2012-12526

Federal Register, Volume 77 Issue 104 (Wednesday, May 30, 2012)[Federal Register Volume 77, Number 104 (Wednesday, May 30, 2012)]

[Proposed Rules]

[Pages 31767-31783]

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

[FR Doc No: 2012-12526]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 151

RIN 3038-AD82

Aggregation, Position Limits for Futures and Swaps

AGENCY: Commodity Futures Trading Commission.

[[Page 31768]]

ACTION: Notice of proposed rulemaking.

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SUMMARY: On November 18, 2011, the Commodity Futures Trading Commission

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

rule and interim final rule, which establish a position limits regime

for 28 exempt and agricultural commodity futures and options contracts

and the physical commodity swaps that are economically equivalent to

such contracts. In response to a petition for exemptive relief under

the Commodity Exchange Act and certain comments to the Commission's

interim final rule for spot-month limits for cash-settled contracts,

this notice proposes certain modifications to the Commission's policy

for aggregation under the position limits regime in CFTC regulations.

DATES: Comments must be received on or before June 29, 2012.

ADDRESSES: You may submit comments, identified by RIN number3038-AD82,

by any of the following methods:

Agency Web Site: http://www.cftc.gov.

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 CFTC regulation

145.9 (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 www.cftc.gov that it may deem to be inappropriate for

publication, such as obscene language. All submissions that have been

redacted or removed that contain comments on the merits of the

rulemaking will be retained in the public comment file and will be

considered as required under the Administrative Procedure Act and other

applicable laws, and may be accessible under the Freedom of Information

Act.

FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist,

Division of Market Oversight, at (202) 418-5452, [email protected];

Neal Kumar, Counsel, Office of General Counsel, at (202) 418-5353,

[email protected], Riva Spear Adriance, Senior Special Counsel, Division

of Market Oversight, at (202) 418-5494, [email protected], Commodity

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

NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII

of the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'')

\3\ to establish a comprehensive new regulatory framework for swaps and

security-based swaps. The legislation was enacted to reduce risk,

increase transparency, and promote market integrity within the

financial system by, among other things: (1) Providing for the

registration and comprehensive regulation of swap dealers and major

swap participants; (2) imposing clearing and trade execution

requirements on standardized derivative products; (3) creating robust

recordkeeping and real-time reporting regimes; and (4) enhancing the

Commission's rulemaking and enforcement authorities with respect to,

among others, all registered entities and intermediaries subject to the

Commission's oversight.

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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection

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

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

\2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

be cited as the ``Wall Street Transparency and Accountability Act of

2010.''

\3\ 7 U.S.C. 1 et seq.

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

the CEA mandate that the Commission establish limits for futures and

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

well as swaps that are economically equivalent to such futures or

options contracts traded on a DCM. This mandate directed the Commission

to establish position limits on the expedited timeframe of 180 days

from the date of enactment for exempt commodities and 270 days from the

date of enactment for agricultural commodities. In response to the

Congressional mandate, the Commission proposed and ultimately adopted

final rules in part 151 regarding position limits for 28 physical

commodity futures and option contracts (``Core Referenced Futures

Contracts'') and physical commodity swaps that are economically

equivalent to such contracts (collectively with Core Referenced Futures

Contracts referred to as ``Referenced Contracts'').\4\

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\4\ See Position Limits for Futures and Swaps, 76 FR 71626, Nov.

18, 2011.

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The regulations in the part 151 position limits regime, consistent

with the Commission's historical approach to position limits,\5\

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

set a threshold that restricts the number of speculative positions that

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

combined,\6\ (2) an exemption for positions that constitute bona fide

hedging transactions,\7\ and (3) rules to determine which accounts and

positions a person must aggregate for the purpose of determining

compliance with the position limit levels.\8\

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\5\ See 17 CFR 150 (1999). Prior to the Dodd-Frank Act

rulemaking, the Commission administered position limits under

Commission regulation 150, which established federal position limits

on certain enumerated agricultural contracts. The position limits on

these agricultural contracts are referred to as ``legacy'' limits,

and the listed commodities are referred to as ``enumerated''

agricultural commodities.

\6\ See 17 CFR 151.4.

\7\ See 17 CFR 151.5. See also CEA section 4a(c)(1) & (2).

\8\ See 17 CFR 151.7.

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The Commission published Part 151 in the Federal Register in

November of 2011, but determined to phase in compliance with the new

position limits regime.\9\ Specifically, 60 days after the Commission

publishes a joint final rulemaking with the Securities and Exchange

Commission (``SEC'') further defining the term ``swap'' in the Federal

Register,\10\ the rules require market participants to comply with

spot-month limits for the 28 physical commodities as well as non-spot

month limits for the enumerated agricultural contracts. The Commission

also established the spot-month position limit levels for cash-settled

contracts on an interim final basis and solicited comments on the

appropriateness of such levels.\11\ Finally, for the remaining non-spot

month limits (i.e., all commodities other than the enumerated

agricultural commodities), the rules require compliance on the first

calendar day of the third calendar month following a

[[Page 31769]]

Commission order providing the numerical level of the non-spot month

limits based upon a formula provided in part 151.\12\

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\9\ See 76 FR at 71632; and 151.4(d).

\10\ Id. See also Further Definition of ``Swap,'' ``Security-

Based Swap,'' and ``Security Based Swap Agreement''; Mixed Swaps;

Security-Based Swap Agreement Recordkeeping, 76 FR 29818, May 23,

2011 (notice of proposed rulemaking).

\11\ See 76 FR 71637.

\12\ See 151.4(d)(3).

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As noted above, one of the three major components to the

Commission's position limits regime is determining which accounts and

positions a person must aggregate.\13\ The final rule in regulation

151.7 largely adopted the Commission's existing aggregation policy

under regulation 150.4. The aggregation provisions generally require

that unless a particular exemption applies, a person must aggregate all

positions for which that person controls the trading decisions with all

the positions for which that person has a 10 percent or greater

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

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

agreement or understanding.\14\

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\13\ The proposed rules in this release deal solely with the

aggregation of accounts.

\14\ See 17 CFR 151.7(a) & (b). In addition, the Commission

included a new aggregation provision for persons with positions in

accounts with identical trading strategies. This provision applies

even if a person does not control trading and has a less than 10

percent interest in an account. See 17 CFR 151.7(d).

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Regulation 151.7 retained the scope of exemptions from aggregation

that were contained in regulation 150.4, including the ownership

interests of limited partners in pooled accounts,\15\ discretionary

accounts and customer trading programs of futures commission merchants

(``FCM''),\16\ and eligible entities with independent account

controllers that manage customer positions (``IAC'' or ``IAC

exemption'').\17\ Further, the Commission provided two additional

exemptions for underwriters of securities,\18\ and where the sharing of

information between persons would cause either person to violate

federal law or regulations adopted thereunder.\19\ With the exception

of the exemption for underwriters, market participants were required to

file a notice with the Commission demonstrating compliance with the

conditions applicable to each exemption.\20\

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\15\ 17 CFR 151.7(c).

\16\ 17 CFR 151.7(e).

\17\ 17 CFR 151.7(f).

\18\ 17 CFR 151.7(g).

\19\ See 17 CFR 151.7(i).

\20\ See 17 CFR 151.7(h). The exemption for federal law

information sharing restrictions in regulation 151.7(i), also

requires that market participants submit an opinion of counsel that

the sharing of information would cause a violation of federal law.

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B. Aggregation Petition and Interim Final Rule Comments

On January 19th, 2012 the Commission received a petition for

interim relief from, among other things, part 151's provision for

aggregation of positions across accounts (hereinafter aggregation

petition'') \21\ under CEA section 4a(a)(7) for purposes of part

151.\22\ The Commission has also received letters that generally

support the aggregation petition.\23\ In addition, several commenters

opined on the aggregation rules in connection with the Commission's

request for comment on the interim final rule for spot-month position

limits on cash-settled contracts.\24\ As further discussed below, the

aggregation petition and certain interim final rule commenters argue

that the Commission should clarify the exemption provided in regulation

151.7(i) where the sharing of information would cause a violation of

federal law and expand the exemption to include circumstances in which

state or foreign law would prohibit the sharing of information

necessary to comply with the aggregation standard. In addition, the

aggregation petition and commenters request that the Commission create

an aggregation exemption for owned non-financial entities.\25\ In this

connection, some commenters argue that the Commission should only

aggregate on the basis of control and not ownership. Finally, one

commenter requests that the Commission expand the exemption provided in

151.7(g) for the ownership interests of broker-dealers connected with

specific market-making activity.

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\21\ The aggregation petition was originally filed by the

Working Group of Commercial Energy Firms; certain members of the

group later reconstituted as the Commercial Energy Working Group.

Both groups (hereinafter, collectively, the ``Working Groups'') wish

to present one voice with respect to the petition. A copy of the

aggregation petition can be found on the Commission's Web site at

www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgap011912.pdf.

\22\ CEA section 4a(a)(7) specifically provides: ``The

Commission, by rule, regulation, or order, may exempt, conditionally

or unconditionally, any person or class of persons, any swap or

class of swaps, any contract of sale of a commodity for future

delivery or class of such contracts, any option or class of options,

or any transaction or class of transactions from any requirement it

may establish under this section with respect to position limits.''

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

\23\ See Commodity Markets Council (``CMC'') on March 9, 2012;

Edison Electric Institute and the American Gas Association on March

1, 2012; and the Futures Industry Association (``FIA'') on March 26,

2012.

\24\ See FIA on January 17, 2012 (``CL-FIA''); Atmos Energy

Holdings (``ATMOS'') on January 17, 2012 (``CL-Atmos''); Edison

Electric Institute (``EEI'') on January 17, 2012 (``CL-EEI''); and

American Gas Association (``AGA'') on January 17, 2012 (``CL-AGA'').

\25\ The Commission initially proposed but did not adopt an

exemption that would have permitted persons with an ownership or

equity interest in a non-financial entity not to aggregate the

positions or accounts of the non-financial entity provided the

person filed an application demonstrating compliance with certain

conditions. See Position Limits for Derivatives, 76 FR 4752, 4762-

63, Jan. 26, 2011. The Commission determined not to adopt this

proposed exemption, but instead generally retained the Commission's

existing aggregation policy. See 76 FR 71626.

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1. Exemption for Federal Law Restriction

As noted above, section 151.7(i) provides an exemption from

aggregation where the sharing of information between persons would

cause either person to violate federal law. The aggregation petition

seeks to clarify that the exemption would apply to potential violations

of federal law,\26\ and also seeks to expand the exemption to apply to

local, state, foreign and international law.\27\ According to the

aggregation petition, the standard in the rule could be read as limited

to per se violations of the law, but not cover ``indicia of improper

market activity.'' \28\ Further, market participants may not be able to

rely on the exemption where they take certain action to avoid the

``potential'' of a violation. Moreover, the Working Groups argue that

the filing of an opinion of counsel to claim the exemption may act as a

disincentive for market participants to avail themselves of the

exemption because an adverse opinion would harm the applicant.

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\26\ Aggregation petition at 18.

\27\ Id. at 24.

\28\ Id. at 17.

