participants. (1) Except as provided in paragraphs (c)(2) and (c)(3) of

this section, a trader that is a limited partner, shareholder or other

similar type of pool participant with an ownership or equity interest

of 10 percent or greater in a pooled account or positions need not

aggregate such pooled positions or accounts if:

(i) The pool operator has, and enforces, written procedures to

preclude the trader from having knowledge of, gaining access to, or

receiving data about the trading or positions of the pool;

(ii) The trader does not have direct, day-to-day supervisory

authority or control over the pool's trading decisions; and

(iii) The pool operator has complied with the requirements of

paragraph (g) of this section and has received an exemption from

aggregation on behalf of the trader or a class of traders from the

Commission.

(2) A commodity pool operator having ownership or equity interest

of 10 percent or greater in an account or positions as a limited

partner, shareholder or other similar type of pool participant must

aggregate those accounts or positions with all other accounts or

positions owned or controlled by the commodity pool operator.

(3) Each limited partner, shareholder, or other similar type of

pool participant having an ownership or equity interest of 25 percent

or greater in a commodity pool must aggregate the pooled account or

positions with all other accounts or positions owned or controlled by

that trader.

(d) Identical trading. For the purpose of applying the position

limits set forth in Sec. 151.4, any trader that holds or controls the

trading of positions, by power of attorney or otherwise, in more than

one account, or that holds or controls trading of accounts or positions

in multiple pools, with identical trading strategies must aggregate all

such accounts or positions.

(e) Trading control by futures commission merchants. The position

limits set forth in Sec. 151.4 shall be construed to apply to all

positions held by a futures commission merchant or its separately

organized affiliates in a discretionary account, or in an account which

is part of, or participates in, or receives trading advice from a

customer trading program of a futures commission merchant or any of the

officers, partners, or employees of such futures commission merchant or

its separately organized affiliates, unless:

(1) A trader other than the futures commission merchant or the

affiliate directs trading in such an account;

(2) The futures commission merchant or the affiliate maintains only

such minimum control over the trading in such an account as is

necessary to fulfill its duty to supervise diligently trading in the

account;

(3) Each trading decision of the discretionary account or the

customer trading program is determined independently of all trading

decisions in other accounts which the futures commission merchant or

the affiliate holds, has a financial interest of 10 percent or more in,

or controls; and

(4) The futures commission merchant has complied with the

requirements of paragraph (g) of this section and has received an

exemption from aggregation from the Commission.

(f) Owned non-financial entities. An entity need not aggregate its

positions with the positions of one of its owned non-financial

entities, as defined in Sec. 151.1, if it can sufficiently

demonstrate, in an application for exemption submitted under paragraph

(g) of this section, that the owned non-financial entity's trading is

independently controlled and managed, indicia of which include:

(1) The entity and its other affiliates have no knowledge of

trading decisions by the owned non-financial entity, and the owned non-

financial entity has no knowledge of trading decisions by the entity or

any of the entity's other affiliates;

(2) The owned non-financial entity's trading decisions are

controlled by persons employed exclusively by the owned non-financial

entity, who do not in any way share trading control with persons

employed by the entity;

(3) The owned non-financial entity maintains and enforces written

policies and procedures to preclude the entity or any of its affiliates

from having knowledge of, gaining access to, or receiving information

or data about its positions, trades or trading strategies, including

document routing and other procedures or security arrangements; and

(4) The owned non-financial entity maintains a risk management

system that is separate from the risk management system of the entity

and any of its other affiliates.

(5) Any other factors the Commission may consider, in its

discretion, that indicate that the owned non-financial entity's trading

is independently controlled and managed.

(g) Applications for exemption. (1) Entities seeking an exemption

from the position limits established by the Commission pursuant to this

section, shall file an initial application for an exemption providing

as part of the application all information required by the Commission,

including but not limited to information:

(i) Describing the relevant circumstances that warrant

disaggregation;

(ii) Providing an independent assessment report on the operation of

the policies and procedures described in Sec. 151.9(c)(1)(iii) for

pool operators and Sec. 151.9(f)(3) for owned non-financial entities;

(iii) Designating an office and employee(s) of the entity, with

salaries and compensation that are independent of trading profits and

losses, which shall be responsible for the coordination of aggregation

rules and position limit compliance;

(iv) Providing an organizational chart that includes the name, main

business address, main business telephone number, main facsimile number

and main e-mail address of the entity and each of its affiliates;

(v) Providing the names of pertinent employees of the entity

(trading, operations, compliance, risk

[[Page 4775]]

management and legal) and their work locations and contact information;

(vi) Providing a description of all information-sharing systems,

bulletin boards, and common e-mail addresses;

(vii) Providing an explanation of the entity's risk management

system;

(viii) Providing an explanation of how and to whom the trade data

and position information is distributed, including which officers

receive reports and their respective titles; and

(ix) A signature by a representative duly authorized to bind the

entity.

