2016-12964

Federal Register, Volume 81 Issue 113 (Monday, June 13, 2016)

[Federal Register Volume 81, Number 113 (Monday, June 13, 2016)]

[Proposed Rules]

[Pages 38457-38514]

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

[FR Doc No: 2016-12964]

[[Page 38457]]

Vol. 81

Monday,

No. 113

June 13, 2016

Part V

Commodity Futures Trading Commission

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17 CFR Parts 37, 38, and 150

Position Limits for Derivatives: Certain Exemptions and Guidance;

Proposed Rule

Federal Register / Vol. 81 , No. 113 / Monday, June 13, 2016 /

Proposed Rules

[[Page 38458]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 37, 38, and 150

RIN 3038-AD99

Position Limits for Derivatives: Certain Exemptions and Guidance

AGENCY: Commodity Futures Trading Commission.

ACTION: Supplemental notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

``CFTC'') is proposing revisions and additions to regulations and

guidance proposed in 2013 concerning speculative position limits in

response to comments received on that proposal. The Commission is

proposing new alternative processes for designated contract markets

(``DCMs'') and swap execution facilities (``SEFs'') to recognize

certain positions in commodity derivative contracts as non-enumerated

bona fide hedges or enumerated anticipatory bona fide hedges, as well

as to exempt from federal position limits certain spread positions, in

each case subject to Commission review. In this regard, the Commission

proposes to amend certain of the regulations proposed in 2013 regarding

exemptions from federal position limits and exchange-set position

limits to take into account these new alternative processes. In

connection with these changes, the Commission proposes to further amend

certain relevant definitions, including to clearly define the general

definition of bona fide hedging for physical commodities under the

standards in CEA section 4a(c). Separately, the Commission proposes to

delay for DCMs and SEFs that lack access to sufficient swap position

information the requirement to establish and monitor position limits on

swaps.

DATES: Comments must be received on or before July 13, 2016.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD99,

by any of the following methods:

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

Mail: Secretary of the Commission, Commodity Futures

Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,

Washington, DC 20581;

Hand delivery/courier: Same as Mail, above.

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

Follow instructions for submitting comments.

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

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

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

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

information that may be exempt from disclosure under the Freedom of

Information Act, a petition for confidential treatment of the exempt

information may be submitted according to the procedures established in

CFTC regulations at 17 CFR part 145.

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

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

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

inappropriate for publication, such as obscene language. All

submissions that have been redacted or removed that contain comments on

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

file and will be considered as required under the Administrative

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

the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist,

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

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

(202) 418-5494, [email protected]; Lee Ann Duffy, Assistant General

Counsel, Office of General Counsel, 202-418-6763, [email protected]; or

Steven Benton, Industry Economist, Division of Market Oversight, (202)

418-5617, [email protected]; Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

The Commission has long established and enforced speculative

position limits for futures and options contracts on certain

agricultural commodities in accordance with the Commodity Exchange Act

(``CEA'' or ``Act'').\1\ The part 150 federal position limits regime

\2\ generally includes three components: (1) The level of the limits,

which set a threshold that restricts the number of speculative

positions that a person may hold in the spot month, an individual

month, and all months combined,\3\ (2) exemptions for positions that

constitute bona fide hedging transactions and certain other types of

transactions,\4\ and (3) rules to determine which accounts and

positions a person must aggregate for the purpose of determining

compliance with the position limit levels.\5\

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

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

regulations establishes federal position limits (that is, position

limits established by the Commission, as opposed to exchange-set

limits) on certain enumerated agricultural contracts; the listed

commodities are referred to as enumerated agricultural commodities.

The position limits on these agricultural contracts are referred to

as ``legacy'' limits because these contracts on agricultural

commodities have been subject to federal position limits for

decades. See also Position Limits for Derivatives, 78 FR 75680 at

75723, note 370 and accompanying text (Dec. 12, 2013) (``December

2013 position limits proposal'').

\3\ See 17 CFR 150.2.

\4\ See 17 CFR 150.3.

\5\ See 17 CFR 150.4.

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In late 2013, the CFTC proposed to amend its part 150 regulations

governing speculative position limits. These proposed amendments were

intended to conform to the requirements of part 150 to particular

changes to the CEA introduced by the Wall Street Transparency and

Accountability Act of 2010 (''Dodd-Frank Act'').\6\ The proposed

amendments included the adoption of federal position limits for 28

exempt and agricultural commodity futures and option contracts and

swaps that are ``economically equivalent'' to such contracts.\7\ In

addition, the

[[Page 38459]]

Commission proposed to require that DCMs and SEFs that are trading

facilities (collectively, ``exchanges'') establish exchange-set limits

on such futures, options and swaps contracts.\8\ Further, the

Commission proposed to (i) revise the definition of bona fide hedging

position (which includes a general definition with requirements

applicable to all hedges, as well as an enumerated list of bona fide

hedges),\9\ (ii) revise the process for market participants to request

recognition of certain types of positions as bona fide hedges,

including anticipatory hedges and hedges not specifically enumerated in

the proposed bona fide hedging definition; \10\ and (iii) revise the

exemptions from position limits for transactions normally known to the

trade as spreads.\11\

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\6\ The Commission previously had issued proposed and final

rules in 2011 to implement the provisions of the Dodd-Frank Act

regarding position limits and the bona fide hedge definition.

Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011);

Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011).

A September 28, 2012, order of the U.S. District Court for the

District of Columbia vacated the November 18, 2011 rule, with the

exception of the rule's amendments to 17CFR 150.2. International

Swaps and Derivatives Association v. United States Commodity Futures

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

the materials and links on the Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_26_PosLimits/index.htm. The Commission issued the December 2013 position limits

proposal, among other reasons, to respond to the District Court's

decision in ISDA v. CFTC. See generally the materials and links on

the Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/PositionLimitsforDerivatives/index.htm.

\7\ See CEA section 4a(a)(5), 7 U.S.C. 6a(a)(5) (providing that

the Commission establish limits on economically equivalent

contracts); CEA section 4a(a)(6), 7 U.S.C. 6a(a)(6) (directing the

Commission to establish aggregate position limits on futures,

options, economically equivalent swaps, and certain foreign board of

trade contracts in agricultural and exempt commodities

(collectively, ``referenced contracts'')). See December 2013

position limits proposal 78 FR at 75825. Under the December 2013

position limits proposal, ``referenced contracts'' would have been

defined as futures, options, economically equivalent swaps, and

certain foreign board of trade contracts, in physical commodities,

and been subject to the proposed federal position limits. The

Commission proposed that federal position limits would apply to

referenced contracts, whether futures or swaps, regardless of where

the futures or swaps positions were established. See December 2013

positions limits proposal at 78 FR 75826 (proposed Sec. 150.2).

\8\ See December 2013 position limits proposal 78 FR at 75754-8.

Consistent with DCM Core Principle 5 and SEF Core Principle 6, the

Commission proposed at Sec. 150.5(a)(1) that for any commodity

derivative contract that is subject to a speculative position limit

under Sec. 150.2, [a DCM] or [SEF] that is a trading facility shall

set a speculative position limit no higher than the level specified

in Sec. 150.2.

\9\ See December 2013 position limits proposal 78 FR at 75706-

11, 75713-18.

\10\ See December 2013 position limits proposal 78 FR at 75718.

\11\ See December 2013 position limits proposal 78 FR at 75735-

6. CEA section 4a(a)(1), 7 U.S.C. 6a(a)(1), permits the Commission

to exempt transactions normally known to the trade as ``spreads''

from federal position limits.

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II. Proposal To Supplement and Revise the December 2013 Position Limits

Proposal

The CFTC is now proposing revisions and additions to regulations

and guidance proposed in 2013 concerning speculative position limits in

response to comments received on that proposal. The Commission is

proposing new alternative processes for DCMs and SEFs to recognize

certain positions in commodity derivative contracts as non-enumerated

bona fide hedges or enumerated anticipatory bona fide hedges, as well

as to exempt from federal position limits certain spread positions, in

each case subject to Commission review. In this regard, the Commission

proposes to amend certain of the regulations proposed in 2013 regarding

exemptions from federal position limits and exchange-set position

limits to take into account these new alternative processes. In

connection with these changes, the Commission proposes to further amend

certain relevant definitions, including to clearly define the general

definition of bona fide hedging for physical commodities under the

standards in CEA section 4a(c). Separately, the Commission proposes to

delay for DCMs and SEFs that lack access to sufficient swap position

information the requirement to establish and monitor position limits on

swaps at this time.

Because this proposal supplements the December 2013 position limits

proposal, it must be read in conjunction with that notice of proposed

rulemaking, such that where this supplemental proposal sets out a

proposed rule text in full, as in four definitions which this

supplement proposes to amend, the rule text is intended to replace what

was proposed in the December 2013 position limits proposal. Where this

supplemental proposal reserves a subsection proposed in the December

2013 position limits proposal, the intention is to provide additional

time for Commission consideration of that subsection. For the avoidance

of doubt, the Commission is still reviewing comments received on such

reserved subsections and does not seek further comment on such reserved

subsections.

A. Proposed Guidance Regarding Exchange-Set Limitations on Swap

Positions

As noted above, in December 2013 the Commission proposed federal

position limits on futures and swaps in physical commodities.\12\ Since

that time, the Commission has worked with industry to improve the

quality of swap position reporting to the Commission under part 20.\13\

In light of the improved quality of the swap position reporting, the

Commission intends to rely on part 20 swap position data, given

adjustments for obvious errors (e.g., data reported based on a unit of

measure, such as an ounce, rather than a futures equivalent number of

contracts), to establish initial levels of federal non-spot month

limits on futures and swaps in a final rule. Moreover, the Commission

notes that the improved quality allows the Commission to utilize part

20 swap position data when monitoring market participants' compliance

with such federal position limits on futures and swaps.

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\12\ CEA section 4a(a)(5) requires federal position limits for

swaps that are ``economically equivalent'' to futures and options

that are subject to mandatory position limits under CEA section

4a(a)(2). See December 2013 position limits proposal at 78 FR 75681-

5 (providing the Commission's interpretation of the statute as

mandating that the Commission impose limits on futures, options, and

swaps, in agricultural and exempt commodities).

\13\ The Commission stated in the December 2013 position limits

proposal that it preliminarily had decided not to use the swaps data

then reported under part 20 for purposes of setting the initial

levels of the proposed single and all-months-combined positions

limits due to concerns about the reliability of such data. December

2013 position limits proposal, 78 FR at 75533. The Commission also

stated that it might use part 20 swaps data should it determine such

data to be reliable, in order to establish higher initial levels in

a final rule. Id. at 75734.

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However, the Commission notes that with respect to exchange-set

limits on swaps, exchanges, on the other hand, generally do not have

access to swap position information. Unlike futures contracts--which

are proprietary to a particular DCM and typically cleared at a single

DCO affiliated with the DCM--swaps in a particular commodity are not

proprietary to any particular trading facility or platform. Market

participants may execute swaps involving a particular commodity on or

subject to the rules of multiple exchanges or, in some circumstances,

over the counter (``OTC''). Further, under the Commission regulations,

data with respect to a particular swap transaction may be reported to

any swap data repository (``SDR'').\14\

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\14\ See Sec. Sec. 45.3, 45.4, and 45.10 of the Commission's

regulations, 17 CFR 45.3, 45.4, and 45.10. See generally CEA

sections 4r (reporting and recordkeeping for uncleared swaps) and 21

(swap data repositories), 7 U.S.C. 6r and 24a.

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In addition, it should be noted that although CEA section 2(h)(8)

requires that swap transactions required to be cleared under CEA

section 2(h)(7) must be traded on either a DCM or a SEF if a DCM or SEF

``makes the swap available to trade,'' \15\ there currently is neither

a requirement for mandatory clearing of a swap on a physical

commodity,\16\ nor has a swap on a physical commodity been made

available to trade.\17\ Consequently, swaps on physical commodities may

use means of execution other than on a DCM or SEF.

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\15\ CEA section 2(h)(8), 7 U.S.C. 2(h)(8) (the ``trading

mandate'').

\16\ See CEA section 2(h) and part 50 of the Commission's

regulations. 7 U.S.C. 2(h) and 17 CFR part 50.

\17\ For example, under rule 37.10, a swap execution facility

may make a swap available to trade, pursuant to CEA section 2(h)(8).

See current list of swaps made available to trade at http://www.cftc.gov/idc/groups/public/@otherif/documents/file/swapsmadeavailablechart.pdf.

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Even if an exchange had access to cleared swap data from a

particular DCO, an exchange may need access to data from additional

DCOs in order to have a sufficient understanding of a market

participant's cleared swap position, because a market participant may

clear economically equivalent swaps on multiple DCOs. Further, DCO

cleared swap data would not provide an exchange with data regarding

economically equivalent uncleared swaps. While SDR data would include

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swap data regarding both cleared and uncleared swaps, such data would

need to be converted to a futures-equivalent position in order to

measure compliance with an exchange-set limit set at a level no higher

than that of the federal position limit. The Commission acknowledges

that if an exchange does not have access to sufficient data regarding

individual market participants' open swap positions, then it cannot

effectively monitor swap position limits.

In light of the above, and based on (i) comments received on the

December 2013 position limits proposal; \18\ (ii) viewpoints expressed

during a Roundtable on Position Limits; \19\ (iii) several Commission

advisory committee meetings that each provided a focused forum for

participants to discuss some aspects of the December 2013 position

limits proposal; \20\ and (iv) information obtained in the course of

ongoing Commission review of SEF registration applications,\21\ the

Commission has determined to revise and amend certain parts of the

December 2013 position limits proposal. The Commission proposes to

temporarily delay for exchanges that lack access to sufficient swap

position information the requirement to establish and monitor position

limits on swaps by: (i) Adding Appendix E to part 150 to provide

guidance regarding Sec. 150.5; and (ii) revising guidance on DCM Core

Principle 5 and SEF Core Principle 6.\22\

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\18\ Comments on the December 2013 position limits proposal are

accessible on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1436.