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Similar to the petition, certain commenters to the interim final

rule argue that the requirement that the sharing of information ``would

cause'' a violation of federal law sets the bar too high to claim the

exemption.\29\ In this connection, commenters opine that such a high

standard makes it too difficult to obtain an opinion of counsel to

reach the necessary conclusion.\30\ Therefore, several commenters argue

that the Commission should clarify that the standard to claim the

exemption is that the sharing of information presents either party with

a reasonable risk of violating federal law.\31\ Commenters also believe

that the Commission should expand this exemption to cover potential

violations of state and foreign law.\32\ Finally, one commenter

suggests

[[Page 31770]]

that the Commission should remove the requirement to file an opinion of

counsel to claim the exemption, which the commenter believes is

burdensome.\33\

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\29\ See CL-FIA at 16-17; CL-Atmos at 5-6; and CL-EEI at 17-18.

\30\ CL-EEI at 17-18; and CL-Atmos at 5-6.

\31\ CL-FIA at 16-17; CL-EEI at 17-18; and CL-Atmos at 5-6.

\32\ CL-AGA at 2; CL-FIA at 16-17; CL-EEI at 17-18; and CL-Atmos

5-6.

\33\ CL-AGA at 5.

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2. The Owned Non-Financial Entity Exemption and Aggregation Based on

Ownership Generally

As noted above, the proposed rules for part 151 proposed that a

person with a 10 percent or greater ownership or equity interest in a

non-financial entity need not aggregate the positions of the non-

financial entity with his own positions, if the person filed an

application with the Commission demonstrating compliance with certain

conditions. This exemption was not part of the Commission's previously

existing aggregation policy for position limits on the enumerated

agricultural contracts in part 150. Ultimately, the Commission

determined to largely retain its existing aggregation policy with

limited additional exemptions, and did not adopt the proposed owned

non-financial entity exemption.

According to the aggregation petition, the Commission's failure to

include an exemption for a person's ownership interest in a non-

financial entity will result in ``serious adverse consequences'' to the

Working Groups participants, and represents a ``drastic departure from

current market practices.'' \34\ In light of these consequences, the

aggregation petition includes a draft owned non-financial entity

exemption for the Commission to incorporate into its aggregation

policy. The draft exemption is similar, but not identical to, the owned

non-financial entity exemption that the Commission proposed but did not

adopt as part of its final rule.\35\

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\34\ See Aggregation petition, pg. 5-16.

\35\ Id. at Exhibit A.

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The aggregation petition suggests that without an owned non-

financial entity exemption, the rules would force information sharing

and the coordination of trading between entities, which would be

contrary to existing best practices for antitrust compliance.\36\ Given

the conflict with such practices, the Working Groups argue that

compliance with the position limits rules may create liability under

the antitrust laws. The Working Groups also argue that the aggregation

rules, as adopted by the Commission, are contrary to certain industry

best practices that ``go beyond the letter of the law or applicable

regulations in order to ensure that activities of unregulated entities

are kept separate from activities of regulated entities to the greatest

extent possible.'' \37\

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\36\ Id. at 7. The Working Groups cite to best practices issued

by the Federal Trade Commission and the U.S. Department of Justice

regarding antitrust guidelines (``Antitrust Guidelines for

Collaboration Among Competitors''). Available at www.ftc.gov/os/2000/04/ftcdojguidelines.pdf.

\37\ Id. at pg. 9.

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The aggregation petition also opines that the information sharing

between persons necessary to comply with the position limits would

impose significant costs that would impact the physical and derivatives

markets.\38\ According to the Working Groups, entities with complex

corporate structure arrangements that include established information

barriers to ensure compliance with other regulatory requirements will

face significant costs to monitor positions on an intra-day basis,

notwithstanding the current lack of control over such trading.\39\ In

this case, the Working Groups claim that aggregation will significantly

impact holding companies and firms that invest in commercial firms,

particularly in the context of ``passive investment.'' Such firms will

have to monitor the commercial firm for compliance with position limits

and ``insert itself into the management of the firm.'' \40\ In

addition, according to the Working Groups, the aggregation of futures,

cleared swaps and bilateral swaps across entities on a real time basis

requires technology that does not yet exist.\41\ The aggregation

petition also points to concerns surrounding allocation and reporting

of positions, sharing of information on physical inventories, and

information sharing for the unwinding of accounts.\42\

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\38\ Id. at 10-16.

\39\ Similarly, according to the aggregation petition, the

aggregation requirements impose significant compliance burdens where

ownership interests may involve international companies, or where a

corporate structure includes multiple levels of companies between a

parent company and a child company with an account or position.

\40\ Id. at 11.

\41\ Id.

\42\ Id. at 12-14.

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The Working Groups assert that the position limit rules represent a

``drastic departure from the status quo.'' \43\ According to the

aggregation petition, the Commission's position limits previously only

applied to agricultural commodity futures and options on futures, and

DCM position limits applied to futures on energy and metals

commodities.\44\ However, the Commission's new position limits rules

will apply to swaps for the first time. Further, the Working Groups

contend that DCMs previously provided ``aggregation exemptions that

provided the flexibility necessary for commercial enterprises to manage

their position limit obligations across entities without undue

burden.'' \45\ In addition, the aggregation of accounts across

commercial firms could lead to decreased liquidity and competition in

the energy derivatives market.

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\43\ Id. at 14.

\44\ The Commission notes that although the aggregation petition

describes the final position limit rules, including the aggregation

requirements, as a ``drastic departure from the status quo,'' and

seeks to differentiate between Commission and DCM rules regarding

treatment of owned positions for purposes of aggregation, many

current and past DCM rules require aggregation of the positions a

person either owns or controls. See Board of Trade of the City of

Chicago, Inc. (``CBOT'') Rule 559.D; Chicago Mercantile Exchange,

Inc. (``CME'') Rule 559.D; New York Mercantile Exchange, Inc.

(``NYMEX'') Rule 559.D; ICE Futures U.S., Inc. (``ICE US'') Rule

6.12; Board of Trade of Kansas City, Missouri, Inc. (``KCBT'') Rule

2008.00; and Minneapolis Grain Exchange, Inc. (``MGE'') Rule 7310.

See also NYMEX Rule 9.35, MGEX Rule 7310 and CBOT Rule 425.05 as

examples of older rules requiring aggregation of the positions a

person either owns or controls, which were in effect over the last

10 years. Furthermore, acceptable practices adopted by the

Commission in August, 2001, provided DCMs with a safe harbor for

position limit rules that aggregated positions a person owns or

controls. See 66 FR 42256, 42280, August 10, 2001, Appendix B to

Part 38, Core Principle 5. See also http://www.cftc.gov/files/foia/fedreg01/foi010810a.pdf.

\45\ Id. at 15.

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In light of these changes, the Working Groups believe that the

Commission should provide relief in the form of an owned non-financial

entity exemption. The aggregation petition includes a draft owned non-

financial entity exemption that follows the Commission's prior proposed

exemption with some modifications.\46\

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\46\ Id. at Exhibit A.

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Similar to the aggregation petition, commenters to the interim

final rule request that the Commission adopt an owned non-financial

entity exemption.\47\ FIA and EEI argue that without such an exemption,

market participants would have to aggregate all positions held by any

entity in which it has a ten percent ownership interest, even if such

interest is passive without control over trading. According to FIA,

such a consequence would ``have an unnecessary and profoundly negative

impact on users of Referenced Contracts, and their affiliates with no

corresponding benefit to the stability or integrity of the market.''

\48\ EEI also argues that the owned non-financial entity exemption

would provide commercial firms the same aggregation relief as eligible

entities that rely on the independent account controller exemption.\49\

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\47\ CL-FIA at 17-18; and CL-EEI at 16-17.

\48\ CL-FIA at 18. See also CL-EEI at 16-17.

\49\ CL-EEI at 16.

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Several commenters also address the requirement that persons

aggregate

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based upon ownership of positions generally. These commenters recommend

that the Commission only aggregate based on control, and not aggregate

positions based upon an ownership interest in a position or

account.\50\ According to these commenters, aggregation through an

ownership interest, absent control of trading decisions, will impose

significant burdens for entities to aggregate on an intra-day basis,

may harm liquidity, and does not address the potential concerns about

coordinated trading. Similar to the comments regarding the owned non-

financial entity exemption, commenters submit that aggregating

positions based solely on ownership creates substantial compliance

burdens within the context of a complex corporate structure. In this

connection, EEI suggests that the Commission not require an entity to

aggregate owned positions if an entity could show the independence of

trading decisions of the owned entity.\51\

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\50\ See e.g., CL-FIA at 15; CL-EEI at 1-2, 14-15; CL-Atmos at

3-5; and CL-AGA at 1-3.

\51\ See e.g., CL-EEI at 14-15.

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3. Exemption for Underwriters

As noted above, Commission rule 151.7(g) includes an exemption from

the ownership criteria for aggregation if the ownership interest:

Is based on the ownership of securities constituting the whole

or a part of an unsold allotment to or subscription by such person

as a participant in the distribution of such securities by the

issuer or by or through an underwriter.

FIA submits that the Commission should clarify and expand this

exemption to include an ownership interest based on the acquisition or

disposition of securities acquired in connection with the trading or

market-making activities of a broker-dealer registered with the SEC, or

a comparable broker-dealer.\52\ FIA believes that aggregation based

upon a 10 percent ownership interest should not be required if the

broker-dealer acquires the interest--(1) In anticipation of demand, (2)

as part of its normal market-making activity, or (3) as a result of a

routine life cycle event, such as a stock distribution. Such ownership

interests, according to FIA, do not present the same concerns about

sharing transaction or position information that may facilitate

coordinated trading.\53\

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\52\ CL-FIA at 6, 16.

\53\ CL-FIA at 16.

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In response to the issues raised in the aggregation petition and

comments to the interim final rule, the Commission has determined to

propose modifications to certain position limits aggregation

provisions.

II. Proposed Rules

A. Proposed Rules for Information Sharing Restriction

The Commission is proposing to clarify that the scope of the

exemption in regulation 151.7(i) includes a reasonable risk of a

violation of federal law. The Commission intended to cover such risks

in the final rule and is therefore proposing to amend regulation

151.7(i) to make clear that the exemption includes circumstances in

which the sharing of information would create a reasonable risk of a

violation of federal law or regulations adopted thereunder.

The proposed rules retain the requirement that market participants

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

151.7(i). The opinion allows Commission staff to review the legal basis

for the asserted regulatory impediment to the sharing of information,

and is particularly helpful where the asserted impediment arises from

laws and/or regulations that the Commission does not directly

administer. Further, Commission staff will have the ability to consult

with other federal regulators as to the accuracy of the opinion, and to

coordinate the development of rules surrounding information sharing and

aggregation across accounts in the future. The Commission also notes

that the proposed clarification should address the concerns of

commenters that obtaining an opinion of counsel could be difficult if

the Commission read the existing standard to include only per se

violations.