(2) An application shall be submitted within the time specified by

the Commission and in the form and manner provided for in Sec. 151.10.

Sec. 151.8 Foreign boards of trade.

The aggregate position limits in Sec. 151.4 shall apply to a

trader with positions in referenced contracts executed on, or pursuant

to the rules of a foreign board of trade, provided that:

(a) Such referenced contracts settle against the price (including

the daily or final settlement price) of one or more contracts listed

for trading on a registered entity; and

(b) The foreign board of trade makes available such referenced

contracts to its members or other participants located in the United

States through direct access to its electronic trading and order

matching system.

Sec. 151.9 Preexisting positions.

(a) The position limits set forth in Sec. 151.2 of this chapter

may be exceeded to the extent that such positions remain open and were

entered into in good faith prior to the effective date of any rule,

regulation, or order that specifies a position limit under this part.

(b) Swap and swaption positions entered into in good faith prior to

the effective date of any rule, regulation, or order that specifies a

position limit under this part may be netted with post-effective date

swap and swaptions for the purpose of applying any position limit.

(c) Swap and swaption positions entered into in good faith prior to

the effective date of any rule, regulation or order that specifies a

position limit under this part shall not be aggregated with positions

in referenced contracts that were entered into after the effective date

of such a rule, regulation or order.

Sec. 151.10 Form and manner of reporting and submitting information

or filings.

Unless otherwise instructed by the Commission or its designees, any

person submitting reports under this section shall submit the

corresponding required filings and any other information required under

this part to the Commission as follows:

(a) Using the format, coding structure, and electronic data

transmission procedures approved in writing by the Commission; and

(b) Not later than 9 a.m. on the next business day following the

reporting or filing obligation is incurred unless:

(1) A 404A filing is submitted pursuant Sec. 151.5(c), in which

case the filing must be submitted at least ten days in advance of the

date that transactions and positions would be established that would

exceed a position limit set forth in Sec. 151.4;

(2) A 404 or 404S filing is submitted pursuant to Sec. 151.5, in

which case the filing must be submitted the day after a position limit

is exceeded and all days the trader exceeds such levels and the first

day after the trader's position is below the position limit;

(3) The filing is submitted pursuant to Sec. 151.6 and not under

any other part under this title, then the 401, 402S, 404, or 404A

filing, or their respective substitutes as provided for under Sec.

151.6(c)(5) and (d), shall be submitted after the establishment of a

position exceeding a visibility level on the latter of either (i) 9

a.m. five business day after such time or (ii) 9 a.m. the first

business day of the subsequent calendar month. If the filing is

submitted pursuant to Sec. 151.6 and not under any other part under

this title, the filing trader shall be required to submit a 401, 402S,

404, or 404A filing, or their respective substitutes, no more often

than once per calendar month; or

(4) An application for exemption renewal is filed pursuant to Sec.

151.7(g)(1), in which case the filing shall be submitted within 30

calendar days of January 1 of each year following the initial

application for exemption.

Sec. 151.11 Registered entity position limits.

(a) Generally. (1) Registered entities shall adopt, and establish

rules and procedures for monitoring and enforcing spot-month, single-

month, and all-months-combined position limits with respect to

agreements, contracts or transactions executed pursuant to their rules

that are no greater than the position limits specified in Sec. 151.4.

(2) For agreements, contracts or transactions with no Federal

limits, or with respect to levels of open interest to which no Federal

limits apply, registered entities that are trading facilities shall

adopt spot-month, single-month and all-months-combined position limits

based on the methodology in 151.4, provided, however, that a registered

entity may adopt, notwithstanding the methodology in 151.4, single-

month or all-months-combined limit levels of 1,000 contracts for

tangible commodities other than energy products and 5,000 contracts for

energy products and non-tangible commodities, including contracts on

financial products.

(3) Securities futures products. Position limits for securities

futures products are specified in Part 41.

(b) Alternatives. For a contract that is not subject to a Federal

position limit, registered entities may adopt position accountability

rules with respect to any agreement, contract or transaction:

(1) On a major foreign currency, for which there is no legal

impediment to delivery and for which there exists a highly liquid cash

market; or

(2) On an excluded commodity that is an index or measure of

inflation, or other macroeconomic index or measure; or

(3) On an excluded commodity that meets the definition of section

1.13(ii), (iii), or (iv) of the Act; or

(4) On an excluded commodity having an average open interest of

50,000 contracts and an average daily trading volume of 100,000

contracts and a highly liquid cash market.

(c) Aggregation. Position limits or accountability rules

established under this section shall be subject to the aggregation

standards of Sec. 151.7.