\19\ A transcript of the June 19, 2014 Roundtable on Position

Limits is available on the Commission's Web site at http://www.cftc.gov/idc/groups/public/@swaps/documents/dfsubmission/dfsubmission_061914-trans.pdf.

\20\ Information regarding the December 9, 2014 and September

22, 2015 meetings of the Agricultural Advisory Committee, sponsored

by Chairman Massad, is accessible on the Commission's Web site at

http://www.cftc.gov/About/CFTCCommittees/AgriculturalAdvisory/aac_meetings. Information regarding February 26, 2015 and the July

29, 2015 meetings of the Energy & Environmental Markets Advisory

Committee (``EEMAC''), sponsored by Commission Giancarlo, is

accessible on the Commission's Web site at http://www.cftc.gov/About/CFTCCommittees/EnergyEnvironmentalMarketsAdvisory/emac_meetings.

\21\ Added by the Dodd-Frank Act, section 5h(a) of the CEA, 7

U.S.C. 7b-3, requires SEFs to register with the Commission. See

generally ``Core Principles and Other Requirements for Swap

Execution Facilities,'' 78 FR 33476 (Aug. 5, 2013). Information

regarding the SEF application process is available on the

Commission's Web site at http://www.cftc.gov/IndustryOversight/TradingOrganizations/SEF2/sefhowto.

\22\ DCM Core Principle 5, Position Limitations or

Accountability, is contained in CEA section 5(d)(5), 7 U.S.C.

7(d)(5). SEF Core Principle 6, Position Limits or Accountability, is

contained in CEA section 5h(f)(6), 7 U.S.C. 7b-3(f)(6).

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The CEA requires in SEF Core Principle 6(B) that a SEF: (i) Set its

exchange-set limit on swaps at a level no higher than that of the

federal position limit; and (ii) monitor positions established on or

through the SEF for compliance with the federal position limit and any

exchange-set limit.\23\ Similarly, for any contract subject to a

federal position limit, including a swap contract, DCM Core Principle

5(B) requires that DCMs must set a position limit at a level no higher

than that of the federal position limit.\24\

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\23\ CEA section 5h(f)(6)(B), 7 U.S.C. 7b-3(f)(6)(B) (SEF Core

Principle 6(B)). The Commission codified SEF Core Principle 6(B),

added by the Dodd-Frank Act, in Sec. 37.600 of its regulations, 17

CFR 37.600. See generally Core Principles and Other Requirements for

Swap Execution Facilities, 78 FR 33476, 33533-4 (June 4, 2013).

\24\ CEA section 5(d)(5)(B), 7 U.S.C. 7(d)(5)(B) (DCM Core

Principle 5(B)). The Commission codified DCM Core Principle 5(B), as

amended by the Dodd-Frank Act, in Sec. 38.300 of its regulations,

17 CFR 38.300. See generally Core Principles and Other Requirements

for Designated Contract Markets, 77 FR 36612, 36639 (June 19, 2012).

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The December 2013 position limits proposal specified that federal

position limits would apply to referenced contracts,\25\ whether

futures or swaps, regardless of where the futures or swaps positions

are established.\26\ Consistent with DCM Core Principle 5 and SEF Core

Principle 6, the Commission proposed at Sec. 150.5(a)(1) that, for any

commodity derivative contract that is subject to a speculative position

limit under Sec. 150.2, [a DCM] or [SEF] that is a trading facility

shall set a speculative position limit no higher than the level

specified in Sec. 150.2.\27\

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\25\ Under the December 2013 position limits proposal,

``referenced contracts'' are defined as futures, options,

economically equivalent swaps, and certain foreign board of trade

contracts, in physical commodities, and are subject to the proposed

federal position limits. See December 2013 position limits proposal

78 FR at 75825.

\26\ See December 2013 positions limits proposal at 78 FR 75826

(proposed Sec. 150.2).

\27\ See December 2013 position limits proposal at 78 FR 75754-

8.

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Three commenters on proposed regulation Sec. 150.5 recommended

that the Commission not require SEFs to establish position limits.\28\

Two noted that because SEF participants may use more than one

derivatives clearing organization (``DCO''), a SEF may not know when a

position has been offset.\29\ Further, during the ongoing SEF

registration process,\30\ a number of persons applying to become

registered as SEFs told the Commission that they lack access to

information that would enable them to knowledgeably establish position

limits or monitor positions.\31\ The Commission observes that this

information gap would also be a concern for DCMs in respect of swaps,

because DCMs lacking access to swap position information also would not

be able to reliably establish position limits on swaps or monitor swap

positions.

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\28\ Commodity Markets Council (``CMC''), on February 10, 2014,

(``CL-CMC-59634''), at 14-15; Futures Industry Association

(``FIA''), on March 30, 2015 (``CL-FIA-60392''), at 10. One

commenter stated that SEFs should be exempt from the requirement to

set positions limits because SEFs are in the early stages of

development and could be harmed by limits that restrict liquidity.

International Swaps and Derivatives Association, Inc. (``ISDA'') and

Securities Industry and Financial Markets Association (``SIFMA''),

on February 10, 2014 (``CL-ISDA/SIFMA-59611''), at 35.

\29\ CL-CMC-59634 at 14-15; CL-FIA-60392 at 10.

\30\ Under CEA section 5h(a)(1), no person may operate a

facility for trading swaps unless the facility is registered as a

SEF or DCM. 7 U.S.C. 7b-3(a)(1).

\31\ For example, in a submission to the Commission under part

40 of the Commission's regulations, BGC Derivative Markets, L.P.

states that ``[t]he information to administer limits or

accountability levels cannot be readily ascertained. Position limits

or accountability levels apply market-wide to a trader's overall

position in a given swap. To monitor this position, a SEF must have

access to information about a trader's overall position. However, a

SEF only has information about swap transactions that take place on

its own Facility and has no way of knowing whether a particular

trade on its facility adds to or reduces a trader's position. And

because swaps may trade on a number of facilities or, in many cases,

over-the-counter, a SEF does not know the size of the trader's

overall swap position and thus cannot ascertain whether the trader's

position relative to any position limit. Such information would be

required to be supplied to a SEF from a variety of independent

sources, including SDRs, DCOs, and market participants themselves.

Unless coordinated by the Commission operating a centralized

reporting system, such a data collection requirement would be

duplicative as each separate SEF required reporting by each

information sources.'' BGC Derivative Markets, L.P., Rule Submission

2015-09 (Oct. 6, 2015), available at http://www.cftc.gov/filings/orgrules/rule100615bgcsef001.pdf.

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The Commission acknowledges that, if an exchange does not have

access to sufficient data regarding individual market participants'

open swap positions, then it cannot effectively monitor swap position

limits. The Commission believes that most exchanges do not have access

to sufficient swap position information to effectively monitor swap

position limits.\32\ In this regard, the Commission believes that an

exchange would have or could have access to sufficient swap position

information to effectively monitor swap position limits if, for

example: (1) It had access to daily information about its market

participants' open swap positions; or (2) it knows that its market

participants regularly engage on its exchange in large volumes of

speculative trading activity

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(it may gain that knowledge through surveillance of heavy trading

activity), that would cause reasonable surveillance personnel at an

exchange to inquire further about a market participant's intentions

\33\ and total open swap positions.

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\32\ The Commission is aware of one SEF that may have access to

sufficient swap position information by virtue of systems

integration with affiliates that are CFTC registrants and shared

personnel. This SEF requires that all of its listed swaps be cleared

on an affiliated DCO, which reports to an affiliated SDR.

\33\ For instance, heavy trading activity at a particular

exchange might cause that exchange to ask whether a market

participant is building a large speculative position or whether the

heavy trading activity is merely the result of a market participant

making a market across several exchanges.

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It is possible that an exchange could obtain an indication of

whether a swap position established on or through a particular exchange

is increasing a market participant's swap position beyond a federal or

exchange-set limit, if that exchange has data about some or all of a

market participant's open swap position from the prior day and combines

it with the transaction data from the current day, to obtain an

indication of the market participant's current open swap position. By

way of example, part 20 requires clearing organizations, clearing

members and swap dealers to report to the Commission routine position

reports for physical commodity swaps; the part 20 swaps data identifies

for the Commission a market participant's reported open swap positions

from the prior trading day. If part 20 swaps data were made available

to an exchange, it could use it to add to any swap positions

established on or through that exchange during the current trading day

to get an indication of a potential position limit violation.\34\ The

indication would alert the exchange to contact the market participant

to inquire about that participant's total open swap position.

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\34\ Nonetheless, that market participant may have conducted

other swap transactions in the same commodity, away from a

particular exchange, that reduced its swap position.

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While this indication would not include the market participant's

activity transacted away from that particular exchange, the Commission

believes that such monitoring would comply with the requirement in CEA

section 5h(f)(6)(B)(ii) that the SEF monitor positions established on

or through the SEF for compliance with the limits set by the Commission

and the SEF. However, the Commission understands that exchanges

generally do not currently have access to a data source that identifies

a market participant's reported open swap positions from the prior

trading day.\35\ The Commission does not believe that it would be

practicable for an exchange to require that market participants self-

report their total open swap positions.\36\ And with only the

transaction data from a particular exchange, it would be impracticable,

if not impossible, for that exchange to monitor and enforce position

limits for swaps.

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\35\ As noted above, although the Commission receives swaps

position data pursuant to Part 20, the Commission has not made this

information available to any exchange.

\36\ An exchange could theoretically obtain swap position data

directly from market participants, for example, by requiring a

market participant to report its swap positions, as a condition of

trading on the exchange. However, the Commission thinks it is

unlikely that a single exchange would unilaterally impose a swaps

reporting regime on market participants.

The Commission abandoned the approach of requiring market

participants to report futures positions directly to the Commission

many years ago. See Reporting Requirements for Contract Markets,

Futures Commission Merchants, Members of Exchanges and Large

Traders, 46 FR 59960 (Dec. 8, 1981). Instead, the Commission and

DCMs rely on a large trader reporting system where futures positions

are reported by sources other than the position holder itself,

including futures commission merchants, clearing members and foreign

brokers. See generally part 19 of the Commission's regulations, 17

CFR part 19. See also, for example, the discussion of an exchange's

large trader reporting system in the Division of Market Oversight

Rule Enforcement Review of the Chicago Mercantile Exchange and the

Chicago Board of Trade, July 26, 2013, at 24-7, available at http://www.cftc.gov/idc/groups/public/@iodcms/documents/file/rercmecbot072613.pdf.

Further, as noted above, exchanges do not have authority to

demand swap position data from derivative clearing organizations or

swap data repositories; nor do exchanges have general authority to

demand market participants' swap position data from clearing members

of DCOs or swap dealers (as the Commission does under part 20).

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Moreover, the Commission has neither required any DCO \37\ or SDR

\38\ to provide such swap data to exchanges,\39\ nor provided any

exchange with access to swaps data collected under part 20 of the

Commission's regulations.\40\

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\37\ Core principle M for DCOs addresses information sharing

only for the purpose of the DCO's carrying out its risk management

program as ``appropriate and applicable,'' but does not address

information sharing for other purposes, and does not address

information sharing with exchanges. CEA section 5b(c)(2)(M), 7

U.S.C. 7a-1(c)(2)(M), and Sec. 39.22, 17 CFR 39.22. The Commission

has access to DCO information relating to trade and clearing details

under Sec. 39.19, 17 CFR 39.19, as is necessary to conduct its

oversight of a DCO. However, the Commission has not used its general

rulemaking authority under CEA section 8a(5), 7 U.S.C. 12a(5), to

require DCOs to provide registered entities access to swap

information, although the Commission could impose such a requirement

by rule. CEA section 5b(c)(2)(A)(i), 7 U.S.C. 7a-1(c)(2)(A)(i).

\38\ An SDR has a duty to provide direct electronic access to

the Commission, or a designee of the Commission who may be a

registered entity (such as an exchange). CEA section 21(c)(4), 7

U.S.C. 24a(c)(4). See 76 FR 54538 at 54551, note 141 and

accompanying text (Sept. 1, 2011). However, the Commission has not

designated any exchange as a designee of the Commission for that

purpose. Further, the Commission has not used its general rulemaking

authority under CEA section 8a(5), 7 U.S.C. 12a(5), to require SDRs

to provide registered entities (such as exchanges) access to swap

information, although the Commission could impose such a requirement

by rule. CEA section 21(a)(3)(A)(ii), 7 U.S.C. 24a(a)(3)(A)(ii).

\39\ Even if such information were to be made available to

exchanges, the swaps positions would need to be converted to

futures-equivalent positions for purposes of monitoring position

limits on a futures-equivalent basis, which would place an

additional burden on exchanges. See December 2013 positions limits

proposal at 78 FR75825 for the proposed definition of futures-

equivalent; see also the discussion, below, regarding this current

notice's amendments to that proposed definition. If at some future

time, the Commission were to consider requiring DCOs or SDRs to

provide swap data to exchanges, or to provide the exchanges with

swap data collected under part 20, the Commission would then

consider the burden that would be placed on the exchange by the need

to convert swap positions into futures equivalents.

\40\ The part 20 swaps data is reported in futures equivalents,

but does not include data specifying where (e.g., OTC or a

particular exchange) reportable positions in swaps were established.

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In light of the foregoing, the Commission is proposing a delay in

implementation of exchange-set limits for swaps only, and only for

exchanges without sufficient swap position information. After

consideration of the circumstances described above, and in an effort to

accomplish the policy objectives of the Dodd-Frank Act regulatory

regime, including to facilitate trade processing of any swap and to

promote the trading of swaps on SEFs,\41\ this current proposal amends

the guidance in the appendices to parts 37 and 38 of the Commission's

regulations regarding SEF core principle 6 and DCM core principle 5,

respectively. The revised guidance clarifies that an exchange need not

demonstrate compliance with SEF core principle 6 or DCM core principle

5 as applicable to swaps until it has access to sufficient swap

position information, after which the guidance would no longer be

applicable.\42\ For clarity, this current proposal includes the same

guidance in a new appendix E to proposed part 150 in the context of the

Commission's proposed regulations regarding exchange-set position

limits.