With regard to comments that the exemption should permit persons to

rely upon ``best practices'' or other ``guidelines,'' the Commission

notes that the proposed exemption applies to situations where the

sharing of information creates a reasonable risk of violating federal

law or regulations adopted thereunder. Whether a reasonable risk exists

will depend on the interconnection of the applicable statute and

regulatory guidance, as well as the particular facts and circumstances

as applied to the statute and guidance. Notwithstanding the

Commission's facts and circumstances review of potentially conflicting

federal law or regulations, the exemption in regulation 151.7(i) is

effective upon filing of the notice in 151.7(h) and opinion of counsel.

These provisions authorize the Commission to request additional

information beyond that contained in the notice filing, and the

Commission may amend, suspend, terminate or otherwise modify a person's

aggregation exemption upon further review. As the Commission gains

further experience with the exemption for federal law information

sharing restriction in regulation 151.7(i), the Commission anticipates

providing further guidance to market participants.

1. Proposed Rules for Information Sharing Restriction--Foreign Law

For the same reasons the Commission adopted the exemption for

federal information sharing restrictions, the Commission proposes

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

addition, similar to the clarification for the exemption for federal

law information sharing restriction, the Commission is also proposing

an exemption where the sharing of information creates a reasonable risk

of violating the law of a foreign jurisdiction. However, the Commission

remains concerned that certain market participants could potentially

use the existing and proposed expansion of the exemption in regulation

151.7(i) to evade the requirements for the aggregation of accounts. In

this regard, this proposed rule, consistent with the exemption for

federal law information sharing restriction, includes the requirement

to file an opinion of counsel specifically identifying the restriction

of law and facts particular to the market participant claiming the

exemption.\54\

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\54\ The Commission notes that the proposed expansion of this

exemption includes a proposed technical change to regulation

151.7(i). The proposed technical change specifies that the

``notice'' filing referenced in current regulation 151.7(i) is a

reference to the notice filing requirements set forth in regulation

151.7(h). In addition, the Commission has proposed a technical

change to the FCM exemption in current regulation 151.7(e). Proposed

regulation 151.7(e)(4) is designed for ease of reference for market

participants to follow the filing requirements in regulation

151.7(h), which requires persons claiming the FCM exemption in

regulation 151.7(e) to file pursuant to regulation 151.7(h).

Finally, the Commission is also proposing a technical change to the

form and manner of filing for an aggregation exemption in regulation

151.10(b)(4). Specifically, this proposed change makes clear that a

notice filing for an aggregation exemption is effective upon filing.

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The Commission notes that the aggregation petition references

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

The proposed rules include relief from aggregation for information

sharing that could create a reasonable risk of violating the law of a

foreign jurisdiction. The Commission seeks comment as to whether this

proposal adequately addresses the concerns of market participants

outlined in the interim final rule comments and the

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aggregation petition, and as to whether those concerns are valid. The

Commission specifically requests comment on the types of

``international'' law, if any, which could create information sharing

restrictions other than the law of a foreign jurisdiction. Should the

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

sufficient to refer to the ``law of a foreign jurisdiction''?

Alternatively, the Commission is considering a case-by-case approach

through petitions submitted pursuant to CEA section 4a(a)(7). Should

the Commission adopt such a case-by-case approach?

2. Proposed Rules for Information Sharing Restriction--State Law

After consideration of the aggregation petition and the interim

final rule comments the Commission is also proposing to establish an

exemption for situations where information sharing restrictions could

trigger state law violations. In addition, similar to the clarification

for the exemption for federal law information sharing restriction, the

Commission is also proposing that the state law information sharing

restriction apply to situations where the sharing of information

creates a reasonable risk of violating the state law. However, as noted

above, the Commission remains concerned about the potential for evasion

within the context of this exemption. In this regard, this proposed

rule, consistent with the federal law information sharing restriction,

includes the requirement to file an opinion of counsel specifically

identifying the restriction of law and facts particular to the market

participant claiming the exemption.

The Commission solicits comments as to the appropriateness of

extending the information sharing exemption to state law. Should the

Commission provide for such an exemption? Alternatively, the Commission

is considering a case-by-case approach through petitions submitted

pursuant to CEA section 4a(a)(7). Should the Commission adopt such a

case-by-case approach and otherwise rely upon the preemption of state

law in administering its aggregation policy?

The Commission notes that the aggregation petition cites to Texas

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

market participant shall not collude with other market participants to

manipulate the price or supply of power.'' \55\ That provision applies

to intra-state transactions and resembles regulations of the Federal

Energy Regulatory Commission.\56\ In this regard, should the Commission

limit application of the proposed exemption for state law information

sharing restrictions to laws that have a comparable provision at the

federal level? What criteria should the Commission use in identifying

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

aggregation?

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\55\ Aggregation petition at 24.

\56\ See e.g. 18 CFR 1c.1 & 1c.2.

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The Commission also solicits additional comment as to the types of

state laws, including specific laws, which could create an information

sharing restriction in conflict with the Commission's aggregation

policy.

The Commission further notes that the aggregation petition seeks to

extend the exemption to information sharing restrictions that arise

from ``local'' law.\57\ However, neither the aggregation petition nor

interim final rule commenters have provided examples, and the

Commission is concerned that an exemption for local law would be

difficult to implement due to the number of laws and/or regulations

that would need to be considered and the vast numbers of localities

that might issue such laws and/or regulations.

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\57\ Aggregation petition at 24.

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The Commission solicits comment as to the appropriateness of

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

Commenters are asked to provide the scope of local law and identify any

specific laws that create information sharing restrictions that would

conflict with the Commission's aggregation policy. What criteria could

the Commission use in identifying local laws that a person may rely

upon for an exemption from aggregation? Should the Commission adopt a

case-by-case approach through petitions submitted pursuant to CEA

section 4a(a)(7) and otherwise rely upon the preemption of local law in

administering its aggregation policy?

B. Proposed Rules--Ownership of Positions Generally

The Commission continues to consider ownership an appropriate

measure for aggregation. Section 4a(a)(1) of the CEA provides for the

general aggregation standard with regard to position limits, and

specifically provides:

In determining whether any person has exceeded such limits, the

positions held and trading done by any persons directly or

indirectly controlled by such person shall be included with the

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

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

and trading done by, two or more persons acting pursuant to an

expressed or implied agreement or understanding, the same as if the

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

person.\58\

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\58\ 7 U.S.C. 6a.

Congress incorporated this provision into Section 4a as part of the CEA

Amendments of 1968 (``1968 Act'').\59\ The legislative history to the

1968 Act indicates that Congress added this language to expressly

incorporate prior administrative determinations of the Commodity

Exchange Authority (predecessor to the Commission).\60\ Prior to the

1968 Act, administrative determinations as well as regulations of the

Commodity Exchange Authority announced standards that included control

of trading and the ownership of positions.\61\

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\59\ Public Law 90-258, 82 Stat. 26 (1968).

\60\ See S. Rep No. 947, 90th Cong., 2 Sess. 5 (1968). This

senate report provides:

Certain longstanding administrative interpretations would be

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

the Commodity Exchange Commission to fix limits on the amount of

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

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

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

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

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

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

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

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

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

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

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

more persons acting pursuant to an express or implied understanding

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

\61\ See Administrative Determination (``A.D.'') 163 (Aug. 7,

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

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

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

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

and later the Commission, provided the aggregation standards for

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

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

1961, then regulation 18.01 read:

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

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

the same or with different futures commission merchants or foreign

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

for the purpose of determining whether such trader has a reportable

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

The provisions concerning aggregation for position limits

generally remained part of the Commission's large trader reporting

regime until 1999 when the Commission incorporated the aggregation

provisions into part 150.4 with the existing position limit

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

Commission's part 151 rulemaking also incorporates the aggregation

provisions in part 151.7 along with the remaining position limit

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

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

regulatory developments, the Commission has

[[Page 31773]]

historically viewed, and continues to view, section 4a as requiring

aggregation on the basis of either ownership or control.\62\ The

Commission also believes that aggregation of positions across accounts

based upon ownership is a necessary part of the Commission's position

limit regime.\63\ An ownership standard establishes a bright-line test

that provides certainty to market participants and the Commission.\64\

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\62\ See e.g., Exemptions from Speculative Position Limits for

Positions which have a Common Owner but which are Independently

Controlled and for Certain Spread Positions, 53 FR 41563, 41564,

Oct. 24, 1988); and Exemption from Speculative Position Limits for

Positions which have a Common Owner but which are Independently

Controlled and for Certain Spread Positions, 55 FR 30926, July 30,

1990.

\63\ See also, Exemptions from Speculative Position Limits for

Positions which have a Common Owner but which are Independently

Controlled and for Certain Spread Positions, 53 FR 13290, 13292,

Apr. 22, 1988. In response to two separate petitions, the Commission

proposed the independent account controller exemption from

speculative position limits, but declined to remove the ownership

standard from its aggregation policy.

\64\ See also Revision of Federal Speculative Position Limits

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

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

applying separately to ownership of positions or to control of

trading decisions.''); and 53 FR 13290, 13293 (1988).

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Absent aggregation on the basis of ownership, the Commission would

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

administrative challenges to individually assess control across all

market participants. Further, if the statute only required aggregation

based on control, market participants may be able to use an ownership

interest to circumvent aggregation in circumstances where an ownership

interest is used to directly or indirectly influence control over the

account or position. The Commission also notes that the ownership prong

attributes a position to the beneficial owner of multiple accounts that

amount to an unduly large position, which position limits are intended

to prevent. Therefore, the proposed rules would continue to require

aggregation based upon either ownership or control.

Regarding a threshold level to aggregate on the basis of ownership,

the Commission has generally found that an ownership or equity interest

of less than 10 percent in an account or position that is controlled by

another person who makes discretionary trading decisions does not

present a concern that such ownership interest results in control over

trading or can be used indirectly to create a large speculative

position through ownership interests in multiple accounts. As such, the

Commission has traditionally viewed an ownership interest below 10

percent as not warranting aggregation.\65\ Commenters suggest that a

similar analysis should prevail for an ownership interest of 10 percent

or more where such ownership represents a passive investment that does

not involve control of the trading decisions of the owned entity.

Commenters argue that under these conditions, such passive investments

would present a reduced concern for trading pursuant to direct or

indirect control, as well as a reduced risk for persons with positions

in multiple accounts to hold an unduly large overall position.

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\65\ The Commission codified this aggregation threshold in its

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

administrative experience of the Commission's predecessor. See

Statement of Policy on Aggregation of Accounts and Adoption of

Related Reporting Rules, 44 FR 33839, 33843, Jun. 13, 1979. Note,

however, rule 151.7(d) will separately require aggregation of

investments in accounts with identical trading strategies.

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While prior Commission rulemakings have generally restricted

exemptions to the ownership criteria to limited partners of commodity

pools and independent account controllers managing customer funds for

an eligible entity, the Commission has considered a broader passive

investment exemption.\66\ Further, the Commission indicated in the part

151 final rule that the development of aggregation exemptions could

occur over time.\67\ This incremental approach to account aggregation

standards reflects the Commission's historical practice.\68\ Consistent

with that practice, the Commission has considered the additional

information provided and the concerns raised by the aggregation

petition and interim final rule commenters, and believes it appropriate

to propose certain relief from the ownership criteria of

aggregation.\69\

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\66\ See e.g., 53 FR 13290, 13292 (1988) (proposal). The 1988

proposal for the independent account controller rule requested

comment on the possibility of a broader passive investment

exemption, and specifically noted:

``[Q]uestions also have been raised regarding the continued

appropriateness of the Commission's aggregation standard which

provides that a beneficial interest in an account or positions of

ten percent or more constitutes a financial interest tantamount to

ownership. This threshold financial interest serves to establish

ownership under both the ownership criterion of the aggregation

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

Aggregation Policy.