(d) Exemptions. (1) Hedge exemptions. (i) For purposes of exempt

and agricultural commodities, no designated contract market or swap

execution facility bylaw, rule, regulation, or resolution adopted

pursuant to this section shall apply to any position that would

otherwise be exempt from the applicable Federal speculative position

limits as determined by Sec. 151.5; provided, however, that the

designated contract market or swap execution facility may limit bona

fide hedging positions or any other positions which have been exempted

pursuant to Sec. 151.5 which it determines are not in accord with

sound commercial practices or exceed an amount which may be established

and liquidated in an orderly fashion.

(ii) For purposes of excluded commodities, no designated contract

market or swap execution facility bylaw, rule, regulation or resolution

adopted pursuant to this section shall apply to any transaction or

position defined under Sec. 1.3(z); provided, however, that the

designated contract market or swap execution facility may limit bona

fide hedging positions 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.

[[Page 4776]]

(2) Procedure. Persons seeking to establish eligibility for an

exemption must comply with the procedures of the designated contract

market or swap execution facility for granting exemptions from its

speculative position limit rules. In considering whether to permit or

grant an exemption, a contract market or swap execution facility must

take into account sound commercial practices and paragraph (d)(1) of

this section apply principles while remaining consistent with Sec.

151.5.

(f) Other exemptions. Speculative position limits adopted pursuant

to this section shall not apply to:

(1) any position acquired in good faith prior to the effective date

of any bylaw, rule, regulation, or resolution which specifies such

limit; or

(2) any 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.

(g) Ongoing responsibilities. Nothing in this Part shall be

construed to affect any provisions of the Act relating to manipulation

or corners or to relieve any designated contract market, swap execution

facility, or governing board of a designated contract market or swap

execution facility from its responsibility under other provisions of

the Act and regulations.

Sec. 151.12 Delegation of authority to the Director of the Division

of Market Oversight.

(a) The Commission hereby delegates, until it orders otherwise, to

the Director of the Division of Market Oversight or such other employee

or employees as the Director may designate from time to time, the

authority:

(1) In Sec. 151.4(e) for determining levels of open interest;

(2) In Sec. 151.5 for granting exemptions relating to bona fide

hedging transactions; and

(3) In Sec. 151.10 for providing instructions or determining the

format, coding structure, and electronic data transmission procedures

for submitting data records and any other information required under

this part.

(b) The Director of the Division of Market Oversight may submit to

the Commission for its consideration any matter which has been

delegated in this section.

(c) Nothing in this section prohibits the Commission, at its

election, from exercising the authority delegated in this section.

Appendix A to Part 151

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

Spot month

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

Current federal Current

Contract limit exchange limit

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

Agricultural Contracts

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

Cocoa............................... ................ 1,000

Coffee.............................. ................ 500

Corn................................ 600 600

Cotton No. 2........................ 300 300

Feeder Cattle....................... ................ 300

Frozen Concentrated Orange Juice.... ................ 300

Lean Hogs........................... ................ 950

Live Cattle......................... ................ 450

Milk Class III...................... ................ 1,500

Oats................................ 600 600

Rough Rice.......................... ................ 600

Soybeans............................ 600 600

Soybean Meal........................ 720 720

Soybean Oil......................... 540 540

Sugar No. 11........................ ................ 5,000

Sugar No. 16........................ ................ 1,000

Wheat (CBOT)........................ 600 600

Wheat, Hard Red Spring.............. 600 600

Wheat, Hard Winter.................. 600 600

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

Base Metals Contracts

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

Copper Grade 1............. ................ 1,200

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

Precious Metals Contracts

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

Gold................................ ................ 3,000

Palladium........................... ................ 650

Platinum............................ ................ 150

Silver.............................. ................ 1,500

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

Energy Contracts

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

Crude Oil, Light Sweet (``WTI'').... ................ 3,000

Gasoline Blendstock (RBOB).......... ................ 1,000

Natural Gas......................... ................ 1,000

No. 2 Heating Oil, New York Harbor.. ................ 1,000

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

[[Page 4777]]

Issued by the Commission, this 13th day of January 2011, in

Washington, DC.

David Stawick,

Secretary of the Commission.

Appendices to Position Limits for Derivatives--Commission Voting

Summary and Statements of Commissioners

Note: The following appendices will not appear in the Code of

Federal Regulations

Appendix 1--Commission Voting Summary

On this matter, Chairman Gensler and Commissioners Dunn, Chilton

and O'Malia voted in the affirmative; Commissioner Sommers voted in

the negative.

Appendix 2--Statement of Chairman Gary Gensler

I support the proposed rulemaking to establish position limits

for physical commodity derivatives. The CFTC does not set or

regulate prices. Rather, the Commission is directed to ensure that

commodity markets are fair and orderly to protect the American

public.