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\41\ See, e.g., CEA sections 5h(b)(1)(B) and 5h(e), 7 U.S.C. 7b-

3(b)(1)(B) and 7b-3(e), respectively.

\42\ Once the guidance was no longer applicable, a DCM or a SEF

would be required to file rules with the Commission to implement the

relevant position limits and demonstrate compliance with Core

Principle 5 or 6, as appropriate. The Commission notes that, for the

same reasons regarding swap position data discussed above in respect

of CEA section 5h(f)(6)(B), the proposed guidance also would

temporarily delay the requirement for SEFs to comply with their

statutory obligation under CEA section 5h(f)(6)(A).

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Although the Commission is proposing to delay implementing the core

principles regarding position limits on swaps, nothing in this current

proposal would prevent an exchange from nevertheless establishing

position limits on swaps. However, it does seem unlikely that an

exchange would implement position limits before

[[Page 38462]]

acquiring sufficient swap position information because of the ensuing

difficulty of enforcing such a limit. The Commission believes that

providing the proposed delay for those exchanges that need it both

preserves flexibility for subsequent Commission rulemaking and allows

for phased implementation of limitations on swaps by exchanges, as

practicable.\43\

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\43\ Although this current proposal would provide position

limits relief to SEFs and to DCMs in regards to swaps, it would not

alter the definition of referenced contract (including economically

equivalent swaps) as proposed in December 2013. See December 2013

position limits proposal 78 FR at 75825. The Commission continues to

review and consider comments received regarding the definition of

referenced contract.

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The Commission observes that courts have upheld relieving regulated

entities of their statutory obligations where compliance is impossible

or impracticable.\44\ The Commission believes that it would be

impracticable, if not impossible, for an exchange to monitor and

enforce position limits for swaps with only the transaction data from

that particular exchange. Accordingly, the Commission believes that it

is reasonable at this time to delay implementation of this discrete

aspect of position limits, only with respect to swaps position limits,

and only for exchanges that lack access to sufficient swap position

information. The Commission believes that this approach would further

the policy objectives of the Dodd-Frank Act regulatory regime,

including the facilitation of trade processing of swaps and the

promotion of trading swaps on SEFs. While this approach would delay the

requirement for certain exchanges to establish and monitor exchange-set

limits on swaps at this time, the Commission notes that, under the

December 2013 position limits proposal, federal position limits would

apply to swaps that are economically equivalent to futures contracts

subject to federal position limits.

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\44\ See, e.g., Ass'n of Irritated Residents v. EPA, 494 F.3d

1027, 1031 (D.C. Cir. 2007) (allowing regulated entities to enter

into consent agreements with EPA--without notice and comment--that

deferred prosecution of statutory violation until such time as

compliance would be practicable); Catron v. County Bd. Of

Commissioners v. New Mexico Fish & Wildlife Serv., 75 F.3d 1429,

1435 (10th Cir.1966) (stating that ``Compliance with [the National

Environmental Protection Act] is excused when there is a statutory

conflict with the agency's authorizing legislation that prohibits or

renders compliance impossible.''). Further, it is axiomatic that

courts will avoid reading statutes to reach absurd or unreasonable

consequences. See, e.g., Griffin v. Oceanic Contractors, Inc., 458

U.S. 564 (1982). To require an exchange to monitor position limits

on swaps, when it currently has extremely limited visibility into a

market participant's swap position, is arguably absurd and certainly

appears unreasonable.

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Request for comment (``RFC'') 1. The Commission requests comment on

all aspects of the proposed delay in implementing the requirements of

SEF core principle 6(B) and DCM core principle 5(B) with respect to the

setting and monitoring by exchanges of position limits for swaps. Does

any DCM or SEF currently have access to sufficient data regarding

individual market participants' open swaps positions to so set and

monitor swaps position limits other than by special call? If yes,

please describe in detail how such access could be obtained.\45\ If no,

how easy or difficult would it be for an exchange to obtain access to

sufficient swap position information by means of contract or other

arrangements?

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\45\ The Commission expects that any DCM or SEF that has access

to sufficient swap position information will report this to the

Commission in a comment letter that will be publicly available in

the comment file for this current proposal on the Commission's Web

site.

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B. Proposal To Amend the Definition of Bona Fide Hedging Position

As discussed below, the Commission is now proposing a general

definition of bona fide hedging position that incorporates only the

standards in CEA section 4a(c)(2), regarding physical commodity

derivatives. Conforming the standards of a general definition of bona

fide hedging position to those of the statute requires eliminating two

components of the general definition of bona fide hedging position in

current Sec. 1.3(z)(1): The incidental test and the orderly trading

requirement.\46\ Thus, the Commission is now proposing to eliminate the

incidental test and the orderly trading requirement, as discussed

below.

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\46\ The inclusion of the incidental test and the orderly

trading requirement in the definition of bona fide hedging has a

long history. As noted in the December 2013 Position Limits

proposal, ``In response to the 1974 legislation, the Commission's

predecessor adopted in 1975 a bona fide hedging definition in Sec.

1.3(z) of its regulations stating, among other requirements, that

transactions or positions would not be classified as hedging unless

their bona fide purpose was to offset price risks incidental to

commercial cash or spot operations, and such positions were

established and liquidated in an orderly manner and in accordance

with sound commercial practices. Shortly thereafter, the newly

formed Commission sought comment on amending that definition. Given

the large number of issues raised in comment letters, the Commission

adopted the predecessor's definition with minor changes as an

interim definition of bona fide hedging transactions or positions,

effective October 18, 1975.'' See December 2013 Position Limits

Proposal at 75703. The Commission is also proposing a non-

substantive change to subsection (1)(ii)(B) of the bona fide hedging

definition by deleting from the definition proposed in the December

2013 position limits proposal the lead in words ``such position.''

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1. December 2013 Proposal

In the December 2013 position limits proposal, the Commission

proposed a new definition of ``bona fide hedging position'' in proposed

Sec. 150.1, to replace the current definition in Sec. 1.3(z). The

opening paragraph of the proposed definition is a general definition of

a bona fide hedging position. As is the case in the current definition

in Sec. 1.3(z), that general definition contained two requirements for

a bona fide hedging position that are not included in CEA section

4a(c)(2): An incidental test and an orderly trading requirement.\47\

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\47\ See December 2013 Position Limits Proposal at 75706-7

(stating ``Bona fide hedging position means any position whose

purpose is to offset price risks incidental to commercial cash,

spot, or forward operations, and such position is established and

liquidated in an orderly manner in accordance with sound commercial

practices, . . .'').

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The incidental test is a component of the December 2013 proposed

bona fide hedging position definition requiring that the risks offset

by a commodity derivative position must be incidental to the position

holder's commercial operations.\48\ The orderly trading requirement is

a component of the December 2013 proposed bona fide hedging position

definition requiring that a bona fide hedge position must be

established and liquidated in an orderly manner in accordance with

sound commercial practices.\49\

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\48\ See December 2013 Position Limits Proposal at 75707.

\49\ Id.

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2. Comments on the December 2013 Proposed Definition of Bona Fide

Hedging Position

Commenters generally objected to the inclusion in the general

definition of bona fide hedging position of the incidental test and the

orderly trading requirement. For example, one commenter objected to the

incidental test, since that test is not included in CEA section 4a(c)

with respect to physical commodity hedges.\50\

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\50\ See, e.g., CME Group, Inc. (``CME Group''), on February 10,

2014 (``CL-CME-59718'') at 47.

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Commenters urged the Commission to eliminate the orderly trading

requirement, because, in the context of the over-the-counter markets,

the concept of orderly trading is not defined, yet the requirement

would impose a duty on end users to monitor market activities to ensure

they do not cause a significant market impact.\51\ Commenters noted the

anti-disruptive

[[Page 38463]]

trading prohibitions and polices would apply regardless of whether

there is an orderly trading requirement.\52\ Commenters requested that

if the Commission were to retain the orderly trading requirement, the

Commission interpret such requirement in a manner consistent with the

Commission's disruptive trading practices interpretation (i.e., a

standard of intentional or reckless conduct); commenters also requested

that the Commission not apply a negligence standard.\53\

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\51\ See Coalition of Physical Energy Companies (``COPE'') on

February 10, 2014 (``CL-COPE-59662'') at 13, Duke Energy Utilities

(``DEU'') on February 10, 2014 (``CL-DEU-59631'') at 5-7, and The

Commercial Energy Working Group (``Working Group'') CL-Working

Group-59693 at 14.

\52\ Section 747 of the Dodd-Frank Act amended the CEA to

expressly prohibit certain disruptive trading practices.

Specifically, CEA section 4c(a)(5), 7 U.S.C. 6c(a)(5), states that

it is unlawful for a person to engage in any trading, practice, or

conduct on or subject to the rules of a registered entity that (A)

violates bids or offers; (B) demonstrates intentional or reckless

disregard for the orderly execution of transactions during the

closing period; or (C) is, of the character of, or is commonly known

to the trade as, `spoofing' (bidding or offering with the intent to

cancel the bid or offer before execution). See also, Antidisruptive

Practices Authority, 78 FR 31890 (May 28, 2103) (providing a policy

statement and guidance).

\53\ See, e.g., FIA on February 7, 2014 (``CL-FIA-59595''), at

5, 33-34, the Edison Electric Institute and the Electric Power

Supply Association (``EEI-EPSA'') on February 10, 2014 ``CL-EEI-

EPSA-59602'') at 14-15, CL-ISDA/SIFMA-59611 at 4, 39, CL-CME-59718

at 67, and IntercontinentalExchange, Inc. (``ICE'') on February 10,

2014 (``CL-ICE-59669'') at 11.

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3. Proposal To Amend the Definition

For the reasons discussed below, and in response to the comments

received, the Commission is proposing to eliminate the incidental test

and orderly trading requirement from the general definition of bona

fide hedging position. For clarity, the Commission is herein

publishing, in proposed Sec. 150.1, a general definition of bona fide

hedging position for physical commodity derivatives that incorporates

only the standards of CEA section 4a(c), but notes that the definition

is subject to further requirements not inconsistent with those

statutory standards and the policy objectives of position limits.

i. Incidental Test

The Commission proposes to eliminate the incidental test. As noted

above, the incidental test and the orderly trading requirement have

been part of the rule 1.3(z)(1) definition of bona fide hedging since

1975.\54\ These provisions were not separately explained in the 1974

notice proposing the adoption of rule 1.3(z)(1) (the notice observed

only that the ``proposed definition otherwise deviates in only minor

ways from the hedging definition presently contained in [CEA section

4a(3)]'').\55\ The then-current statutory definition of bona fide

hedging position in CEA section 4a(3) used the concepts of ``good

faith'' (regarding the amount of a commodity a person expects to raise)

and a ``reasonable hedge'' (regarding hedges of inventory).

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\54\ 40 FR 11560 (March 12, 1975).

\55\ See 39 FR 39731 (Nov. 11, 1974). CEA section 4a(3) then

stated that no order issued under its paragraph (1) shall apply to

transactions or positions which are shown to be bona fide hedging

transactions or positions as such terms as shall be defined by the

Commission within one hundred and eighty days after the effective

date of the Commodity Futures Trading Commission Act of 1974 by

order consistent with the purposes of this chapter. 7 U.S.C. 6a(3)

1974. As noted in the Federal Register release adopting the

definition, the definition was proposed pursuant to section 404 of

the Commodity Futures Trading Commission Act of 1974 (P.L. 93-463),

which directed the Secretary of Agriculture to promulgate

regulations defining ``bona fide hedging transactions and

positions.'' 39 FR at 39731 (Nov. 11, 1974).

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The Commission adopted the concept of economically appropriate in

1977, after finding its definition of bona fide hedging inadequate due

to changes in commercial practices and the diverse nature of

commodities now under regulation, but did not address whether the

concept of economically appropriate overlapped with the incidental

test.\56\ The economically appropriate test requires that a bona fide

hedging position be economically appropriate to the reduction of risks

in the conduct and management of a commercial enterprise.\57\ While in

the 1977 rulemaking defining bona fide hedging the Commission discussed

the concept of economically appropriate as an expansive standard, the

incidental test appears to have simply been left in the definition as

an historical carryover. In the December 2013 position limits proposal,

the Commission noted that it believed the incidental test's concept of

commercial cash market activities is embodied in the economically

appropriate test for physical commodities in CEA section 4a(c)(2).\58\

In light of this connection between the concept of commercial cash

market activities and the economically appropriate test, the Commission

notes that it included in the December 2013 positions limits proposal

the intention to apply the economically appropriate test to hedges in

an excluded commodity.\59\

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\56\ 42 FR 42748 (August 24, 1977). In the Federal Register

release adopting the amended definition, the Commission stated that

it was adopting amendments to its general regulations to ``generally

broaden the scope of the hedging definition to include current

commercial risk shifting practices in the markets now under

regulation. The Commission has also recognized the potential for

market disruption if certain trading practices are carried out

during the delivery period of any future. The definition therefore

restricts the classification of certain transactions and positions

as bona fide hedging during the last five days of trading. In

addition, the Commission has amended its regulations to include

reporting requirements for some new types of bona fide hedging which

will now be recognized.'' 42 FR 42718 (Aug. 24, 1977).

\57\ See CEA section 4a(c)(2)(A)(ii).

\58\ See December 2013 Proposal at 75707.

\59\ Id.