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

attention where beneficial ownership in several otherwise unrelated

accounts may be greater than ten percent, but the circumstances

surrounding the financial interest clearly exclude the owner from

control over the positions. The Commission is requesting comment on

whether further revisions to the current Commission rules and

policies regarding ownership are advisable in light of the exemption

hereby being proposed. If such financial interests raise issues not

addressed by the proposed exemption for independent account

controllers, what approach best resolves those issues while

maintaining a bright-line aggregation test?''

\67\ See 76 FR 71626, 71654.

\68\ See e.g., 53 FR 41563, 41567, Oct. 24, 1988 (the definition

of eligible entity for purposes of the IAC exemption originally only

included CPOs, or exempt CPOs or pools, but the Commission indicated

a willingness to expand the exemption after a ``reasonable

opportunity'' to review the exemption.); 56 FR 14308, 14312, Apr. 9,

1991 (The Commission expanded eligible entities to include commodity

trading advisors, but did not include additional entities requested

by commenters until the Commission had the opportunity to assess the

current expansion and further evaluate the additional entities); and

64 FR 24038, May 5, 1999 (The Commission expanded the list of

eligible entities to include many of the entities commenters

requested in the 1991 rulemaking).

\69\ The Commission notes that ownership and control are

considered separately for the aggregation of accounts. As such, if

the Commission were to adopt the proposed exemption outlined below,

and a market participant qualified for the exemption, such person

would nonetheless have to aggregate those same accounts or positions

identified in the exemption if such person otherwise controlled

trading, acted pursuant to an express or implied agreement or held

positions in accounts with identical trading strategies.

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1. Disaggregation Relief for Owned Entities

Proposed rule 151.7(b) continues the Commission's longstanding rule

that persons with an ownership or equity interest in an account or

position of less than 10 percent need not aggregate such positions

solely on the basis of the ownership criteria. Persons with a 10

percent or greater ownership interest would still generally be required

to aggregate the account or positions. However, proposed rule

151.7(b)(1) establishes a notice filing procedure to permit a person in

specified circumstances to disaggregate the positions of a separately

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

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

would need to demonstrate compliance with certain conditions set forth

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

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

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

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

Commission may subsequently call for additional information as well as

reject, modify or otherwise condition such relief. Further, such person

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

change to the circumstances described in the filing.

The proposed criteria to claim relief under 151.7(b)(1) address the

Commission's concerns that an

[[Page 31774]]

ownership or equity interest of 10 percent and above may facilitate or

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

accumulate a large position through multiple accounts that could

overall amount to an unduly large position. Essentially, the proposed

rules amending the ownership criteria for aggregation across accounts

establish a rebuttable presumption that persons with an ownership or

equity interest of 10 percent or greater must aggregate, but such

persons may file for disaggregation relief if their ownership interest

does not exceed 50 percent and they can demonstrate independence by

meeting the criteria described below.\70\

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\70\ The Commission notes that the conditions for independence

apply to the person filing the notice as well as the owned entity.

In addition, for purposes of complying with the proposed conditions,

such ``person'' shall include any entity that such person must

aggregate pursuant to regulation 151.7. For example, if company A

files a notice under proposed regulation 151.7(b)(1) for company A's

equity interest of 30 percent in company B, then company A must

comply with the conditions for the exemption, including any entity

with which company A aggregates positions under 151.7. In this

connection, if company A controls the trading of company C, then

there must be independence between company B and company C for

purposes of company A's 151.7(b)(1) notice filing.

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Proposed rule 151.7(b)(1)(i)(A) conditions aggregation relief for

the ownership interest in another entity on a demonstration that a

person filing for disaggregation relief and the owned entity do not

have knowledge of the trading decisions of the other. The Commission

believes that where an entity has an ownership interest in another

entity and neither entity share trading information, such entities

demonstrate independence. In contrast, persons with knowledge of

trading decisions of another in which they have an ownership interest

are likely to take such decisions into account in making their own

trading decisions, which implicates the Commission's concern about

independence and enhances the risk for coordinated trading. For

purposes of this provision, the Commission does not consider knowledge

of overall end-of-day position information to necessarily constitute

knowledge of trading decisions, so long as the position information

cannot be used to dictate or infer trading strategies. As such, the

knowledge of end-of-day positions for the purpose of monitoring credit

limits for corporate guarantees would not necessarily constitute

knowledge of trading information. However, the ability to monitor the

development of positions on a real time basis could constitute

knowledge of trading decisions because of the substantial likelihood

that such knowledge might affect trading strategies or influence

trading decisions of the other.

Proposed rule 151.7(b)(1)(i)(B) conditions aggregation relief on a

demonstration that such person seeking disaggregation relief and the

owned entity trade pursuant to separately developed and independent

trading systems. Further, proposed rule 151.7(b)(1)(i)(C) conditions

relief on a demonstration that such person and the owned entity have,

and enforce, written procedures to preclude the one entity from having

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

other. Such procedures must include document routing and other

procedures or security arrangements, including separate physical

locations, which would maintain the independence of their activities.

The Commission has applied these same conditions in connection with the

IAC exemption to ensure independence of trading between an eligible

entity and an affiliated independent account controller.\71\ Such

conditions have been useful in ensuring that trading is not coordinated

through the development of similar trading systems, and that procedures

are in place to prevent the sharing of trading decisions between

entities. Similar to the IAC exemption, the proposed owned entity

exemption in proposed rule 151.1(b)(1) would permit disaggregation if

there is independence of trading between two entities. Thus the

Commission proposes to include the above conditions, which are already

applicable in the IAC context, and which should also strengthen the

independence between the two entities for the owned entity exemption.

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\71\ See 17 CFR 151.7(f).

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Proposed rule 151.7(b)(1)(i)(D) conditions aggregation relief on a

demonstration that such person does not share employees that control

the owned entity's trading decisions, and the employees of the owned

entity do not share trading control with such persons. The Commission

is concerned that shared employees with knowledge of trading decisions

undermine the independence of trading between entities. Similar to the

restriction on information sharing, the sharing of employees with

knowledge of trading decisions presents a strong risk to the

independence of trading between entities. In the aggregation petition,

the Working Groups submit that entities should be permitted to share

``attorneys, accountants, risk managers, compliance and other mid- and

back-office personnel.'' \72\ At this time, the Commission questions,

and seeks comment regarding, whether the sharing of such persons

compromises independence because it would provide each entity with

knowledge of the other's trading decisions.\73\

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\72\ Aggregation petition at Exhibit A.

\73\ The Commission notes that the proposed condition barring

the sharing of employees that control the owned entity's trading

decisions would include a prohibition on sharing of employees

described in the aggregation petition (attorneys, accountants, risk

managers, compliance and other mid-and back-office personnel), to

the extent such employees are aware of the trading decisions of the

person or the owned entity.

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Proposed rule 151.7(b)(1)(i)(E) conditions aggregation relief on a

demonstration that the person and the owned entity do not have risk

management systems that permit the sharing of trades or trading

strategies with the other. This condition addresses concerns that risk

management systems that permit the sharing of trades or trading

strategies with each other present a significant risk of coordinated

trading through the sharing of information.\74\ The Commission has not

proposed a condition that the risk management system be separately

developed from the risk management system of the owned entity, and the

Commission seeks comment as to whether risk management systems that do

not communicate trade information can maintain independence of trading

between entities.\75\

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\74\ This condition is similar to a condition proposed in the

aggregation petition.

\75\ The Commission remains concerned that a trading system, as

opposed to a risk management system, that is not separately

developed from another system can subvert independence because such

a system could apply the same or similar trading strategies even

without the sharing of trading information.

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Proposed rule 151.7(b)(1)(ii) conditions aggregation relief on a

demonstration that such person does not have greater than a 50 percent

ownership or equity interest in the owned entity. An equity or

ownership interest above 50 percent constitutes a majority ownership or

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

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

This proposal would provide administrative certainty and would address

concerns about circumvention of position limits by coordinated trading

or direct or indirect influence between entities. To the extent that

the majority owner may have the ability and incentive to direct,

control or influence the management of the owned entity, the proposed

bright-line test would be a reasonable approach to the aggregation of

owned accounts pursuant to Section

[[Page 31775]]

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

multiple accounts would have the ability to hold and control a

significantly large and potentially unduly large overall position in a

particular commodity, which position limits are intended to

prevent.\76\

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\76\ The Commission notes that aggregation based on ownership

looks to a person's equity interest regardless of voting control. By

way of comparison, with a greater than 50 percent interest in voting

shares, such person generally is required to consolidate the owned

entity for purposes of the Generally Accepted Accounting Principles

(``GAAP''). See Financial Accounting Standards Board Accounting

Standards Codification Topic 810, at paragraphs 810-10-15-8 and 10,

available at https://asc.fasb.org/. See also Accounting Research

Bulletin 51 at paragraph 3 and Statement of Financial Accounting

Standard No. 94 at paragraph 2. The Commission believes that

aggregation based upon an ownership or equity interest of greater

than 50 percent, regardless of voting interest, is appropriate to

address the heightened risk of direct or indirect influence over the

owned entity. Further, unless a particular exemption applies, a

person with a 50 percent or greater voting interest in an owned

entity would likely be required to aggregate the positions of the

owned entity on the basis of control.

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The proposed owned entity exemption and the clarification and

expansion of the violation of law exemption address concerns raised in

the aggregation petition and interim final rule comments. First, the

clarification and extension of the violation of law exemption responds

to concerns that market participants could face increased liability

under state, federal and foreign law. While the aggregation petition

and other commenters argue that an owned non-financial entity exemption

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

proposed clarification and expansion would allow market participants to

avail themselves of the violation of law exemption in those

circumstances where the sharing of information creates a reasonable

risk of violating the above mentioned bodies of law.

The proposed owned entity exemption applies to both financial and

non-financial entities that have passive ownership interests. Market

participants that qualify for the exemption can file a notice with the

Commission demonstrating independence between entities and, thereafter,

forgo the development of monitoring and tracking systems for the

aggregation of accounts. The Commission seeks comment as to whether

such passive interests present a significantly reduced risk of

coordinated trading compared to owned entities that fail the criteria

for the proposed exemption. In addition, the Commission specifically

requests comment as to whether the proposed relief should be limited to

ownership interests in non-financial entities.