When the CFTC set position limits in the past, the agency sought

to ensure that the markets were made up of a broad group of market

participants with a diversity of views. At the core of our

obligations is promoting market integrity, which the agency has

historically interpreted to include ensuring markets do not become

too concentrated.

Position limits help to protect the markets both in times of

clear skies and when there is a storm on the horizon. In 1981, the

Commission said that ``the capacity of any contract market to absorb

the establishment and liquidation of large speculative positions in

an orderly manner is related to the relative size of such positions,

i.e., the capacity of the market is not unlimited.''

Today's proposal would implement important new authorities in

the Dodd-Frank Act to prevent excessive speculation and manipulation

in the derivatives markets. The Dodd-Frank Act expanded the scope of

the Commission's mandate to set position limits to include certain

swaps. The proposal re-establishes position limits in agriculture,

energy and metals markets. It includes one position limits regime

for the spot month and another regime for single-month and all-

months combined limits. It would implement spot-month limits, which

are currently set in agriculture, energy and metals markets, sooner

than the single-month or all-months-combined limits. Single-month

and all-months-combined limits, which currently are only set for

certain agricultural contracts, would be re-established in the

energy and metals markets and be extended to certain swaps. These

limits will be set using the formula proposed today based upon data

on the total size of the swaps and futures market collected through

the position reporting rule the Commission hopes to finalize early

next year. It is only with the passage and implementation of the

Dodd-Frank Act that the Commission will have broad authority to

collect data in the swaps market.

It will be some time before position limits for single-month and

all-months-combined can be fully implemented. In the interim, if a

trader has a position that is above a level of 10 and 2\1/2\;

percent of futures and options on futures open interest in the 28

contracts for which the Commission is proposing position limits, I

have directed staff to collect information, including using special

call authority when appropriate, to monitor these large positions.

Staff will brief the Commission and make any appropriate

recommendations based upon existing authorities for the Commission's

consideration during its closed surveillance meetings at least

monthly on what staff finds.

Collecting this data relating to large traders with positions in

the futures markets above such levels or points of 10 and 2\1/2\;

percent would give the Commission a better look into the market and

help us identify potential concerns. For example, if a trader does

not have a bona fide hedge exemption, we can look into the details

of its position and its intentions. It may also give us additional

information as to how the position limits in the proposed rulemaking

would affect traders in these markets.

These levels, or points, are the positions at which CFTC staff

will brief the Commission under its existing authorities. They would

not be a substitute for current position limits or accountability

levels, and they should not be interpreted to be a level that will

automatically trigger any additional regulatory action.

Appendix 3--Statement of Commissioner Bart Chilton

I reluctantly concur in the Commission's approval of publication

of notice of a proposed rulemaking on position limits for

derivatives. I support the Commission's issuance of a position

limits proposal, but I do not support the timing.

I have said repeatedly that it is of paramount importance to

adhere to the deadlines imposed by Congress in the Wall Street

Reform and Consumer Protection Act of 2010. Position limits is one

of the rulemakings with an earlier target date. The current proposal

does not meet the statutory time limits of imposition of limits

within 180 days from the date of enactment for energy and metal

commodities and 270 days for agricultural commodities. The agency

does not have the authority to delay these statutory deadlines.

At the open Commission meeting of the agency on December 9,

2010, the Chairman indicated an intent to move forward with two

proposals on speculative position limits and to move

``expeditiously'' to implement spot month limits. This bifurcation

of spot and single month/aggregate rulemakings was a good attempt to

meet the January deadline set by Congress. At the meeting on

December 16, 2010, however, the Commission was presented with a

single proposed rule, with a 60-day comment period, addressing spot,

single month, and aggregate limits. Accordingly, it is now clear

that spot month limits will not be implemented for many months, at

best, and single month/aggregate limits--and the corresponding new

bona fide hedging rule--may take more than a year to implement.

We need to address excessive speculation in these markets now.

We already have more speculative positions in the commodities

markets than ever before. There are some who suggest that certain

commodity prices are currently delinked from supply and demand

fundamentals, and are being impacted by excessive speculation.

Should these conditions worsen, I will not hesitate to continue to

criticize the delay that the Commission's position limits proposed

rulemaking exacerbates.

I commend the position point agreement that the Chairman

publicly directed the staff to undertake. This interim measure will

give the agency a window into the ``largest of the large'' traders

in our markets, and is an appropriate provisional effort as we

transition to include the swaps market into our traditional

surveillance systems.

The Commission should have acted so as to implement position

limits as directed by Congress, pursuant to the statutory deadlines.

I am disappointed that it failed to do so, and I will continue to

aggressively advocate for rules that will appropriately address

excessive speculatio

.[FR Doc. 2011-1154 Filed 1-25-11; 8:45 am]

BILLING CODE P

Last Updated: January 26, 2011