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In both the current and December 2013 proposed definitions of bona

fide hedging position, the incidental test requires a reduction in

price risk. Although the Commission is now proposing to eliminate the

incidental test from the first paragraph of its proposed bona fide

hedge definition, the Commission notes that it interprets risk, in the

economically appropriate test, to mean price risk. Commenters suggested

the Commission adopt a broader interpretation of risk (including, for

example, execution and logistics risk and credit risk).\60\ However, a

broader interpretation appears to be inconsistent with the policy

objectives of position limits in CEA section 4a(a)(3)(B) regarding

physical commodities, particularly: Diminishing excessive speculation

that causes sudden or unreasonable fluctuations or unwarranted changes

in the price of a commodity; deterring manipulation, squeezes, and

corners; and ensuring the price discovery function is not disrupted.

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\60\ See, e.g., CMC on March 30, 2015, (``CL-CMC-60391'') at 2.

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ii. Orderly Trading Requirement

The Commission proposes to eliminate the orderly trading

requirement. While that provision has been a part of the regulatory

definition of bona fide hedge since 1975,\61\ and previously was found

in the statutory definition of bona fide hedge prior to the 1974

amendment removing the statutory definition from CEA section 4a(3), the

Commission is not aware of a denial of recognition of a position as a

bona fide hedge as a result of a lack of orderly trading on an

exchange. Further, the Commission notes that the meaning of the orderly

trading requirement is unclear in the context of the over-the-counter

swap market, as well as in the context of permitted off-exchange

transactions (e.g., exchange of derivatives for related positions). In

addition, the Commission observes that disruptive trading activity by a

commercial entity engaged in establishing or liquidating a hedging

position would generally appear to be contrary to its economic

interests. However, the Commission notes that an exchange may use its

own discretion to condition its recognition of a bona fide

[[Page 38464]]

hedging position on an orderly trading requirement.

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\61\ See 40 FR 11560 (March 12, 1975).

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The Commission notes the anti-disruptive trading prohibitions of

CEA section 4c(a)(5), as added by the Dodd-Frank Act, apply to trading

on registered entities, but not to over-the-counter transactions,

regardless of whether the trading is related to hedging activities.

Specifically, the anti-disruptive trading prohibitions in CEA section

4c(a)(5) make it unlawful to engage in trading on a registered entity

that ``demonstrates intentional or reckless disregard for orderly

execution of trading during the closing period.'' In this regard, the

Commission notes that it also has the authority, under CEA section

4c(a)(6), to prohibit the intentional or reckless disregard for the

orderly execution of transactions on a registered entity outside of the

closing period.

C. Proposed Rules Related to Recognition of Bona Fide Hedging Positions

and Granting of Spread Exemptions

In sections D, E, and F, below, this current proposal discusses

three sets of proposed Commission rules that would enable an exchange

to submit to the Commission exchange rules under which the exchange

could take action to recognize certain bona fide hedging positions and

to grant certain spread exemptions, with regard to both exchange-set

and federal position limits. In each case, the proposed Commission

rules would establish a formal CFTC review process that would permit

the Commission to revoke all such exchange actions.

If the changes in this current proposal are adopted, exchanges

would be able to: (i) Recognize certain non-enumerated bona fide

hedging positions (``NEBFHs''), i.e., positions that are not enumerated

by the Commission's rules (pursuant to proposed Sec. 150.9); \62\ (ii)

grant exemptions to position limits for certain spread positions

(pursuant to proposed Sec. 150.10); \63\ and (iii) recognize certain

enumerated anticipatory bona fide hedging positions (pursuant to

proposed Sec. 150.11).\64\

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\62\ See note 73 below.

\63\ The Commission has authority to exempt spread positions

under CEA section 4a(a)(1), which provides that the Commission may

exempt transactions normally known to the trade as ``spreads'' from

federal position limits. Under this current proposal, applicants may

rely on an exchange's grant of a spread exemption absent notice from

such exchange or the Commission to the contrary.

\64\ Unlike exemptions for spreads, no exemption is needed for

bona fide hedging transactions or positions as under CEA section

4a(c)(1), no rule, regulation or order issued under CEA section

4a(a) applies to transactions or positions shown to be bona fide

hedging transactions or positions. 7 U.S.C. 6a(c)(1). Accordingly,

Commission regulation 1.3(z)((3), for example, provides that upon

request, the Commission may recognize (rather than ``exempt'')

certain transactions and positions as bona fide hedges. By notifying

the applicant that the Commission, based on the information

provided, recognizes that the applicant's position has been shown to

be a bona fide hedge, the Commission is basically providing a safe

harbor from position limits in connection with that position for the

applicant. For ease of administration, the Commission now proposes,

with respect to federal position limits, to extend this recognition

process to exchanges' ``recognition'' of positions as NEBFHs or

anticipatory enumerated bona fide hedges with respect to federal

limits subject to subsequent Commission review. Under this current

proposal, positions recognized by exchanges as NEBFHs or

anticipatory enumerated bona fide hedges will not be subject to

federal limits absent notice from an exchange or the Commission to

the contrary. DCMs currently grant non-enumerated exemptions to

exchange-set limits that are consistent with current Sec.

1.3(z)(1), 17 CFR 1.3(z)(3). In addition, DCMs currently grant bona

fide exemptions to exchange-set limits for sales or purchases for

future delivery of unsold anticipated production or unfilled

anticipated requirements consistent with, and enumerated in, Sec.

1.3(z)(2)(i)(B) or Sec. 1.3(z)(2)(ii)(C), 17 CFR 1.3(z)(2) (i)(B)

or 1.3(z)(2)(ii)(C).

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The Commission's authority to permit certain exchanges to recognize

positions as bona fide hedging positions is found, in part, in CEA

section 4a(c)(1).\65\ CEA section 4a(c)(1) provides that no CFTC rule

applies to ``transaction or positions which are shown to be bona fide

hedging transactions or positions,'' as those terms are defined by

Commission rule consistent with the purposes of the CEA. The Commission

notes that ``shown to be'' is passive voice, which could encompass

either a position holder or an exchange being able to ``show'' that a

position is entitled to treatment as a bona fide hedge, and does not

specify that the Commission must determine in advance whether the

position or transaction was shown to be bona fide. The Commission

interprets CEA section 4a(c)(1) to authorize the Commission to permit

certain SROs (i.e., DCMs and SEFs, meeting certain criteria) to

recognize positions as bona fide hedges for purposes of federal limits,

subject to Commission review.

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\65\ Further, under CEA section 8a(5), the Commission may make

such rules as, in the judgment of the Commission, are reasonably

necessary to effectuate any of the provisions or to accomplish any

of the purposes of the CEA.

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When determining whether to recognize positions as bona fide

hedges, an exchange would be required to apply the standards in the

Commission's general definition of bona fide hedging position, which

incorporates the standards in CEA section 4a(c)(2),\66\ and the

exchange's conclusions would be subject to Commission review and, if

necessary, remediation.\67\

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\66\ CEA section 4a(c)(2), adopted by the Dodd-Frank Act,

directs the Commission to define (including to narrow the scope of)

what constitutes a bona fide hedging position, for the purpose of

implementing federal position limits on physical commodity

derivatives. In response to that directive, in the December 2013

position limits proposal, the Commission proposed to add a

definition of bona fide hedging position in Sec. 150.1, to replace

the definition in current Sec. 1.3(z). See infra notes 104-106 and

accompanying text; see also supra preamble Section II.B.3

(describing the Commission's current proposal to further amend its

general definition of bona fide hedging position as proposed in the

December 2013 position limits proposal).

\67\ See infra preamble Section II.D.3 (discussing the proposed

requirements that the exchanges: Make recognitions pursuant to

exchange rules submitted to the Commission; keep related records;

make reports to the Commission; and provide transparency to the

public). After review, the Commission could, for example, revoke or

confirm an exchange-granted exemption. See also proposed Sec.

150.9.

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In addition, the Commission would permit certain exchanges to

exempt positions normally known to the trade as spreads, subject to a

consideration of the four policy objectives of position limits found in

CEA section 4a(a)(3)(B).\68\ The Commission notes that nothing in CEA

section 4a(a)(1) prohibits the Commission from exempting such

spreads.\69\ The Commission interprets this provision as CEA statutory

authority to exempt spreads that are consistent with the other policy

objectives for position limits, such as those in CEA section

4a(a)(3)(B).\70\ The Commission finds, pursuant to CEA section 8a(5),

that permitting certain exchanges to recognize such spreads, subject to

subsequent Commission review of such actions, is reasonably necessary

to effectuate the CEA's policy objectives.\71\

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\68\ As discussed below, the proposed rules would require the

exchanges: To issue exemptions pursuant to exchange rules submitted

to the Commission; to keep records; to make reports to the

Commission; and to provide transparency to the public. See infra

Section II.E; see also proposed Sec. 150.10.

\69\ See CEA section 4a(a)(1) (stating that ``[n]othing in this

section shall be construed to prohibit the Commission from . . .

from exempting transactions normally known to the trade as

`spreads'. . .'')

\70\ CEA section 4a(a)(3)(B) provides that the Commission shall

set limits to the maximum extent practicable, in its discretion--to

diminish, eliminate, or prevent excessive speculation as described

under this section; to deter and prevent market manipulation,

squeezes, and corners; to ensure sufficient market liquidity for

bona fide hedgers; and to ensure that the price discovery function

of the underlying market is not disrupted.'' In addition, CEA

section 4a(a)(7) authorizes the Commission to exempt any class of

transaction from any requirement it may establish with respect to

position limits.

\71\ The Commission notes that the proposed process for exchange

exemptions of spread positions, in a similar manner to the proposed

process for exchange recognition of a position as bona fide hedge,

would require the exchange to apply the standards required under

proposed Sec. 150.10(a)((3)(ii)) (requiring the exchange to

determine that exempting the spread position would further the

purposes of CEA section 4a(3)(B)), and the exchanges conclusions

would be subject to Commission review and, if necessary, remediation

(after review, the Commission could, for example, revoke or confirm

an exchange-granted exemption). See proposed Sec. 150.10.

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[[Page 38465]]

Further, the Commission would permit certain exchanges to recognize

certain enumerated anticipatory hedging positions under the

Commission's definition of bona fide hedging position, essentially as

an administrative collection of certain information, but subject to

Commission review. Under proposed Sec. 150.11, the exchange would be

required to follow defined administrative procedures that require the

market participant to file certain information with the exchange,

including the information the market participant would be required to

file with the Commission under Sec. 150.7 as proposed in the December

2013 position limits proposal; in the alternative, the market

participant could choose to file that same information directly with

the Commission under proposed Sec. 150.7.\72\

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\72\ As discussed below, the proposed rules would require the

exchanges: To make administrative recognitions pursuant to exchange

rules submitted to the Commission; to keep records; and to make

reports to the Commission. There is no need for an exchange to

provide transparency to the public in regard to the existence of a

type of enumerated bona fide hedging position, as the enumerated

bona fide hedge positions are already listed in the Commission's

proposed definition of bona fide hedging position. See infra Section

II.F; see also proposed Sec. 150.11.

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Each of the exchange-administered processes under proposed

Sec. Sec. 150.9,\73\ 150.10,\74\ and 150.11 \75\ would be subject to

Commission review.\76\ The three proposed processes would allow market

participants to rely on an exchange's recognition of an NEBFH, spread,

or anticipatory exemption until an exchange or the Commission notifies

them to the contrary. However, the proposed processes would not protect

exchanges or applicants from charges of violations of applicable

sections of the CEA or other Commission regulations, other than

position limits. For instance, a market participant's compliance with

position limits or an exemption does not confer any type of safe harbor

or good faith defense to a claim that the market participant had

engaged in an attempted manipulation, a perfected manipulation or

deceptive conduct, as is the case under both current Sec. 150.6 as

well as Sec. 150.6 as proposed in the December 2013 position limits

proposal.\77\

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\73\ Specifically, exchanges will be able to: (1) Grant

exemptions from exchange-set limits for NEBFHs pursuant to proposed

Sec. Sec. 150.9, 150.3(a)(1)(i) and Sec. 150.5(a)(2); and (2)

recognize NEBFHs (pursuant to proposed Sec. Sec. 150.9 and

150.3(a)(1)(i)) that will not be subject to federal limits absent

notice from an exchange or the Commission to the contrary.

\74\ Specifically, exchanges will be able to: (1) Grant

exemptions from exchange-set limits for certain spread positions

pursuant to proposed Sec. Sec. 150.10, 150.3(a)(1)(iv) and

150.5(a)(2); and (2) grant exemptions from federal limits for

certain spread positions pursuant to proposed Sec. Sec. 150.10 and

150.3(a)(1)(iv).

\75\ Specifically, exchanges will be able to: (1) Grant

exemptions from exchange-set limits for enumerated anticipatory bona

fide hedges pursuant to proposed Sec. Sec. 150.11, 150.3(a)(1)(i)

and Sec. 150.5(a)(2); and (2) recognize enumerated anticipatory

bona fide hedges (pursuant to proposed Sec. Sec. 150.11 and

150.3(a)(1)(i)) that will not be subject to federal limits absent

notice from an exchange or the Commission to the contrary.

\76\ The three processes are non-exclusive because there are

alternative methods to seek recognition of a position as a bona fide

hedge or to receive an exemption for a spread position, including

requests for no-action letters under Sec. 140.99 or exemptive

relief under CEA section 4a(a)(7), per the December 2013 position

limits proposal. See December 2013 position limits proposal, 78 FR

at 75719-20.

\77\ See the discussion of Sec. 150.6 as proposed in the

December 2013 position limits proposal, 78 FR at 75746-7.