While the owned non-financial entity exemption mentioned in the

aggregation petition would permit disaggregation even if the owned

entity is a wholly owned company, the Commission is concerned that an

ownership interest greater than 50 percent presents heightened concerns

for coordinated trading or direct or indirect influence over an account

or position, and that permitting disaggregation at that level of

ownership would be inconsistent with the statutory requirement to

aggregate on the basis of ownership. Small ownership interests of less

than 10 percent do not warrant aggregation. A 10 percent or greater

ownership interest has served as a useful measure for aggregation, but

the Commission has determined relief may be warranted for passive

investments. However, for the reasons discussed above, an ownership

interest greater than 50 percent requires aggregation because ownership

at that level serves as a useful benchmark for the increased risk of

direct or indirect influence over the trading of an owned entity.

Because the circumstances facilitating control can be difficult to

monitor, a facts and circumstances review would be difficult to

administer by both market participants and the Commission. In addition,

a person with a greater than 50 percent ownership interest in multiple

accounts may have the ability to hold a significantly large and

potentially unduly large overall position in a particular commodity,

which position limits are intended to prevent. Therefore, the

Commission proposes limiting the availability of the exemption to those

having an ownership interest no greater than 50 percent because such a

bright-line rule would provide clarity to market participants and a

useful tool for the Commission to simplify aggregation where there is

an increased and substantial risk of coordinated trading.\77\

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\77\ The Commission reminds market participants that proposed

regulation 151.7(b)(1) does not affect the applicability of a

separate exemption from aggregation (e.g., the independent account

controller exemption).

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With regard to filing requirements for the exemption in regulation

151.7(b) (1), the Commission notes that market participants would be

required to file in accordance with regulation 151.7(h).\78\ As such,

market participants must file a notice with the Commission with a

description of how they adhere to the criteria in regulation

151.7(b)(1) and a certification that the conditions are met. This

certification, as well as any other certification made under regulation

151.7(h), must come from a senior officer of the market participant

with knowledge as to the contents of the notice.\79\ Therefore, the

Commission is proposing to clarify in regulation 151.7(h)(1)(ii) that

such certification come from a senior officer. Further, regulation

151.7(h)(3) requires market participants to promptly update a notice

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

in the notice filing.\80\

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\78\ Where the provisions of regulation 151.7 require a person

to file a notice, entities cannot rely upon an exemption unless such

entity has properly filed a notice in accordance with regulation

151.7(h).

\79\ See 17 CFR 151.7(h)(1)(ii). Market participants should

update the certification if the individual certifying compliance no

longer works for the company.

\80\ In this regard, the Commission clarifies that a material

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

original certification is no longer employed by the company. See

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

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

claim an exemption under 151.7(b)(1), the Commission notes that each

submission must be specific to the facts of the particular entity. The

person claiming the exemption must provide specific facts that

demonstrate compliance with each condition of relief. Such a

demonstration should likely include an organizational chart including

the ownership and control structure of the involved entities, a

description of the risk management system, a description of the

information-sharing systems (including bulletin boards, and common

email addresses of the entities identified), an explanation of how and

to whom the trade data and position information is distributed

(including the responsibilities of the individual receiving such

information), and the officers that receive reports of the trade data

and position information.\81\

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\81\ The Commission notes that this list is not meant to be

exhaustive of the factors that would indicate an exemption is

warranted and should not be interpreted as being solely sufficient

to claim the exemption because each filing is fact specific. As

noted earlier, the Commission may demand additional information

regarding the exemption within its discretion.

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The Commission specifically requests comments as to the

appropriateness of the owned entity exemption as well as the conditions

applicable to the exemption. Should the Commission add additional

criteria? If so, what criteria and why? Should the Commission require

market participants to submit additional information to claim the

exemption? If so, what information and why? With regard to the owned

entity exemption, should the Commission alter the scope of the

exemption? If so, how should it be altered and why? Further,

[[Page 31776]]

at what percent of ownership interest should a market participant no

longer be able to claim the exemption proposed in regulation

151.7(b)(1), if any? Are there specific circumstances in which a higher

percentage of ownership than 50 percent would be appropriate to claim

the exemption in regulation 151.7(b)(1) notwithstanding the concerns

described above regarding coordinated trading, direct or indirect

influence, and significantly large and potentially unduly large overall

positions in a particular commodity? In addition, the Commission

welcomes comment on the owned non-financial entity exemption set forth

in appendix A of the aggregation petition as an alternative to the

owned entity exemption proposed herein.

2. Higher Tier Entities

In connection with the Working Groups' request for the Commission

to include an owned non-financial entity exemption, the Working Groups

also request that the Commission provide relief from the filing

requirements for claiming the exemption. Specifically, the aggregation

petition argues that if an entity files a notice and claims the owned

non-financial entity exemption, then ``every higher-tier company (a

company that holds an interest in the company that submitted the

notice) need not aggregate the referenced contracts of the owned non-

financial entities identified in the notice.'' \82\ Thus, the

Commission is proposing rules that provide relief to such ``higher-tier

entities'' within the context of a corporate structure.\83\

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\82\ Aggregation petition at 23.

\83\ For purposes of the discussion below, ``higher-tier''

entities include entities with a 10 percent or greater ownership

interest in an owned entity.

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Proposed rule 151.7(j) provides that higher-tier entities may rely

upon a notice for exemption filed by the owned entity, and such

reliance would only go to the accounts or positions specifically

identified in the notice. For example, if company A has a 30 percent

interest in company B, and company B has filed an exemption notice for

the accounts and positions of company C, then company A may rely upon

company B's exemption notice for the accounts and positions of company

C. Should company A wish to disaggregate the accounts or positions of

company B, company A would have to file a separate notice for an

exemption.

The proposed rules also provide that a higher-tier entity that

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

conditions of the applicable aggregation exemption other than the

notice filing requirements. Although higher-tier entities need not

submit a separate notice to rely upon the notice filed by an owned

entity, the Commission notes that it may, upon call, request that a

higher-tier entity submit information to the Commission, including the

possibility of an on-site visit, demonstrating compliance with the

applicable conditions.

The Commission believes that these proposed rules, if adopted,

should significantly reduce the filing requirements for aggregation

exemptions. Further, the Commission does not anticipate that the

reduction in filing will impact the Commission's ability to effectively

survey the proper application of exemptions from aggregation. The

initial filing of an owned entity exemption notice should provide the

Commission with sufficient information regarding the appropriateness of

the exemption, while repetitive filings of higher-tier entities would

not be expected to provide additional substantive information. However,

the Commission again notes that higher-tier entities would still be

required to comply with the substantive conditions of the exemption

specified in the owned entity's notice filing.

C. Underwriting

As noted above, Commission regulation 151.7(g) includes an

exemption from aggregation where an ownership interest is in an unsold

allotment of securities. FIA requests that the Commission expand the

exemption to include situations where securities are owned in

anticipation of demand as part of normal market-making activity, or as

a result of a routine life cycle event, such as a stock distribution.

The Commission believes that the ownership interest of a broker-

dealer registered with the SEC, or similarly registered with a foreign

regulatory authority,\84\ in an entity based on the ownership of

securities acquired as part of reasonable activity in the normal course

of business as a dealer is largely consistent with the ownership of an

unsold allotment of securities covered by the underwriting exemption

currently found in regulation 151.7(g). In both circumstances, the

ownership interest is likely transitory and not to hold for investment

purposes. Accordingly, the Commission is proposing an aggregation

exemption in regulation 151.7(g) for such activity.\85\

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\84\ See 15 U.S.C. 78o.

\85\ The Commission specifically notes that this proposed

exemption would not apply to registered broker-dealers that acquire

an ownership interest in securities with the intent to hold for

investment purposes.

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However, the Commission notes that this exemption would not apply

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

interest in another entity because this would not be consistent with

holding such a transitory interest for the purpose of market making and

runs a higher risk of coordinated trading.\86\ Therefore, a broker-

dealer that acquires more than 50 percent ownership interest in another

entity must aggregate that entity, in the absence of another

aggregation exemption.

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\86\ With regard to FIA's request that the exemption include a

broker-dealer's ownership of securities in anticipation of demand or

as part of routine life cycle events, the proposed rules would cover

such activity if the activity was in the normal course of the

person's business as a dealer.

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The Commission requests comment on whether ownership of stock, by a

broker-dealer registered with the SEC or similarly registered with a

foreign regulatory authority, that is acquired as part of reasonable

activity in the normal course of business as a dealer, without other

ownership interests or indicia of control or concerted action, warrants

aggregation.

D. Independent Account Controller for Eligible Entities

As noted above in section I.A of this release, section 151.7(f)

provides an eligible entity with an exemption for the eligible entity's

customer accounts that are managed and controlled by independent

account controllers. In the part 151 rulemaking, the Commission adopted

the same definitions of eligible entity and independent account

controller found in the Commission's prior position limit regulations

in regulation 150.1. The definition of eligible entity includes ``the

limited partner or shareholder in a commodity pool the operator of

which is exempt from registration under Sec. 4.13 of this chapter * *

*.'' However, with regard to a CPO that is exempt under regulation

4.13, the definition of an independent account controller only extends

to ``a general partner of a commodity pool the operator of which is

exempt from registration under Sec. 4.13 of this chapter.'' At the

time the Commission expanded the IAC exemption to include regulation

4.13 commodity pools, market participants generally structured such

pools as limited partnerships.\87\

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\87\ See 63 FR 38532.

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The Commission understands that today, not all regulation 4.13

commodity pools are formed as partnerships. For example, regulation

[[Page 31777]]

4.13 pools may be formed as limited liability companies and have

managing members, not general partners.

The Commission is proposing to expand the definition of independent

account controller to include the managing member of a limited

liability company. As such, regulation 4.13 commodity pools established

as limited liability companies would be accorded the same treatment as

such pools formed as limited partnerships. The limitation of the

exemption to general partners was based upon a market structure that,

historically, did not generally include regulation 4.13 commodity pools

established as limited liability companies. In light of market

developments since the Commission expanded IACs to include regulation

4.13 pools as eligible entities, it may not be appropriate for there to

be a distinction between limited partnerships and limited liability

companies in this regard. As such, the Commission is proposing to amend

the definitions of eligible entity and independent account controller

in part 151.1 to specifically provide for regulation 4.13 commodity

pools established as limited liability companies.

The Commission intends to coordinate the disposition of the

petition with the implementation of position limits under part 151. To

do so, among other things, the Commission has directed staff to

promptly review comment letters as soon as practicable following close

of the comment period. Further, in order to provide an orderly

transition to the compliance dates specified in part 151.4, the

Commission intends to finalize consideration of the petition prior to

the first compliance date of part 151.

III. Related Matters

A. Considerations of Costs and Benefits

Section 15(a) of the CEA requires the Commission to consider the

costs and benefits of its actions before promulgating a regulation

under the CEA or issuing an order.\88\ Section 15(a) further specifies

that the costs and benefits shall be evaluated in light of the

following five broad areas of market and public concern: (1) Protection

of market participants and the public; (2) efficiency, competitiveness,

and financial integrity of futures markets; (3) price discovery; (4)

sound risk management practices; and (5) other public interest

considerations.

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\88\ 7 U.S.C. 19(a).

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The proposed rules provide the public with an opportunity to

comment on concerns raised in the aggregation petition and in comments

on the interim final rule. The petitioner and the commenters seek

clarification of certain provisions of the Commission's aggregation

policy, and seek to alter or expand exemptions from aggregation to

include circumstances where there may be a low risk of coordinated

trading. The Commission requests comment on all aspects of its

consideration of costs and benefits, including identification and

assessment of any costs and benefits not discussed herein. In addition,

the Commission requests that commenters provide data and any other

information or statistics that they believe supports their positions

with respect to the Commission's consideration of costs and benefits.

1. Aggregation Petition and Other Comments

As discussed in section I.B. of this release, the Commission

received a petition seeking relief from certain aggregation provisions

in the final rules, as well as several comments regarding aggregation

in response to the interim final rule on cash-settled contract limits.

Among other things, the aggregation petition requests that the

Commission provide an aggregation exemption for owned non-financial

entities similar to an exemption that the Commission proposed but did

not adopt in its final rules.\89\

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\89\ As part of the proposed rules for part 151, the Commission

proposed that persons with an ownership or equity interest in a non-

financial entity need not aggregate the positions or accounts of the

non-financial entity provided the person filed an application

demonstrating compliance with certain conditions. See Position

Limits for Derivatives, 76 FR 4752, 4762-63, Jan. 26, 2011.

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The aggregation petition states that compliance with the final

rules' aggregation requirements would require information sharing and

coordination of trading that is contrary to current best practices.\90\

The aggregation petition contends that the aggregation rules may impede

investment in commercial firms, impair liquidity and competition in

energy derivatives markets, or cause firms to exit the market

altogether.\91\ Further, the aggregation petition states that the

aggregation rules necessitate the development and implementation of

extensive and expensive information technology systems that can track

positions across numerous affiliates, even if those affiliates

currently trade independently of each other.\92\ The aggregation

petition also submits that companies with an ownership position in a

joint venture would have to divest their interest to avoid operational

difficulties associated with aggregating positions.\93\ The petitioner

contends that these asserted costs could be mitigated if the Commission

were to adopt a variant of the owned non-financial entity

exemption,\94\ clarify that the violation of law exemption applies to

situations in which there is a ``reasonable risk'' of violating the

applicable law, expand the violation of law exemption to include

possible violations of local, state, foreign, and international

law,\95\ and adopt provisions relieving ``higher-tier'' entities of the

filing requirement, as discussed above.\96\

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\90\ See Aggregation Petition at 19.

\91\ Id. at 10-16.

\92\ Id. at 11.

\93\ Id. at 15.

\94\ Id. at Exhibit A.

\95\ Id. at 16-18.

\96\ Id. at 23.

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Several commenters to the Commission's interim final rule also

suggest that the Commission adopt a version of the ``owned non-

financial entity'' exemption; these commenters argue that even above 10

percent ownership, where there is no common control, there is no risk

of coordinated trading and, therefore, no need for aggregation of

positions.\97\ These commenters recommend that the Commission aggregate

based on control, and not based on an ownership interest in a position

or account.\98\ Commenters contend that aggregation of accounts in

passive investments, where the owned entity is independently managed

and controlled, will be costly and have a negative impact on markets

and market participants.\99\ Commenters also claim that many businesses

establish information barriers between affiliates, and that the final

rules would require the destruction of those barriers in order to

ensure compliance.\100\

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\97\ See CL-FIA at 15; CL-Atmos at 4-5; and CL-EEI at 14-15.

\98\ See e.g. CL-FIA at 15; CL-EEI at 1-2, 14-15; CL-Atmos at 3-

5; and CL-AGA at 1-3.

\99\ See CL-FIA at 18 and CL-EEI at 16-17.

\100\ See CL-FIA at 15; CL-EEI at 14-15; and CL-Atmos at 3.

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As with the petitioners, commenters to the interim final rule also

assert that the aggregation provisions impose significant operational

challenges for entities and end-users in particular, requiring them to

develop and maintain costly internal infrastructure mechanisms to

ensure compliance.\101\ FIA estimates that for a large conglomerate,

costs to comply with the final rule's aggregation procedures could be

high. In particular, FIA estimates that each entity could spend as much

as $500,000 to $1,000,000 to identify all entities subject to

[[Page 31778]]

aggregation and to establish protocols for reporting all commonly owned

and controlled positions in Referenced Contracts; as much as $1,000,000

to $1,500,000 to establish new information technology systems for

consolidating and tracking aggregated position information; and

approximately $100,000 for each entity subject to aggregation to report

position information to its affiliates and/or controlling

entities.\102\

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\101\ See CL-EEI at 14-15; and CL-Atmos at 1-2.

\102\ See CL-FIA at 19-20.

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With regard to the exemption for federal law information sharing

restriction in regulation 151.7(i), several commenters also suggest

that the Commission extend the exemption to include state and foreign

jurisdictions.\103\ One commenter wrote that the provision in

regulation 151.7(i) that requires an opinion of counsel to obtain such

an exemption was too burdensome and should be revised.\104\

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\103\ See CL-EEI at 17-18; CL-AGA at 1-2; CL-FIA at 6; and CL-

Atmos at 5.

\104\ See CL-AGA at 5.

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One commenter also suggests that the Commission extend the

underwriting exemption in regulation 151.7(g) to include situations

where a broker-dealer acquires positions for legitimate dealing

reasons, such as in anticipation of increased demand, as part of its

normal market-making activity, or as a result of a routine life-cycle

event.\105\

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\105\ See CL-FIA at 16.

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2. Summary of the Commission's Proposal

Exemption for Violation of Laws. In the final part 151 rules, the

Commission included an exemption from aggregation for those entities

for whom sharing the requisite information would violate federal law.

The Commission seeks to clarify that it always intended the exemption

to apply in those circumstances in which the sharing of information

presents a ``reasonable risk'' of violating the applicable law(s).

As explained above, one commenter urged the Commission to drop the

requirement that, to obtain the violation-of-laws exemption an entity

must submit an opinion of counsel (as discussed in section II.C). Such

an opinion allows the Commission to review the facts and circumstances

supporting the claimed exemption, and thus the proposed rules would

retain the requirement to submit an opinion of counsel.

In light of the aggregation petition and comments on the interim

final rule, the Commission is including in this proposal an expansion

of the violation-of-law exemption to include state law and the law of

foreign jurisdictions. The existing rule allows entities who believe

that the aggregation provisions would require them to violate state or

foreign laws to seek an exemption on a case-by-case basis. The

Commission seeks comment as to the scope of the proposed exemption.

Proposed Owned Entity Exemption. Proposed rule 151.7(b)(1) provides

that any person with an ownership or equity interest in an entity

(financial or non-financial) of 10 percent or greater may disaggregate

the owned entity's positions upon demonstrating compliance with each of

several specified indicia of independence.\106\ The proposed indicia

are that such person and the owned entity: (1) Do not have knowledge of

the trading decisions of the other; (2) trade pursuant to separately

developed and independent trading systems; (3) have in place policies

and procedures to preclude sharing knowledge of, gaining access to, or

receiving data about, trades of the other; (4) do not share employees

that control the trading decisions of the other; and (5) maintain a

risk management system that does not allow the sharing of trade

information or trading strategies between entities. In addition, such

person's ownership or equity interest in the owned entity cannot exceed

50 percent.

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\106\ As discussed in section II.D.1, at over 50 percent

ownership, the proposed ownership standard would mandate aggregation

in order to give effect to the statutory requirement that positions

``held'' by a person must be aggregated, and because of a person's

ability to influence management and the concomitant heightened

concerns about coordinated trading. The owned entity exemption does

not impact the availability of the IAC, FCM, and federal, state, or

foreign law information sharing restriction exemptions as found in

regulation 151.7(h). However, as proposed, this exemption from the

ownership criteria would not apply to investments in accounts with

identical trading strategies.

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The aggregation petition and several of the other commenters urge

that the Commission should permit market participants to disaggregate

accounts in situations where ownership of an account is passive, as

they contend there is a less of a concern regarding coordinated

trading.\107\ The aggregation petition and other commenters suggest

that the Commission add an owned non-financial entity exemption, which

they contend would incorporate such situations as well as alleviate

potential negative impacts to liquidity and competition in both

physical and derivatives markets.

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\107\ They further contend that a lack of an owned non-financial

entity exemption could increase liability for antitrust and other

federal law and regulations. This concern is addressed by the

proposed clarification discussed above, which provides that market

participants may avail themselves of the violation of law exemption

if the sharing of information creates a reasonable risk of a

violation.

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The Commission is proposing to permit disaggregation of entities

where a person has no greater than a 50 percent interest in the entity

and meets certain other conditions. The proposed owned-entity exemption

would apply to a person's passive investments in either financial or

non-financial entities. Those who qualify under this proposal would

have to demonstrate that they meet all of its conditions. The

Commission seeks comment as to whether the concerns suggested by the

aggregation petition and other commenters are valid, whether this

proposal meets those concerns, and whether the 50 percent limit and

other conditions are appropriate.

Expansion of the Underwriter Exemption. The Commission is also

proposing to expand the exemption for the underwriting of securities

that was adopted as regulation 151.7(g) to include ownership interests

acquired through the market-making activities of an affiliated broker

dealer. This proposal would exempt from aggregation ownership interests

acquired as part of a person's reasonable market-making activity in the

normal course of business as a broker-dealer registered with the SEC or

comparable registration in a foreign jurisdiction,\108\ so long as

there is no other ownership interests or indicia of control or

concerted action. The Commission intends for this proposal to apply to

ownership interests that are likely transitory and not for investment

purposes, and seeks comment as to whether such interests are at a low

risk for the coordination of trading or whether this exemption could

lead to evasion of applicable position limits.\109\

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\108\ See 15 U.S.C. 78o.

\109\ The Commission specifically notes that this proposed

exemption would not apply to registered broker-dealers that acquire

an ownership interest in securities with the intent to hold for

investment purposes.

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Proposed ``Higher-Tier'' Entity Filing Relief. The Commission also

is proposing to extend filing relief to ``higher-tier'' entities. As

such, proposed regulation 151.7(j) provides that higher-tier entities

may rely on exemption notices filed by owned entities. Commenters claim

that such an exemption would reduce the burden of filing exemption

notices by eliminating redundancies. The Commission seeks comment as to

whether this proposal will in fact reduce the filing burden for

claiming an exemption, and whether the proposal would affect the

Commission's

[[Page 31779]]

ability to oversee how exemptions are applied in the market.

Independent Account Controller Exemption. As discussed above, the

IAC exemption in regulation 151.7(f) previously included commodity

pools exempt from registration under Sec. 4.13 that are structured as

limited partnerships. The Commission is proposing to allow commodity

pools structured as limited liability companies to rely on the IAC

exemption. The Commission seeks comment as to whether there is any

relevant distinction between limited partnerships and limited liability

companies for purposes of this exemption.

3. Consideration of Costs and Benefits

It is the Commission's goal that this proposal uphold part 151's

regulatory aims without diminishing its effectiveness. In so doing, the

Commission adheres to its belief that aggregation represents a key

element to prevent evasion of prescribed position limits and that its

historical approach towards aggregation--one that appropriately blends

consideration of ownership and control indicia--remains sound.\110\

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\110\ The Commission's general policy on aggregation is derived

from CEA Section 4a(a)(1), which directs the Commission to aggregate

based on separate considerations of ownership, control, or persons

acting pursuant to an express or implied agreement.