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The Commission views this current proposal, enabling exchanges to

elect to administer these three processes, to be suitable since each

process requires that: (i) An exchange submit implementing rules

subject to Commission review, under the ordinary rule submission

procedures of the Commission's part 40 regulations; (ii) the standards

for receiving the recognition or exemption be those set out under the

statute; \78\ (iii) each exchange's actions under these processes be

reviewed under the Commission's rule enforcement review program; \79\

and (iv) all exchange actions under such implementing rules are subject

to Commission review.\80\

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\78\ See, e.g., proposed Sec. 150.9(a)(3) (requiring exchanges

that elect to process NEBFH applications to solicit sufficient

information to allow it to determine why a derivative position

satisfies the requirements of section 4a(c) of the Act), and

proposed Sec. 150.9(a)(4) (requiring exchanges that elect to

process NEBFH applications to determine whether a derivative

position for which a complete application has been submitted

satisfies the requirements of section 4a(c) of the Act), and

proposed Sec. 150.10(a)(4)(vi) (requiring exchanges that elect to

process spread exemptions applications to determine that exempting a

spread position would further the purposes of CEA section

4a(a)(3)(B)). See also infra discussion in Section II.D.3 and

III.E.2 (each providing discussion of the standards for exchange

determinations).

\79\ See note 126 for further information regarding the

Commission's rule enforcement review program.

\80\ See proposed Sec. Sec. 150.9(a)(d), 150.10(a)(d), and

150.11(a)(d). The Commission notes that its de novo review of

exchange actions may be upon the Commission's own initiative or in

response to a request for an interpretation under Sec. 140.99 by a

market participant whose application for recognition of a position

as a bona fide hedge was rejected by an exchange.

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The Commission observes that for decades, exchanges have operated

as self-regulatory organizations (``SROs'').\81\ These SROs are charged

with carrying out regulatory functions, including, since 2001,

complying with core principles, and operate subject to the regulatory

oversight of the Commission pursuant to the CEA as a whole, and more

specifically, sections 5 and 5h.\82\ As SROs, exchanges do not act only

as independent, private actors.\83\ When the Act is read as a whole, as

the Commission noted in 1981, ``it is apparent that Congress envisioned

cooperative efforts between the self-regulatory organizations and the

Commission. Thus, the exchanges, as well as the Commission, have a

continuing responsibility in this matter

[[Page 38466]]

under the Act.'' \84\ The Commission's approach to its oversight of its

SROs was subsequently ratified by Congress in 1982, when it gave the

CFTC authority to enforce exchange set limits.\85\ As the Commission

observed in 2010, ``since 1982, the Act's framework explicitly

anticipates the concurrent application of Commission and exchange-set

speculative position limits.'' \86\ The Commission further noted that

the ``concurrent application of limits is particularly consistent with

an exchange's close knowledge of trading activity on that facility and

the Commission's greater capacity for monitoring trading and

implementing remedial measures across interconnected commodity futures

and option markets.'' \87\

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\81\ CFTC regulation 1.3(ee) defines SRO to mean a DCM, SEF, or

registered futures association (such as the National Futures

Association). Under the Commission's regulations, SROs have certain

delineated regulatory responsibilities, which are carried out under

Commission oversight and which are subject to Commission review. See

also note 126 (describing reviews of DCMs carried out by the

Commission).

\82\ 7 U.S.C. 7 and 7 U.S.C. 7b-3, respectively. See also note

126 below.

\83\ The Commission views as instructive the following examples

of case law addressing grants of authority by an agency (the

Securities and Exchange Commission, the ``SEC'') to a self-

regulatory organization (``SRO'') (in the SEC cases the SRO was

NASD, now FINRA), providing insight into the factors addressed by

the court regarding oversight of an SRO.

First, in 1952, the Second Circuit reviewed an SEC order that

failed to set aside a penalty fixed by NASD suspending the defendant

broker-dealer from membership. Citing Sunshine Anthracite Coal Co.

v. Adkins, 310 U.S. 381 (1940), the Second Circuit found that, in

light of the statutory provisions vesting the SEC with power to

approve or disapprove NASD's rules according to reasonably fixed

statutory standards, and the fact that NASD disciplinary actions are

subject to SEC review, there was ``no merit in the contention that

the Maloney Act unconstitutionally delegates power to the NASD.''

R.H. Johnson v. Securities and Exchange Commission, 198 F. 2d 690,

695 (2d Cir. 1952).

In 1977, the Third Circuit, in Todd & Co. v. Securities and

Exchange Commission (``Todd''), 557 F.2d 1008 (3rd Cir. 1977),

likewise concluded that the Act did not unconstitutionally delegate

legislative power to a private institution. The Todd court

articulated critical factors that kept the Maloney Act within

constitutional bounds. First, the SEC had the power, according to

reasonably fixed statutory standards, to approve or disapprove

NASD's rules before they could go into effect. Second, all NASD

judgments of rule violations or penalty assessments were subject to

SEC review. Third, all NASD adjudications were subject to a de novo

(non-deferential) standard of review by the SEC, which could be

aided by additional evidence, if necessary. Id. at 1012. Based on

these factors, the court found that ``[NASD's] rules and its

disciplinary actions were subject to full review by the SEC, a

wholly public body, which must base its decision on its own

findings'' and thus that the statutory scheme was constitutional.

Id., at 1012-13. See also First Jersey Securities v. Bergen, 605

F.2d 690 (1979), applying the same three-part test delineated in

Todd, and then upholding a statutory narrowing of the Todd test.

Further, in 1982, the Ninth Circuit considered the

constitutionality of Congress' delegation to NASD in Sorrel v.

Securities and Exchange Commission, 679 F. 2d 1323 (9th Cir. 1982).

Sorrel followed R.H. Johnson, Todd and First Jersey in holding that

because the SEC reviews NASD rules according to reasonably fixed

standards, and the SEC can review any NASD disciplinary action, the

Maloney Act does not impermissibly delegate power to NASD.

\84\ Establishment of Speculative Position Limits, 46 FR 50938,

50939 (Oct. 16, 1981). As the Commission noted at that time that

``[s]ince many exchanges have already implemented their own

speculative position limits on certain contracts, the new rule

merely effectuates completion of a regulatory philosophy the

industry and the Commission appear to share.'' Id. at 50940. The

Commission believes this is true for the current proposal.

\85\ See Futures Trading Act of 1982, Public Law 97-444, 96

Stat. 2299-30 (1983). In 2010, the Commission noted that the 1982

legislation ``also gave the Commission, under section 4a(5) of the

Act, the authority to directly enforce violations of exchange-set,

Commission-approved speculative position limits in addition to

position limits established directly by the Commission through

orders or regulations.'' Federal Speculative Position Limits for

Referenced Energy Contracts and Associated Regulations, 75 FR 4144,

4145 (Jan. 36, 2010) (``2010 Position Limits Proposal for Referenced

Energy Contracts''). Section 4a(5) has since been redesignated as

section 4a(e) of the Act. 7 U.S.C. 4a(e).

\86\ 2010 Position Limits for Referenced Energy Contracts at

4145.

\87\ Id.

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The Commission notes that it retains the power to approve or

disapprove the rules of exchanges, under standards set out pursuant to

the CEA, and to review an exchange's compliance with those rules. By

way of example, the Commission notes that its Division of Market

Oversight would conduct ``rule enforcement reviews'' \88\ of each

exchange's compliance with the rules it files under this current

proposal. Such reviews would include an examination of how effectively

an exchange administers these three proposed processes, including

review of recognitions and exemptions granted under the rules.

Exchanges, as SROs, are also subject to comprehensive Commission

regulation.\89\

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\88\ See note126 for further information regarding the

Commission's rule enforcement review program.

\89\ See, e.g., Sec. 1.52 of the Commission's regulations, 17

CFR 1.52 (Self-regulatory organization adoption and surveillance of

minimum financial requirements); part 37, 17 CFR part 37 (Swap

Execution Facilities); part 38, 17 CFR part 38 (Designated Contract

Markets); and part 40, 17 CFR part 40 (Provisions Common to

Registered Entities).

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The Commission--in adopting and administering a regime that permits

certain SROs (i.e., DCMs and SEFs that meet certain criteria) to

recognize positions as bona fide hedges subject to Commission review,

modification, or rejection--proposes building upon the experience and

expertise of the DCMs in administering their own processes for

recognition of bona fide hedging positions under current Sec.

1.3(z).\90\ Consistent with current market practice, the three proposed

exchange-administered processes will accomplish fact gathering

regarding large positions for the Commission, without much expense of

Commission resources. The information obtained by means of fact

gathering during the application processes will be available to the

Commission at any time upon request and pursuant to the recordkeeping

and recording provisions at proposed Sec. Sec. 150.9 (b) and (c),

150.10(b) and (c), and 150.11(b) and (c). The Commission believes that

the initial disposition of applications through the exchange-

administered processes should establish a reasonable basis for a

Commission determination that an application should be subsequently

approved or denied. The Commission anticipates that exchanges will

advise and consult with Commission staff regarding the effectiveness of

these programs, once implemented by the exchanges, and their utility in

advancing the policy objectives of the Act.

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\90\ See note 116, and accompanying text (pointing to ICE

Futures U.S. and CME Group comment letters noting their experience

overseeing position limits, position accountability levels, and the

recognition of bona fide hedges.)

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Moreover, the Commission is not diluting its ability to recognize

or not recognize bona fide hedging positions \91\ or to grant or not

grant spread exemptions. The Commission has reserved to itself the

ability to review any exchange action, and to review any application by

a market participant to an exchange, whether prior to or after

disposition of such application by an exchange. An exchange may ask the

Commission to consider an NEBFH application (proposed Sec.

150.9(a)(8)), spread application (proposed Sec. 150.10(a)(8)), or

enumerated anticipatory bona fide hedge application (proposed Sec.

150.11(a)(6)). The Commission may also on its own initiative at any

time--before or after action by an exchange--review any application

submitted to an exchange for recognition of an NEBFH (proposed Sec.

150.9(d)(1)), a spread exemption (proposed Sec. 150.10(d)(1)), or an

enumerated anticipatory bona fide hedge (proposed Sec.

150.11(d)(1)).\92\ And, as noted above, market participants will still

be able to request a staff interpretive letter under Sec. 140.99 from

the Commission or seek exemptive relief under CEA section 4a(a)(7) from

the Commission, as an alternative to the three proposed exchange-

administered processes.\93\

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\91\ In connection with recognition of bona fide hedging

positions, the Commission notes that the statute is silent or

ambiguous with respect to the specific issue--whether the CFTC may

authorize SROs to recognize positions as bona fide hedging

positions. CEA section 4a(c) provides that no Commission rule

establishing federal position limits applies to positions which are

shown to be bona fide hedging positions, as such term shall be

defined by the CFTC. As noted above, the ``shown to be'' phrase is

passive voice, which could encompass either a position holder or an

exchange being able to ``show'' that a position is entitled to

treatment as a bona fide hedge, and does not specify that the

Commission must be the party determining in advance whether the

position or transaction was shown to be bona fide; the Commission

interprets that provision to permit certain SROs (i.e., DCMs and

SEFs, meeting certain criteria) to recognize positions as bona fide

hedges for purposes of federal limits when done so within a regime

where the Commission can review and modify or overturn such

determinations. Under the proposal, an SRO's recognition is

tentative, because the Commission would reserve the power to review

the recognition, subject to the reasonably fixed statutory standards

in CEA section 4a(c)(2) (directing the CFTC to define the term bona

fide hedging position). An SRO's recognition would also be

constrained by the SRO's rules, which would be subject to CFTC

review under the proposal. The SROs are parties that are subject to

Commission authority, their rules are subject to Commission review

and their actions are subject to Commission de novo review under the

proposal--SRO rules and actions may be changed by the Commission at

any time.

\92\ Under the review process set forth in proposed Sec. Sec.

150.9(d) and 150.10(d), the Commission will give notice to the

exchange and the applicable applicant that they have 10 business

days to provide any supplemental information to the Commission. The

review process set forth in proposed Sec. 150.11(d) is simpler

because the Commission does not anticipate that applications for

recognition of enumerated anticipatory bona fide hedge positions

would be based on novel facts and circumstances; instead the review

of such an application would focus on whether the application met

the filing requirements contained in proposed Sec. 150.11(a). If

the filing was not complete, then proposed Sec. 150.11(d) would

provide an opportunity to supplement to the applicant and the

exchange.

During the review process, when the Commission considers an

exchange's disposition of an application, the Commission will

consider not only the Act but the Commission's relevant regulations

and interpretations. That is, the Commission will apply the same

standards during review as the exchange should or would have applied

in disposing of an application.

\93\ The December 2013 position limits proposal provides that

market participants can request a staff interpretive letter under

Sec. 140.99 from Commission staff or seek exemptive relief under

CEA section 4a(a)(7) from the Commission. See, e.g., 78 FR at 75719-

20. As noted above, the process of requesting interpretations under

Sec. 140.99 would also be available to market participants whose

application for recognition of a position as a bona fide hedge was

rejected by an exchange. See supra note 76; see also infra note 109

and accompanying text.

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[[Page 38467]]

The Commission notes that CEA section 8a(5) authorizes the

Commission to make such rules as, in its judgment, are reasonably

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

the purposes of the Act.\94\ The Commission currently views the

proposed processes to be reasonably necessary to implement CEA section

4a(a)(1), including for the purpose of diminishing, eliminating, or

preventing the burden of excessive speculation.\95\ As pointed out by

the Commission in 1981: ``Section [4a(a)(1)] represents an express

Congressional finding that excessive speculation is harmful to the

market, and a finding that speculative limits are an effective

prophylactic measure. Section 8a(5), accordingly would authorize the

Commission to develop regulations necessary to effectuate the purposes

of the Act, one of which is expressed in section [4a(a)(1)]. Consistent

with this approach, the Commission fashioned rule 1.61 [current rule

150.5] to assure that the exchanges would have an opportunity to employ

their knowledge of their individual contract markets to propose the

position limits they believe most appropriate.'' \96\

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\94\ 7 U.S.C. 12a(5).

\95\ 7 U.S.C. 6a(a)(1). The proposal also is reasonably

necessary to accomplish the purposes of the Act delineated in CEA

section 3(b): ``to deter and prevent price manipulation or any other

disruptions to market integrity. 7 U.S.C. 5(b). Further, the

proposal is reasonably necessary to accomplish the purposes of the

Act delineated in CEA section 4a(c)(1) ``to permit producers,

purchasers, sellers, middlemen, and users of a commodity or a

product derived therefrom to hedge their legitimate anticipated

business needs.'' 7 U.S.C. 6a(c)(1).