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The Commission seeks comment as to whether compliance with this

proposal will reduce the costs market participants will incur to comply

with the aggregation requirements of the final rules. In particular,

how would the cost of filing a notice for disaggregation relief compare

with the cost of developing systems necessary to aggregate the

positions of owned entities under the current version of part 151? Note

that, in the preamble to part 151, the Commission estimated that the

filing of a Notice of Disaggregation would create certain costs for

market participants.\111\ In particular, the Commission approximated

that the aggregation-related reporting requirements would affect

``ninety entities, resulting in a total burden, across all these

entities, of 225,000 annual labor hours and $5.9 million in annualized

capital, start-up, total operating, and maintenance costs.'' \112\ The

Commission has estimated the additional burden that may result from the

proposed rules as part of its Paperwork Reduction Act calculations, and

requests comment on those estimations.\113\ The Commission also seeks

comment as to how many entities would be able to take advantage of the

proposed exemption. Alternatively, how many entities would be able to

take advantage of the owned non-financial entity exemption described in

the aggregation petition?

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\111\ The costs of filing the Notice included costs of filing an

opinion of counsel as well as the other necessary information under

Sec. 151.7(h).

\112\ 76 FR 71626 at 71683.

\113\ See section III.C.2 of this release.

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Because costs associated with the aggregation of positions are

highly variable and entity-specific, the Commission requests that

commenters submit data from which the Commission can consider and

quantify the costs of the proposed rules.

In assessing benefits, it is important for the Commission to

determine whether the proposed rules will enhance the Commission's

ability to monitor compliance with position limits by focusing the

Commission's resources on those entities most at risk of coordinated

trading through multiple accounts. The Commission seeks comment as to

whether the proposed amendments to the Commission's aggregation policy

will result in lower costs for market participants without compromising

the core purposes of the position limits regime.

4. Section 15(a) Considerations

As the Commission has long held, position limits are an important

regulatory tool that is designed to prevent concentrated positions of

sufficient size to manipulate or disrupt markets. The aggregation of

accounts for purposes of applying position limits represents an

integral component that impacts the effectiveness of those limits. In

the final rule, the Commission implemented a policy for the aggregation

of accounts that largely tracked its longstanding standards of

aggregation, which were designed to prevent evasion of those position

limits. The proposed rules would amend this policy to introduce and

expand certain exemptions. The Commission intends for the proposed

rules to preserve the important protections of the existing aggregation

policy, but at a lower cost for market participants. The Commission

requests comment on its consideration of the costs and benefits of the

proposed rules in relation to each of the Section 15(a) factors

discussed herein.

a. Protection of Market Participants and the Public

The Commission wants to ensure that the exemptions proposed in

these rules will not lessen the protection of market participants and

the public that the aggregation policy in the Final Rule provides.

Given that the account aggregation standards are necessary to implement

an effective position limit regime, it is important that the clarified

and expanded exemptions of the proposed rules be sufficiently tailored

to exempt from aggregation only those accounts that do pose a low risk

of coordinated trading. The Commission believes that clarifying the

scope of the violation of law exemption to include the risk of

violating the applicable law more accurately informs market

participants as to the standard for claiming the exemption. The

proposed owned-entity exemption maintains the Commission's historical

presumption threshold of 10 percent ownership or equity interest and

makes that presumption rebuttable only where several conditions

indicative of independence are met. This exemption focuses on the

conditions that impact trading independence. The Commission intends

that any exemption it adopts would allow the Commission to direct its

resources to monitoring those entities with a higher risk of

coordinated trading and thus at a higher risk of circumventing position

limits, without reducing the protection of market participants and the

public that the Commission's aggregation policy affords.

Similarly, the Commission intends for the ``higher-tier'' entity

exemption, and the expansion of the underwriting and IAC exemptions, to

reduce costs for market participants without a compromise to the

integrity or effectiveness of the Commission's aggregation policy.

The Commission welcomes comment regarding whether the proposed

rules would impact protection of market participants and the public.

b. Efficiency, Competitiveness, and Financial Integrity of Futures

Markets

The Commission wants to ensure that the exemptions proposed in

these rules would fully preserve account aggregation as a tool to

uphold the integrity of the part 151 position limit regime, which helps

maintain the overall competitiveness and integrity of derivatives

markets. The Commission seeks comment regarding whether the proposed

rules would impact the efficiency, competitiveness, and/or financial

integrity of futures markets.

c. Price Discovery

Similarly, the Commission wants to ensure that the exemptions

proposed in these rules do not adversely impact the price discovery

process, which the part 151 position limit regime (including the

account aggregation provisions in

[[Page 31780]]

Sec. 151.7) is designed to protect. The Commission welcomes comment as

to whether the proposed rules would impact price discovery.

d. Sound Risk Management

The Commission wants to ensure that the exemptions proposed in

these rules will not lessen the effectiveness of the sound risk

management practices that the Final Rule promotes. The Commission

welcomes comment as to whether the proposed rules would impact sound

risk management practices.

e. Other Public Interest Considerations

The Commission has not identified any other public interest

considerations related to the costs and benefits of the proposed rules.

The Commission welcomes comment as to whether there are additional

public interest considerations the Commissions should consider.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') requires that agencies

consider the impact of their regulations on small businesses.\114\ The

requirements related to the proposed amendments fall mainly on DCMs,

swap execution facilities (``SEF'') that are trading facilities, FCMs,

foreign brokers, and large traders. The Commission has previously

determined that DCMs, FCMs, foreign brokers and large traders are not

``small entities'' for the purposes of the RFA.\115\ Further, in the

Commission's position limits rule,\116\ the Commission determined that

SEFs, which includes SEFs that are trading facilities, are not ``small

entities'' for purposes of the RFA.

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\114\ 44 U.S.C. 601 et seq.

\115\ See Policy Statement and Establishment of Definitions of

``Small Entities'' for Purposes of the Regulatory Flexibility Act,

47 FR 18618, Apr. 30 1982. See also Special Calls, 72 FR 34417, Jun.

22, 2007 (foreign broker determination).

\116\ 76 FR 71626, Nov. 18, 2011.

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

certifies, on behalf of the Commission, pursuant to 5 U.S.C. 605(b),

that the actions proposed to be taken herein would not have a

significant economic impact on a substantial number of small entities.

C. Paperwork Reduction Act

1. Overview

The Paperwork Reduction Act (``PRA'') imposes certain requirements

on Federal agencies in connection with their conducting or sponsoring

any collection of information as defined by the PRA.\117\ 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. Certain provisions of the proposed regulations would result in

new collection of information requirements within the meaning of the

PRA. The Commission seeks to supplement the control number assigned by

the Office of Management and Budget (``OMB'') for part 151--Position

Limits for Futures and Swaps (OMB control number 3038-0077). 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.

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\117\ 44 U.S.C. 3501 et seq.

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In January of 2012, the Commission received a petition requesting

relief under section 4a(a)(7) of the CEA and clarification of certain

aggregation requirements in regulation 151.7. In response to that

petition, the Commission is proposing to clarify certain aspects of the

aggregation standards, and to expand the scope of certain exemptions

from aggregation. If adopted, responses to this collection of

information would be mandatory to the extent persons wish to rely upon

the exemptions contained within the proposed amendments to Commission

regulation 151.7. 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 CEA strictly prohibits the

Commission, unless specifically authorized by the CEA, 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.\118\ The Commission also is required to

protect certain information contained in a government system of records

pursuant to the Privacy Act of 1974.\119\

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\118\ 7 U.S.C. 12(a)(1).

\119\ 5 U.S.C. 552a.

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Proposed rule 151.7(b)(1) establishes an exemption for a person to

disaggregate the positions of a separately organized entity (``owned

entity''). To claim the exemption, a person would need to meet certain

criteria and file a notice with the Commission in accordance with

regulation 151.7(h). The notice filing would need to demonstrate

compliance with certain conditions set forth in regulations

151.7(b)(1)(i)-(vii). Similar to other exemptions from aggregation, the

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

the Commission may call for additional information as well as reject,

modify or otherwise condition such relief. Further, such person is

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

to the filing.

The proposed rules also amend regulation 151.7(i), which provides

an exemption from aggregation where the sharing of information between

persons would cause either person to violate federal law. The proposed

amendments clarify that the exemption would apply to a situation where

the sharing of information creates a reasonable risk of a violation of

federal law or regulations adopted thereunder, and not solely a per se

violation. For the same reasons the Commission adopted the exemption

for information sharing restrictions for federal law, the Commission

expanded the exemption in regulation 151.7(i) to generally extend to

the state law and the law of a foreign jurisdiction. The proposed rules

also retain the requirement that market participants file a notice

demonstrating compliance with the condition and an opinion of counsel

that the sharing of information could create a reasonable risk of a

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

The opinion allows Commission staff to review the legal basis for the

asserted regulatory impediment to the sharing of information, and is

particularly helpful where the asserted impediment arises from laws

and/or regulations that the Commission does not directly administer.

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

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

the development of rules surrounding information sharing and

aggregation across accounts in the future.

The Commission is also proposing to amend the definitions of

eligible entity and independent account controller in part 151.1 to

specifically provide for regulation 4.13 commodity pools established as

limited liability companies. These proposed amendments will likely

expand the number of entities that can file for the independent account

controller aggregation exemption.

Finally, the proposed rules include relief from notice filings for

``higher-tier'' entities, which, under proposed regulation 151.7(j),

may rely on the filings submitted by owned entities. A ``higher-tier''

entity need not submit a separate notice pursuant to the notice filing

requirements to rely upon the notice filed by an owned entity as long

as it complies with conditions of the applicable aggregation exemption.

[[Page 31781]]

2. Reporting Burdens

Proposed regulation 151.7(b)(1) specifies that qualified persons

may file a notice claiming exemptive relief from aggregation. Proposed

regulation 151.7(b)(1)(vii) states that the notice is to be filed in

accordance with regulation 151.7(h), which requires a description of

the relevant circumstances that warrant disaggregation and a statement

that certifies that the conditions set forth in the exemptive provision

have been met. Persons claiming the exemption would be required to

submit to the Commission, as requested, such information as relates to

the claim for exemption. An updated or amended notice must be filed

with the Commission upon any material change.

With regard to the existing filing procedure for claiming

exemptions from aggregation, in the part 151 final rule the Commission

estimated that ninety entities would incur a burden of 225,000 annual

labor hours as well as $5.9 million in annualized capital, start-up,

total operating, and maintenance costs. This estimate was based on each

entity submitting one notice of disaggregation per year at a burden of

2,500 labor hours. Given the expansion of the exemptions that market

participants may claim, the Commission anticipates an increase in the

number of notice filings; however, because of the relief for ``higher-

tier'' entities under proposed regulation 151.7(j), the Commission

expects that increase to be offset by a reduction in the number of

filings by ``higher-tier'' entities. Thus, the Commission anticipates a

small net increase in the number of filings under regulation 151.7 as a

result of the proposed rules. The Commission believes that this small

increase will create a small increase in the annual labor burden.

However, because entities will have already incurred the capital,

start-up, operating, and maintenance costs to file other exemptive

notices, the Commission does not anticipate an increase in those costs.

In light of the Commission providing for these additional

exemptions, the Commission estimates that 90 entities will each file

two notices annually under proposed regulation 151.7(b)(1), at an

average of 20 hours per filing. Thus, the Commission approximates a

total per-entity burden of 40 labor hours annually. Using the same

labor cost estimates as in the existing collection (OMB 3038-

0077),\120\ such a burden would cost approximately $3,100 per entity

for filings under proposed regulation 151.7(b)(1). Under proposed

regulation 151.7(f), the Commission anticipates that 10 entities will

annually file one notice each, at an average of 20 hours per filing,

for a per-entity burden of 20 labor hours annually. Such a burden would

cost approximately $1,600 per entity. Finally, the Commission

anticipates that 45 entities will annually file one notice each under

proposed regulation 151.7(i), at an average of 80 hours per filing, for

a per-entity burden of 80 hours each. Such a burden would cost

approximately $6,300 per entity. Monetary estimates have been rounded

to the nearest hundred.

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\120\ 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)'' (60% weight),

``compliance advisor (intermediate)'' (20%), ``systems analyst''

(10%), and ``assistant/associate general counsel'' (10%).

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In sum, the Commission estimates that 145 entities would submit a

total of 235 responses per year and incur a total burden of 7,400 labor

hours at a cost of approximately $582,000 annually in addition to the

existing burden under Sec. 151.7.

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 email at [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 in 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 151--POSITION LIMITS FOR FUTURES AND SWAPS

1. The authority citation for part 151 is revised to read as

follows:

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).

2. In Sec. 151.1, revise the definition for ``eligible entity''

and paragraph (5) of the definition of ``independent account

controller'' to read as follows:

Sec. 151.1 Definitions.

* * * * *

Eligible Entity means a commodity pool operator; the operator of a

trading vehicle which is excluded, or which itself has qualified for

exclusion from the definition of the term ``pool'' or ``commodity pool

operator,'' respectively, under Sec. 4.5 of this chapter; the limited

partner, limited member or shareholder in a commodity pool the operator

of which is exempt from registration under Sec. 4.13 of this chapter;

a commodity trading advisor; a bank or trust company; a savings

association; an insurance company; or the separately organized

affiliates of any of the above entities:

* * * * *

Independent Account Controller * * *

(5) Who is registered as a futures commission merchant, an

introducing broker, a commodity trading advisor, or

[[Page 31782]]

an associated person of any such registrant, or is a general partner or

manager of a commodity pool the operator of which is exempt from

registration under Sec. 4.13 of this chapter.

* * * * *

3. Revise Sec. 151.7 to read as follows:

3. In Sec. 151.7:

a. Revise paragraph (b);

b. Add paragraph (e)(4);

c. Revise paragraphs (g), (h), and (i); and

d. Add paragraph (j).

The revisions and additions read as follows:

Sec. 151.7 Aggregation of positions.

* * * * *

(b) Ownership of accounts generally. For the purpose of applying

the position limits set forth in Sec. 151.4, except for the ownership

interest of limited partners, shareholders, members of a limited

liability company, beneficiaries of a trust or similar type of pool

participant in a commodity pool subject to the provisos set forth in

paragraph (c) of this section or in accounts or positions in multiple

pools as set forth in paragraph (d) of this section, any person holding

positions in more than one account, or holding accounts or positions in

which the person by power of attorney or otherwise directly or

indirectly has a 10 percent or greater ownership or equity interest,

must aggregate all such accounts or positions. However--

(1) Any person with a 10 percent or greater ownership or equity

interest in an owned entity, need not aggregate the accounts or

positions of the owned entity with any other accounts or positions such

person is required to aggregate, provided that:

(i) Such person, including any entity that such person must

aggregate, and the owned entity:

(A) Do not have knowledge of the trading decisions of the other;

(B) Trade pursuant to separately developed and independent trading

systems;

(C) Have and enforce written procedures to preclude each from

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

of the other. Such procedures must include document routing and other

procedures or security arrangements, including separate physical

locations, which would maintain the independence of their activities;

(D) Do not share employees that control the trading decisions of

either; and

(E) Do not have risk management systems that permit the sharing of

trades or trading strategy;

(ii) Such person does not have greater than a 50 percent ownership

or equity interest in the owned entity; and

(iii) Such person complies with the requirements of paragraph (h)

of this section.

(2) [Reserved]

* * * * *

(e) * * *

(4) The futures commission merchant or the affiliate has complied

with the requirements of paragraph (h) of this section.

* * * * *

(g) Exemption for underwriting. Notwithstanding any of the

provisions of this section, a person need not aggregate the positions

or accounts of an owned entity if the ownership interest is based on

the ownership of securities constituting the whole or a part of an

unsold allotment to or subscription by such person as a participant in

the distribution of such securities by the issuer or by or through an

underwriter.

(1) Further, a broker-dealer registered with the Securities and

Exchange Commission, or similarly registered with a foreign regulatory

authority, need not aggregate the positions or accounts of an owned

entity if the ownership interest is based on the ownership of

securities acquired as part of reasonable activity in the normal course

of business as a dealer, provided that, such person does not have

actual knowledge of the trading decisions of the owned entity.

(h) Notice filing for exemption. (1) Persons seeking an aggregation

exemption under paragraph (b)(1), (c), (e), (f), or (i) of this section

shall file a notice with the Commission, which shall be effective upon

submission of the notice, and shall include:

(i) a description of the relevant circumstances that warrant

disaggregation; and

(ii) a statement of a senior officer of the entity certifying that

the conditions set forth in the applicable aggregation exemption

provision have been met.

(2) Upon call by the Commission, any person claiming an aggregation

exemption under this section shall provide such information concerning

the person's claim for exemption as is requested by the Commission.

Upon notice and opportunity for the affected person to respond, the

Commission may amend, suspend, terminate, or otherwise modify a

person's aggregation exemption for failure to comply with the

provisions of this section.

(3) In the event of a material change to the information provided

in the notice filed under this paragraph, an updated or amended notice

shall promptly be filed detailing the material change.

(4) A notice shall be submitted in the form and manner provided for

in Sec. 151.10.

(i) Exemption for law information sharing restriction.

Notwithstanding any other provision of this section, a person is not

subject to the aggregation requirements of this section if the sharing

of information associated with such aggregation creates a reasonable

risk that either person could violate state or federal law or the law

of a foreign jurisdiction, or regulations adopted thereunder, and

provided that such a person does not have actual knowledge of

information associated with such aggregation. Provided further, that

such person file a prior notice pursuant to paragraph (h) of this

section and an opinion of counsel that the sharing of information

creates a reasonable risk that either person could violate state or

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

adopted thereunder. Provided however, the exemption in this paragraph

shall not apply where the law or regulation serves as a means to evade

the aggregation of accounts or positions. All documents submitted

pursuant to this paragraph shall be in English, or if not, accompanied

by an official English translation.

(j) Higher-Tier Entities. If an owned entity has filed a notice

under paragraph (h) or (i) of this section, any person with an

ownership or equity interest of 10 percent or greater in the owned

entity need not file a separate notice identifying the same positions

and accounts previously identified in the notice filing of the owned

entity, provided that:

(1) Such person complies with the conditions applicable to the

exemption specified in the owned entity's notice filing, other than the

filing requirements; and

(2) Such person does not otherwise control trading of the accounts

or positions identified in the owned entity's notice.

(3) Upon call by the Commission, any person relying on the

exemption in paragraph (j)(1) of this section shall provide to the

Commission such information concerning the person's claim for

exemption. Upon notice and opportunity for the affected person to

respond, the Commission may amend, suspend, terminate, or otherwise

modify a person's aggregation exemption for failure to comply with the

provisions of this section.

4. In Sec. 151.10, revise paragraph (b)(4) to read as follows:

Sec. 151.10 Form and manner of reporting.

* * * * *

[[Page 31783]]

(b) * * *

(4) A notice of disaggregation is filed pursuant to Sec. 151.7(h),

in which case the notice shall be effective upon filing.

* * * * *

5. In Sec. 151.12, revise paragraph (a)(5) and add paragraph

(a)(6) to read as follows:

Sec. 151.12 Delegation of authority to the Director of the Division

of Market Oversight.

(a) * * *

(5) In Sec. 151.7(j)(1)(iii) to call for additional information

from a trader claiming the exemption in Sec. 151.7(j)(1).

(6) In Sec. 150.10 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.

* * * * *

Issued in Washington, DC, on May 17, 2012 by the Commission.

David A. Stawick,

Secretary of the Commission.

Note: The following appendix will not appear in the Code of

Federal Regulations.

Appendix 1--Statement of Commissioner Jill E. Sommers

I support the Commission's proposed rules that, among other

things, expand the exemptions relating to information sharing

restrictions, expand the circumstances under which market

participants will not be required to aggregate positions, and reduce

the reporting burdens on higher tier entities. I am pleased that we

recognize that the final position limits rules issued on November

18, 2011 set forth an unworkable and overly restrictive approach to

these issues.

Essentially, as they relate to ``owned entities,'' the proposed

rules contain three ``tiers'' for purposes of aggregation. First, if

the ownership interest is less than 10 percent, one need not

aggregate positions with those of the owned entity. Second, if the

ownership interest is between 10 percent and 50 percent, one must

aggregate positions with those of the owned entity unless it can be

shown that there is a lack of knowledge of, and control over, the

trading of the owned entity. Third, if the ownership interest

exceeds 50 percent, one must always aggregate positions with those

of the owned entity, even if there is a lack of knowledge of, and

control over, the trading of the owned entity.

I question whether a bright-line approach is the correct

approach, and if it is, whether the line should be drawn at 50

percent. In the absence of knowledge of, and control over, trading

of an owned entity, is there a real difference between owning 49

percent and owning 50 percent? I don't think there is. In justifying

50 percent as the correct place to draw the line, the preamble to

the proposed rules states, ``such a bright-line rule would provide

clarity to market participants and a useful tool for the Commission

to simplify aggregation.'' Providing clarity and certainty to market

participants is important. However, if providing clarity and

certainty results in a one-size-fits-all answer that fails to take

into account the varying needs of a very diverse group of market

participants, the clarity and certainty are of little use. Moreover,

while it is important to establish an aggregation approach that the

Commission can effectively administer, I hesitate to put too much

weight on ``simplifying'' the approach if the simplified approach is

needlessly restrictive.

In my dissent to the final position limits rules, I expressed

concern that with regard to the 19 new reference contracts, the

Commission was taking on ``front-line oversight of the granting and

monitoring of bona-fide hedging exemptions for the transactions of

massive, global corporate conglomerates that on a daily basis

produce, process, handle, store, transport, and use physical

commodities in their extremely complex logistical operations.'' My

concerns apply equally to the issue of aggregation. We have limited

experience as it relates to these new reference contracts, and no

experience aggregating swaps into the overall calculations. In the

face of such limited experience, our apparent certainty on where to

draw lines is troubling.

[FR Doc. 2012-12526 Filed 5-29-12; 8:45 am]

BILLING CODE P

Last Updated: May 30, 2012