\96\ 46 FR 50938, 50940 (Oct. 16, 1981). Commission Sec. 1.61

required all contract markets not subject to federal speculative

position limits to adopt and enforce exchange-set speculative

position limits; in 1999, as part of the Commission's simplification

and reorganization of its position limit rules, the substance of

rule 1.61's requirements were relocated to Part 150 of the

Commission's rules, ``thereby incorporating within that Part all

Commission rules relating to speculative position limits.'' 64 FR

24038, 24040 (May 5, 1999).

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In addition, section 8a(7) of the Act provides the Commission with

authority to alter or supplement the rules of a registered entity,

including DCMs and SEFs, if the Commission determines that such changes

are necessary or appropriate.\97\ Consequently, as the Commission noted

in 1981, ``CEA section 8a(7) further underscores the fact that Congress

affirmatively contemplated a regulatory system whereby the exchanges

would act in the first instance to adopt rules which would protect

persons producing, handling, processing or consuming any commodity

traded for future delivery. Secondarily, the Commission has express

authority to mandate any modifications to an exchange's rules to

protect such persons.'' \98\

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\97\ CEA section 8a(7) provides the Commission with authority

``to alter or supplement the rules of a registered entity insofar as

necessary or appropriate by rule or regulation or by order, if after

making the appropriate request in writing to a registered entity

that such registered entity effect on its own behalf specified

changes in its rules and practices, and after appropriate notice and

opportunity for hearing, the Commission determines that such

registered entity has not made the changes so required, and that

such changes are necessary or appropriate for the protection of

persons producing, handling, processing, or consuming any commodity

traded for future delivery on such registered entity, or the product

or byproduct thereof, or for the protection of traders or to insure

fair dealing in commodities traded for future delivery on such

registered entity.'' 7 U.S.C. 12a(7).

\98\ 46 FR 50938, 50940 (Oct. 16, 1981). See also the

Commission's statement in 1999, that the Commission and the

exchanges ``share responsibility for enforcement of speculative

position limits,'' noting that ``the Commission can directly take

enforcement actions against violations of exchange-set speculative

position limits as well as those provided under Commission rules.''

64 FR 24038, note 3 and accompanying text (May 5, 1999).

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D. Exchange Recognition of Positions as Non-Enumerated Bona Fide Hedges

1. Background

DCMs have for some time set their own position limits on numerous

physical commodity futures contracts pursuant to DCM Core Principle

5.\99\ DCMs have established exchange-set limits for futures contracts,

including for futures contracts currently subject to Commission-set

limits under current Sec. 150.2, as well as other futures contracts

not subject to federal position limits. Pursuant to the guidance of

current Sec. 150.5(d), DCMs may grant exemptions to exchange-set

position limits for positions that meet the Commission's general

definition of bona fide hedging position in current Sec.

1.3(z)(1).\100\ Current Sec. 1.3(z)(2) provides a list of enumerated

bona fide hedging positions. In addition, current Sec. 1.3(z)(3)

provides a procedure for market participants to seek recognition from

the Commission for NEBFHs for contracts subject to federal position

limits under current Sec. 150.2. DCMs generally have granted NEBFH

exemptions pursuant to exchange rules that incorporate the Commission's

general definition of bona fide hedging positions in current Sec.

1.3(z)(1).

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\99\ 7 U.S.C. 7(d)(5). As explained in the December 2013

position limits proposal, ``the CFMA core principles regime

concerning position limitations or accountability for exchanges had

the effect of undercutting the mandatory rules promulgated by the

Commission in Sec. 150.5. Since the CFMA amended the CEA in 2000,

the Commission has retained Sec. 150.5, but only as guidance on,

and acceptable practice for, compliance with DCM core principle 5.''

December 2013 position limits proposal, 78 FR at 75754.

Prior to the Commodity Futures Modernization Act of 2000

(``CFMA''), DCMs set position limits pursuant to the requirements of

Sec. 150.5, adopted on May 5, 1999. 17 CFR 150.5; see 64 FR 24038

(May 5, 1999) (codifying various policies related to the requirement

that DCMs set speculative position limits); see also 46 FR 50938

(Oct. 16, 1981) (requiring DCMs to set speculative position limits

in active futures markets for which no exchange or Commission

imposed limits were then in effect). There are only nine commodity

futures contracts currently subject to federal position limits

pursuant to Sec. 150.2 of the Commission's regulations. 17 CFR

150.5.

\100\ 17 CFR 1.3(z)(1).

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In contrast to the longstanding DCM experience monitoring position

limits on futures contracts and granting exemptions to those exchange-

set limits on futures contracts, exchanges generally do not currently

administer speculative position limits on swaps. Previously, facilities

operating under CEA section 2(h)(3) as exempt commercial markets

(``ECMs'') were subject to CFTC regulation under authority granted by

Congress in 2008 (although that authority was subsequently superseded

by the Dodd-Frank Act).\101\ Under that 2008 authority, the Commission

issued guidance that an ECM should establish spot month position limits

on any swap contract that the Commission determined to be a significant

price discovery contract (``SPDC'').\102\ However, since the Dodd-Frank

Act, exchanges have ``futurized'' (or converted into futures contracts)

those SPDCs.\103\ Thus, the Commission understands that exchanges

generally do

[[Page 38468]]

not currently have speculative position limits applicable to swaps

contracts.

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\101\ The CFTC Reauthorization Act of 2008, H.R. 2419, sec.

13201 (May 22, 2008) (promulgating 7 U.S.C. 2(h)(7(C)(ii)(IV) (Core

Principles Applicable to Significant Price Discovery Contracts--

Position Limitations or Accountability). The Dodd-Frank Act amended

CEA section 2(h), effective July 16, 2011, H.R. 4173, sec. 734(a)

(July 21, 2010), replacing the provisions governing ECMs with

clearing requirements in regards to swaps.

\102\ 17 CFR part 36. It should be noted that prior to the Dodd-

Frank Act, ECMs could require clearing of swaps at a particular DCO

and, thus, could gain access to information on open positions in a

particular swap from a single affiliated DCO. The Dodd-Frank Act

altered the playing field, providing market participants with a

choice as to which DCO they wish to use. CEA section 5h(f)(11)(B)

generally does not permit a SEF to impose any material

anticompetitive burden on clearing. 7 U.S.C. 7b-3(f)(11)(B).

\103\ In 2012, ICE (which listed the only contracts that had

been determined by the Commission to be SPDCs) ``futurized'' the

SPDC contracts listed on its ECM by listing them instead on its DCM

(as it noted at that time, its plan was to ``convert 251 Energy

Contracts to futures contracts that would be listed for trading on

the Exchange's electronic trading platform,'' along with a request

that the Commission issue an order transferring the swap open

interest carried at the DCO for the ICE ECM OTC contracts to futures

and options open interest carried at the DCO for ICE, the DCM. ICE

Submission No. 12-45, August 15, 2012).

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CEA section 4a(c) provides generally that federal position limits

do not apply to positions that are shown to be bona fide hedging

positions.\104\ CEA section 4a(c)(2), adopted by the Dodd-Frank Act,

directs the Commission to narrow the scope of what constitutes a bona

fide hedging position, for the purpose of implementing federal position

limits on physical commodity derivatives, within specific

parameters.\105\ In response to that directive, the Commission proposed

to add a definition of bona fide hedging position in Sec. 150.1, to

replace the definition in current Sec. 1.3(z).\106\

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\104\ 7 U.S.C. 6a(c)(1).

\105\ CEA section 4a(c)(2) generally requires the Commission to

define a bona fide hedging position as a position that: (a) Meets

three tests (a position (1) is a substitute for activity in the

physical marketing channel (``temporary substitute test''), (2) is

economically appropriate to the reduction of risk, and (3) arises

from the potential change in value of current or anticipated assets,

liabilities or services); or (b) reduces the risk of a swap that was

executed opposite a counterparty for which such swap would meet the

three tests (``pass-through swap offset requirement''). 7 U.S.C.

6a(c)(2). In contrast, the definition of a bona fide hedge in

current Sec. 1.3(z): Does not include the temporary substitute

test, but instead includes guidance that a bona fide hedging

position should normally represent a substitute for transactions in

the physical marketing channel; and does not include the pass-

through swap offset requirement. See December 2013 positions limits

proposal at 75708-9.

\106\ See December 2013 position limits proposal 78 FR at 75706,

75823.

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The December 2013 position limits proposal would replace the

process for Commission recognition of NEBFHs under current Sec.

1.3(z)(3) \107\ and Sec. 1.47 \108\ of the Commission's regulations

with proposed Sec. 150.3(e), which would provide guidance for persons

seeking non-enumerated hedging exemptions through the filing of a

petition under section 4a(a)(7) of the Act or by requesting an

interpretation under Sec. 140.99.\109\ When discussing non-enumerated

hedges in the December 2013 position limits proposal, the Commission

noted that ``[u]nder the proposal for physical commodities, additional

enumerated hedges could only be added to the definition of bona fide

hedging position by way of notice and comment rulemaking,'' and asked

whether it should ``adopt, as an alternative, an administrative

procedure that would allow the Commission to add additional enumerated

bona fide hedges without requiring notice and comment rulemaking.''

\110\ The Commission recognized that ``there are complexities to

analyzing the various price risks applicable to particular commercial

circumstances in order to determine whether a hedge exemption is

warranted.'' \111\

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\107\ 17 CFR 1.3(z)(3) (providing authority for the Commission

to recognize bona fide hedge positions other than those enumerated

in Sec. 1.3(z)(2)).

\108\ 17 CFR 1.47 (providing a process for persons to

demonstrate NEBFH falls within the scope of Sec. 1.3(z)(1)). As

noted in the December 2013 position limits proposal, ``Section 1.47

of the Commission's regulations was removed and reserved by the

vacated part 151 Rulemaking. On September 28, 2012, the District

Court for the District of Columbia vacated the part 151 Rulemaking

with the exception of the amendments to Sec. 150.2. 887 F. Supp. 2d

259 (D.D.C. 2012). Vacating the part 151 Rulemaking, with the

exception of the amendments to Sec. 150.2, means that as things

stand now, it is as if the Commission had never adopted any part of

the part 151 Rulemaking other than the amendments to Sec. 150.2.

That is, . . . Sec. 1.47 is still in effect.'' December 2013

position limits proposal, 78 FR at 75740, note 478. The full text of

current Sec. 1.47 can be found at https://www.gpo.gov/fdsys/pkg/CFR-2010-title17-vol1/pdf/CFR-2010-title17-vol1-sec1-47.pdf. See 17

CFR 1.3(z) (2010). Similarly, the full text of current Sec.

1.3(z)(3) can be found at https://www.gpo.gov/fdsys/pkg/CFR-2010-title17-vol1/pdf/CFR-2010-title17-vol1-sec1-3.pdf. See 17 CFR 1.3(z)

(2010).

\109\ 7 U.S.C. 6a(a)(7) and 17 CFR 140.99, respectively.

\110\ December 2013 position limits proposal, 78 FR at 75718.

\111\ Id. at 75703.

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Historically, the Commission has recognized bona fide hedges where

a demonstrated physical price risk has been shown.\112\ In addition,

when summarizing the disposition of the Working Group petition requests

in the December 2013 position limits proposal, the Commission observed

that ``context is essential to determining the nature of any price risk

that has been realized and could support the existence of a bona fide

hedge,'' and ``the only way to evaluate the nature of any price risk

would be for the Commission to be provided with particulars of the

transaction.'' \113\

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\112\ Id.

\113\ Id. at 75719-20. As noted above, under the December 2013

position limits proposal, the Commission could consider the facts

and circumstances if the party either requested a staff interpretive

letter under Sec. 140.99 or exemptive relief under CEA section

4a(a)(7). See also note 76 and accompanying text.

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2. Comments on the December 2013 Process for Recognition of a Position

as a Bona Fide Hedge

Some commenters have suggested that the Commission permit exchanges

to process applications for non-enumerated bona fide hedges

(``NEBFHs'').\114\ For example, ICE Futures U.S. (``ICE Futures U.S.'')

commented that the Commission should not now undertake the daily

administration of NEBFHs when its resources are limited,\115\ and

stated that it has extensive, direct experience overseeing position

limits, position accountability levels, and the recognition of bona

fide hedges.\116\ ``The

[[Page 38469]]

rules and procedures developed and used by . . . [ICE Futures U.S.] to

perform this important function were designed to incorporate the

specific needs and differing practices of the commercial participants

in each of its markets as those needs and practices have developed over

time.'' \117\ These commenters generally espoused the view that the

Commission should continue in its broad oversight role in the granting

of hedge exemptions and should not begin to become involved in the

daily administration of hedge exemptions. One academic suggested that

permitting the exchanges to process NEBFH applications would be

acceptable so long as the Commission surveils the work of the

exchanges.\118\

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\114\ See, e.g., comment of Tom LaSala, CME Group, that ``the

exchanges would be open to a 1.47-like process'' where the exchanges

would review requests for recognition of non-enumerated bona fide

hedge positions on behalf of the Commission, Transcript, Roundtable

on Position Limits, June 19, 2014, p. 125, available at http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff061914; Futures

Industry Association (FIA), on July 31, 2014 (``CL-FIA-59931''), at

8 (recommending exchange review of non-enumerated hedge applications

in the first instance); ISDA and SIFMA on July 7, 2014 (``CL-ISDA/

SIFMA-59917''), at 4 (suggesting that the Commission include in the

final rulemaking a process for market participants to apply to

registered exchanges for bona fide hedging exemptions); Natural Gas

Supply Association (``NGSA'') on Aug. 4, 2014 (``CL-NGSA-59941''),

at 9 (requesting the Commission to consider using ICE and CME Group

to continue to administer hedge exemptions); Working Group on March

30, 2015 (``CL-Working Group-60396''), at 6 (recommending that DCMs

be able to grant bona fide hedge exemptions in the energy industry

either on an enumerated or non-enumerated basis); International

Energy Credit Association (``IECreditAssn'') on Aug. 4, 2014 (``CL-

IECreditAssn-59957''), at 6 (stating that ``the [IECreditAssn] is

generally supportive of a pre-approval procedure for nonenumerated

hedging exemptions, whereby a commercial end-user could first seek

and obtain review and approval by a CFTC-regulated Exchange''); ICE

on March 30, 2015 (``CL-ICE-60387''), at 8 (noting that ``the

exchanges should continue to exercise the authority to grant non-

enumerated hedge exemption requests pursuant to their rules and

procedures''); COPE on March 30, 2015 (``CL-COPE-60388''), at 6-8

(supporting Working Group's suggestion that DCMs administer

enumerated and non-enumerated hedge exemptions). See also Plains

All-American Pipeline, L.P. (``PAAP'') on Aug. 4, 2014 (``CL-PAAP-

59951''), at 3-4; BG Group Energy Merchants (``BG Energy'') on March

30, 2015 (``CL-BG Energy-60383''), at 7-8; Sempra Energy

(``Sempra'') on March 30, 2015 (``CL-SEMP-60384''), at 5. Contra

Occupy the SEC on Aug. 7, 2014 (``CL-OSEC-59972'') at 4 (maintaining

that permitting exchanges to ``self-define'' hedging exceptions

``would likely create an environment conducive to producing a `race

to the bottom' among exchanges as they would have incentives to

attract and retain participants seeking to take advantage of the

loosest rules''); Institute for Agriculture and Trade Policy on

March 30, 2015 (``CL-IATP-60394'') at 3 (arguing that the Commission

should not permit the exchanges ``to manage position limits''). See

also Transcript, Agricultural Advisory Committee Meeting, Sept. 22,

2015, pp. 124-51 available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/aac_transcript092215.pdf (discussing

exchange-administered processes for NEBFHs); Transcript, Energy and

Environmental Markets Advisory Committee Meeting, Feb. 26, 2015, pp.

239-44, available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/emactranscript022615.pdf (offering a

general discussion touching on alternative processes).

\115\ ICE Futures U.S., on March 30, 2015 (``CL-ICEUS-60378''),

at 3-4. See also CL-CME-60406, at 5 (stating that ``CME Group is

sympathetic to the fact that the Commission faces resource

constraints that would prevent it from administering a workable non-

enumerated hedge exemption in real time . . . .'').

\116\ CL-ICEUS-60378 at 1. See also CL-CME-60406 at 5 (noting

that ``[E]xchanges have years of experience reviewing requests for

hedge exemptions and approving or denying those requests based on a

facts-and-circumstances approach.''); statement of R. Oppenheimer on

behalf of the Working Group, Energy and Environmental Markets

Advisory Committee meeting, July 29, 2015 (asserting that ``The

exchanges have the knowledge, the expertise, and the regulatory

incentive to carefully scrutinize the exemption process, and they

already engage in a parallel process for their own interest in self-

regulating and ensuring convergence and orderly liquidation of

futures contracts as they come to expiry.'')

\117\ CL-ICEUS-60378 at 1.

\118\ John Parsons, Transcript, Roundtable on Position Limits,

June 19, 2014, at 135-6.

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3. Proposed NEBFH Recognition Process

In light of DCM experience in granting NEBFH exemptions to

exchange-set position limits for futures contracts, and after

consideration of comments recommending exchange review of NEBFH

requests, the Commission now proposes to permit exchanges to recognize

NEBFHs with respect to the proposed federal speculative position

limits. Under proposed Sec. 150.9, an exchange, as an SRO \119\ that

is under Commission oversight and whose rules are subject to Commission

review,\120\ could establish rules under which the exchange could

recognize as NEBFHs positions that meet the general definition of bona

fide hedging position in proposed Sec. 150.1, which implements the

statutory directive in CEA section 4a(c) for the general definition of

bona fide hedging positions in physical commodities.\121\ The

exchange's recognition would be subject to review by the Commission.

Exchange recognition of a position as a NEBFH would allow the market

participant to exceed the federal position limit to the extent that it

relied upon the exchange's recognition unless and until such time that

the Commission notified the market participant to the contrary.\122\

The Commission could issue such a notification in accordance with the

proposed review procedures. That is, if a party were to hold positions

pursuant to a NEBFH recognition granted by the exchange, such positions

would not be subject to federal position limits, unless or until the

Commission were to determine that such NEBFH recognition is

inconsistent with the CEA or CFTC regulations thereunder. Under this

framework, the Commission would continue to exercise its authority in

this regard by reviewing an exchange's determination and verifying

whether the facts and circumstances in respect of a derivative position

satisfy the requirements of the general definition of bona fide hedging

position proposed in Sec. 150.1.\123\ If the Commission determined

that the exchange-granted recognition was inconsistent with section

4a(c) of the Act and the Commission's general definition of bona fide

hedging position in Sec. 150.1 and so notified a market participant

relying on such recognition, the market participant would be required

to reduce the derivative position or otherwise come into compliance

with position limits within a commercially reasonable amount of time.

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\119\ As noted above, under the Commission's regulations, SROs

have certain delineated regulatory responsibilities, which are

carried out under Commission oversight and which are subject to

Commission review. See also, note 126 (describing reviews of DCMs

carried out by the Commission).

\120\ See CEA section 5c(c), 7 U.S.C. 7a-2(a) (providing

Commission with authority to review rules and rule amendments of

registered entities, including DCMs).

\121\ As previously noted, Congress has required in CEA section

4a(c) that the Commission, within specific parameters, define what

constitutes a bona fide hedging position for the purpose of

implementing federal position limits on physical commodity

derivatives, including, as previously stated, the inclusion in new

section 4a(c)(2) of a directive to narrow the bona fide hedging

definition for physical commodity positions from that currently in

Commission regulation Sec. 1.3(z). See supra notes 32 and 105 and

accompanying text; see also December 2013 positions limits proposal

at 75705. In response to that mandate, the Commission proposed in

its December 2013 position limits proposal to add a definition of

bona fide hedging position in Sec. 150.1, to replace the definition

in current Sec. 1.3(z) See 78 FR at 75706, 75823.

For the avoidance of doubt, the Commission is still reviewing

comments received on these provisions. The Commission intends to

finalize the general definition of bona fide hedging position based

on the standards of CEA section 4a(c), and may further define the

bona fide hedging position definition consistent with those

standards.

\122\ See generally the discussion of proposed Sec. 150.9(d)

and the requirements regarding the review of applications by the

Commission, below. The Commission notes that exchange participation

is voluntary, not mandatory and that exchanges could elect not to

administer the process. Market participants could still request a

staff interpretive letter under Sec. 140.99 or seek exemptive

relief under CEA section 4a(a)(7), per the December 2013 position

limits proposal. The process does not protect exchanges or

applicants from charges of violations of applicable sections of the

CEA or other Commission regulations. For instance, a market

participant's compliance with position limits or an exemption

thereto would not confer any type of safe harbor or good faith

defense to a claim that he had engaged in an attempted manipulation,

a perfected manipulation or deceptive conduct; see the discussion of

Sec. 150.6 (Ongoing application of the Act and Commission

regulations) as proposed in the December 2013 position limits

proposal, 78 FR at 75746-7.

\123\ See, e.g. the general discussion of the Commission's

review process proposed in Sec. 151.9(c), which would support the

Commission's surveillance program by facilitating the tracking of

NEBFHs recognized by exchanges, keeping the Commission informed of

the manner in which an exchange is administering its procedures for

recognizing such NEBFHs.

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The Commission believes that permitting exchanges to so recognize

NEBFHs is consistent with its statutory obligation to set and enforce

position limits on physical commodity contracts, because the Commission

is retaining its authority to determine ultimately whether any NEBFH so

recognized is in fact a bona fide hedging position. The Commission's

authority to set position limits does not extend to any position that

is shown to be a bona fide hedging position.\124\ Further, most, if not

all, DCMs already have a framework and application process to recognize

non-enumerated positions, for purposes of exchange-set limits, as

within the meaning of the general bona fide hedging definition in Sec.

1.3(z)(1).\125\ The Commission has a long history of overseeing the

performance of the DCMs in granting appropriate exemptions under

current exchange rules regarding exchange-set position limits \126\ and

[[Page 38470]]

believes that it would be efficient and in the best interest of the

markets, in light of current resource constraints,\127\ to rely on the

exchanges to initially process applications for recognition of

positions as NEBFHs. In addition, because many market participants are

familiar with current DCM practices regarding bona fide hedges,

permitting DCMs to build on current practice may reduce the burden on

market participants. Moreover, the process outlined below should reduce

duplicative efforts because market participants seeking recognition of

an NEBFH would be able to file one application for relief, only to an

exchange, rather than to both an exchange with respect to exchange-set

limits and to the Commission with respect to federal limits.\128\

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\124\ CEA section 4a(c)(1), 7 U.S.C. 6a(c)(1). See also supra

note 65.

\125\ Rulebooks for some DCMs can be found in the links to their

associated documents on the Commission's Web site at http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=TradingOrganizations.

\126\ The Commission bases this view on its long experience

overseeing DCMs and their compliance with the requirements of CEA

section 5 and part 38 of the Commission's regulations, 17 CFR part

38. Under part 38, a DCM must comply, on an initial and ongoing

basis, with twenty-three Core Principles established in section 5(d)

of the CEA, 7 U.S.C. 7(d), and part 38 of the CFTC's regulations and

with the implementing regulations under part 38. The Division of

Market Oversight's Market Compliance Section conducts regular

reviews of each DCM's ongoing compliance with core principles

through the self-regulatory programs operated by the exchange in

order to enforce its rules, prevent market manipulation and customer

and market abuses, and ensure the recording and safe storage of

trade information. These reviews are known as rule enforcement

reviews (``RERs''). Some periodic RERs examine a DCM's market

surveillance program for compliance with Core Principle 4,

Monitoring of Trading, and Core Principle 5, Position Limitations or

Accountability. On some occasions, these two types of RERs may be

combined in a single RER. Market Compliance can also conduct

horizontal RERs of the compliance of multiple exchanges in regard to

particular core principles. In conducting an RER, the Division of

Market Oversight (DMO) staff examines trading and compliance

activities at the exchange in question over an extended time period

selected by DMO, typically the twelve months immediately preceding

the start of the review. Staff conducts extensive review of

documents and systems used by the exchange in carrying out its self-

regulatory responsibilities; interviews compliance officials and

staff of the exchange; and prepares a detailed written report of

findings. In nearly all cases, the RER report is made available to

the public and posted on CFTC.gov. See materials regarding RERs of

DCMs at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/dcmruleenf on the Commission's Web site. Recent RERs conducted

by DMO covering DCM Core Principle 5 and exemptions from position

limits have included the Minneapolis Grain Exchange, Inc. (``MGEX'')

(June 5, 2015), ICE Futures U.S. (July 22, 2014), the Chicago

Mercantile Exchange (``CME'') and the Chicago Board of Trade

(``CBOT'') (July 26, 2013), and the New York Mercantile Exchange

(May 19, 2008). While DMO may sometimes identify deficiencies or

make recommendations for improvements, it is the Commission's view

that it should be permissible for DCMs to process applications for

exchange recognition of positions as NEBFHs. Consistent with the

fifteen SEF core principles established in section 5h(f) of the CEA,

7 U.S.C. 7b-3(f), and with the implementing regulations under part

37, 17 CFR part 37, the Commission will perform similar RERs for

SEFs. The Commission's preliminary view is that it should be

permissible for SEFs to process applications as well, after

obtaining the requisite experience administering exchange-set

position limits discussed below.

\127\ Since the enactment of the Dodd-Frank Act, Commissioners,

CFTC staff, and public officials have expressed repeatedly and

publicly that Commission resources have not kept pace with the

CFTC's expanded jurisdiction and increased responsibilities. The

Commission anticipates there may be hundreds of applications for

NEBFHs. This is based on the number of exemptions currently

processed by DCMs. For example, under the existing process, during

the period from June 15, 2011 to June 15, 2012, the Market

Surveillance Department of ICE Futures U.S. received 142 exemption

applications, 121 of which related to bona fide hedging requests,

while 21 related to arbitrage or cash-and-carry requests; 92 new

exemptions were granted. Rule Enforcement review of ICE Futures

U.S., July 22, 2014, p. 40. Also under the existing process, during

the period from November 1, 2010 to October 31, 2011, the Market

Surveillance Group from the CME Market Regulation Department took

action on and approved 420 exemption applications for products

traded on CME and CBOT, including 114 new exemptive applications,

295 applications for renewal, 10 applications for increased levels,

and one temporary exemption on an inter-commodity spread. Rule

Enforcement Review of the Chicago Mercantile Exchange and the

Chicago Board of Trade, July 26, 2013, p. 54. These statistics are

now a few years old, and it is possible that the number of

applications under the processes outlined in this proposal will

increase relative to the number of applications described in the

RERs. The CFTC would need to shift substantial resources, to the

detriment of other oversight activities, to process so many requests

and applications and has determined, as described below, to permit

exchanges to process applications initially. The Commission

anticipates it will regularly, as practicable, check a sample of the

exemptions granted, including in cases where the facts warrant

special attention, retrospectively as described below, including

through RERs.

\128\ One commenter specifically requested that the Commission

streamline duplicative processes. American Gas Association (``AGA'')

on March 30, 2015 (``CL-AGA-60382'') at 12 (stating that ``AGA . . .

urges the Commission to ensure that hedge exemption requests and any

hedge reporting do not require duplicative filings at both the

exchanges and the Commission, and therefore recommends revising the

rules to streamline the process by providing that an applicant need

only apply to and report to the exchanges, while the Commission

could receive any necessary data and applications by coordinating

data flow between the exchanges and the Commission.''). See also

CL--Working Group--60396 (explaining that ``To avoid employing

duplicative efforts, the Commission should simply rely on DCMs to

administer bona fide hedge exemptions from federal speculative

position limits as they carry out their core duties to ensure

orderly markets.'')

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i. Proposed Sec. 150.9(a)--Requirements For Exchange Application

Process

a. Submission of Exchange Rules Under Part 40

The Commission contemplates in proposed Sec. 150.9(a)(1) that

exchanges may voluntarily elect to process NEBFH applications by filing

new rules or rule amendments with the Commission pursuant to part 40 of

the Commission's regulations. The Commission anticipates that,

consistent with current practice, most exchanges will self-certify such

new rules or rule amendments pursuant to Sec. 40.6. The self-

certification process should be a low burden for exchanges, especially

for those that already recognize non-enumerated positions meeting the

general definition of bona fide hedging position in Sec.

1.3(z)(1).\129\ In the Commission's view, allowing DCMs to continue to

follow current practice, and extend that practice to exchange

recognition of NEBFHs for purposes of the federal position limits, will

permit the Commission to more effectively allocate its limited

resources to oversight of the exchanges' actions.\130\

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\129\ DCMs currently process applications for exemptions from

exchange-set position limits for certain NEBFHs and enumerated

anticipatory bona fide hedges, as well as for exemptions from

exchange-set position limits for certain spread positions, pursuant

to CFMA-era regulatory guidance. See note 102, above, and

accompanying text. This practice continues because, among other

things, the Commission has not finalized the rules proposed in the

December 2013 position limits proposal.

As noted above and as explained in the December 2013 position

limits proposal, while current Sec. 150.5 regarding exchange-set

position limits pre-dates the CFMA ``the CFMA core principles regime

concerning position limitations or accountability for exchanges had

the effect of undercutting the mandatory rules promulgated by the

Commission in Sec. 150.5. Since the CFMA amended the CEA in 2000,

the Commission has retained Sec. 150.5, but only as guidance on,

and acceptable practice for, compliance with DCM core principle 5.''

December 2013 position limits proposal 78 FR at 75754.

The DCM application processes for bona fide hedge exemptions

from exchange-set position limits generally reference or incorporate

the general definition of bona fide hedging position contained in

current Sec. 1.3(z)(1), and the Commission believes the exchange

processes for approving non-enumerated bona fide hedge applications

are at least to some degree informed by the Commission process

outlined in current Sec. 1.47.

\130\ If the Commission becomes concerned about an exchange's

general processing of NEBFH applications, the Commission may review

such processes pursuant to a periodic rule enforcement review or a

request for information pursuant to Commission regulation Sec.

37.5. Separately, under proposed Sec. 150.9(d), the proposal

provides that the Commission may review a DCM's determinations in

the case of any specific NEBFH application.

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RFC 2. Are there any facts and circumstances specific to DCMs that,

for purposes of exchange limits, currently recognize non-enumerated

positions meeting the general definition of bona fide hedging position

in Sec. 1.3(z)(1), that the Commission should accommodate in any final

regulations regarding the processing of NEBFH applications?

RFC 3. Are there any concerns regarding an exchange that elects to

stop processing NEBFH applications? For example, what should be the

status of a previously recognized NEBFH, if the exchange that

recognized a NEBFH no longer provides for an annual review?

b. Requirements for an Exchange To Process Applications

Proposed Sec. 150.9(a)(1) provides that exchange rules must

incorporate the general definition of bona fide hedging position in

Sec. 150.1. It also provides that, with respect to a commodity

derivative position for which an exchange elects to process NEBFH

applications, (i) the position must be in a commodity derivative

contract that is a referenced contract; (ii) the exchange must list

such commodity derivative contract for trading; (iii) such commodity

derivative contract must be actively traded on such exchange; (iv) such

exchange must have established position limits for such commodity

derivative contract; and (v) such exchange must have at least one year

of experience administering exchange-set position limits for such

commodity derivative contract. The requirement for one year of

experience is intended as a proxy for a minimum level of expertise

gained in monitoring futures or swaps trading in a particular physical

commodity.

[[Page 38471]]

The Commission believes that the exchange NEBFH process should be

limited only to those exchanges that have at least one year of

experience overseeing exchange-set position limits in an actively

traded referenced contract in a particular commodity because an

individual exchange may not be familiar enough with the specific needs

and differing practices of the commercial participants in those markets

for which the exchange does not list any actively traded referenced

contract in a particular commodity. Thus, if a referenced contract is

not actively traded on an exchange that elects to process NEBFH

applications for positions in such referenced contract, that exchange

might not be incentivized to protect or manage the relevant commodity

market, and its interests might not be aligned with the policy

objectives of the Commission as expressed in CEA section 4a. The

Commission expects that an individual exchange will describe how it

will determine whether a particular listed referenced contract is

actively traded in its rule submission, based on its familiarity with

the specific needs and differing practices of the commercial

participants in the relevant market.\131\

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\131\ For example, a DCM (``DCM A'') may list a commodity

derivative contract (``KX,'' where ``K'' refers to contract and

``X'' refers to the commodity) that is a referenced contract,

actively traded, and DCM A has the requisite experience and

expertise in administering position limits in that one contract KX.

DCM A can therefore recognize NEBFHs in contract KX. But DCM A is

not limited to recognition of just that one contract KX-DCM A can

also recognize any other contract that falls within the meaning of

referenced contract for commodity X. So a market participant could,

for example, apply to DCM A for recognition of a position in any

contract that falls within the meaning of referenced contract for

commodity X. However, that market participant would still need to

seek separate recognition from each exchange where it seeks an

exemption from that other exchange's limit for a commodity

derivative contract in the same commodity X.

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The Commission is also mindful that some market participants, such

as commercial end users in some circumstances, may not be required to

trade on an exchange, but may nevertheless desire to have a particular

derivative position recognized as a NEBFH. The Commission believes that

commercial end users should be able to avail themselves of an

exchange's NEBFH application process in lieu of requesting a staff

interpretive letter under Sec. 140.99 or seeking CEA section 4a(a)(7)

exemptive relief. This is because the Commission believes that

exchanges that list particular referenced contracts will have enough

information about the markets in which such contracts trade and will be

sufficiently familiar with the specific needs and differing practices

of the commercial participants in such markets in order to

knowledgeably recognize NEBFHs for derivatives positions in commodity

derivative contracts included within a particular referenced contract.

The Commission also views this to be consistent with the efficient

allocation of Commission resources.

RFC 4. Are there circumstances in which the Commission should

permit an exchange to process an NEBFH application for a position in a

commodity derivative contract where that contract is a referenced

contract that is not actively traded on such exchange or for which the

exchange has less than one year of experience administering position

limits?

RFC 5. Should the Commission define ``actively traded'' in terms of

a minimum monthly volume of trading, such as an average monthly trading

volume of 1,000 futures-equivalent contracts over a twelve month

period?

RFC 6. Are there any concerns if a market participant applies for

recognition of a NEBFH on one exchange, intending to execute the trades

comprising the recognized position away from that exchange (e.g., over

the counter)?

RFC 7. Are there concerns regarding the applicability of NEBFH

positions in the spot month? Should the Commission, parallel to the

requirements of current regulation 1.3(z)(2) (i.e., the ``five-day

rule''), provide that such positions not be recognized as NEBFH

positions during the lesser of the last five days of trading or the

time period for the spot month? \132\

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\132\ 17 CFR 1.3(z)(2). See also, e.g., the ``bona fide hedging

position'' definition proposed in the December 2013 position limits

proposal, 78 FR at 75823-24.

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RFC 8. If the Commission permits NEBFH positions to be held into

the spot month, should recognition of NEBFH positions be conditioned

upon additional filings to the exchange--similar to the proposed Form

504 filings required for the proposed conditional spot month limit

exemption? \133\ As proposed, Form 504 would require additional

information on the market participant's cash market holdings for each

day of the spot month period. Under this alternative, market

participants would submit daily cash position information to the

exchanges in a format determined by the exchange, which would then be

required to forward that information to the Commission in a process

similar to that proposed under Sec. 150.9(c)(2).

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\133\ The conditional spot month limit exemption and the related

Form 504 were discussed in the December 2013 position limits

proposal (78 FR 75680 at 75736-8). A copy of the proposed form was

submitted to the Federal Register (id. at 75803-8) to ensure the

public has the opportunity to comment on the information required by

the proposed form. The Commission estimated the number of market

participants that would be required to file the form in the December

2013 position limits proposal (id. at 75783). Commenters are

encouraged to review and comment on the proposed Form 504 under the

context of this current proposal.

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RFC 9. Alternatively, if the Commission permits NEBFH positions to

be held into the spot month, should the Commission require market

participants to file the Form 504 with the Commission? Under this

alternative, the relevant cash market information would be submitted

directly to the Commission, eliminating the need for the exchange to

intermediate, although the Commission could share such a filing with

the exchanges. The Commission would adjust the title of the Form 504 to

clarify that the form would be used for all daily spot month cash

position reporting purposes, not just the proposed requirements of the

conditional spot month limit exemption in proposed Sec. 150.3(c).

Consistent with the restrictions regarding the offset of risks

arising from a swap position in CEA section 4a(c)(2)(B), proposed Sec.

150.9(a)(1) would not permit an exchange to recognize an NEBFH

involving a commodity index contract and one or more referenced

contracts. That is, an exchange may not recognize an NEBFH where a bona

fide hedge position could not be recognized for a pass through swap

offset of a commodity index contract.\134\

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\134\ This is consistent with the Commission's interpretation in

the December 2013 position limits proposal that CEA section

4a(c)(2)(b) is a direction from Congress to narrow the scope of what

constitutes a bona fide hedge in the context of index trading

activities. ``Financial products are not substitutes for positions

taken or to be taken in a physical marketing channel. Thus, the

offset of financial risks from financial products is inconsistent

with the proposed definition of bona fide hedging for physical

commodities.'' December 2013 position limits proposal, 78 FR at

75740. See also the discussion of the temporary substitute test in

the December 2013 position limits proposal, 78 FR at 75708-9.

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c. Exchanges May Establish a Dual-Track Application Process

Proposed Sec. 150.9(a)(2) permits an exchange to establish a less

expansive application process for NEBFHs previously recognized and

published on such exchange's Web site than for NEBFHs based on novel

facts and circumstances. This is because the Commission believes that

some lesser degree of scrutiny may be adequate for applications

involving recurring fact patterns, so long as the applicants are

[[Page 38472]]

similarly situated. However, the Commission understands that DCMs

currently use a single-track application process to recognize non-

enumerated positions, for purposes of exchange limits, as within the

meaning of the general bona fide hedging definition in Sec.

1.3(z)(1).\135\ The Commission does not know whether any exchange will

elect to establish a separate application process for NEBFHs based on

novel versus non-novel facts and circumstances, or what the salient

differences between the two processes might be, or whether a dual-track

application process might be more likely to produce inaccurate results,

e.g., inappropriate recognition of positions that are not bona fide

hedges within the parameters set forth by Congress in CEA section

4a(c).\136\ In proposing to permit separate application processes for

novel and non-novel NEBFHs, the Commission seeks to provide flexibility

for exchanges, but will insist on fair and open access for market

participants to seek recognition of compliant positions as NEBFHs.

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\135\ 17 CFR 1.3(z)(1).

\136\ 7 U.S.C. 6a(c). The Commission notes that it could, under

the proposal, review determinations made by a particular exchange,

for example, that recognizes an unusually large number of bona fide

hedges, relative to those of other exchanges.

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RFC 10. Would separate application processes for novel and non-

novel NEBFHs be more likely to produce inaccurate results, e.g.,

inappropriate recognition of positions that are not bona fide hedges

within the parameters set forth by Congress in section 4a(c) of the

Act?

d. Market Participant's Facts and Circumstances

The Commission believes that there is a core set of information and

materials necessary to enable an exchange to determine, and the

Commission to verify, whether the facts and circumstances attendant to

a position satisfy the requirements of CEA section 4a(c). Accordingly,

the Commission proposes to require in Sec. 150.9(a)(3)(i), (iii) and

(iv) that all applicants submit certain factual statements and

representations. Proposed Sec. 150.9(a)(3)(i) requires a description

of the position in the commodity derivative contract for which the

application is submitted and the offsetting cash positions.\137\

Proposed Sec. 150.9(a)(3)(iii) requires a statement concerning the

maximum size of all gross positions in derivative contracts to be

acquired during the year after the application is submitted.\138\

Proposed Sec. 150.9(a)(3)(iv) requires detailed information regarding

the applicant's activity in the cash markets for the commodity

underlying the position for which the application is submitted during

the past three years.\139\ These proposed application requirements are

similar to existing requirements for recognition under current Sec.

1.48 of a NEBFH.

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\137\ See Sec. 1.47(b)(1), 17 CFR 1.47(b)(1), requiring a

description of the futures positions and the offsetting cash

positions.

\138\ See Sec. 1.47(b)(4), 17 CFR 1.47(b)(4), requiring the

maximum size of gross futures positions which will be acquired

during the following year.

\139\ See Sec. Sec. 1.47(b)(6), 1.48(b)(1)(i) and (2)(i), 17

CFR 1.47(b)(6), 1.48(b)(1)(i) and 2(i), requiring three years of

history of production or usage.

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The Commission also proposes to require in Sec. 150.9(a)(3)(ii)

and (v) that all applicants submit detailed information to demonstrate

why the position satisfies the requirements of CEA section 4a(c) \140\

and any other information necessary to enable the exchange to

determine, and the Commission to verify, whether it is appropriate to

recognize such a position as an NEBFH.\141\ The Commission anticipates

that such detailed information may include both a factual and legal

analysis indicating why recognition is justified for such applicant's

position. The Commission expects that if the materials submitted in

response to proposed Sec. 150.9(a)(3)(ii) are relatively

comprehensive, requests for additional information pursuant to proposed

Sec. 150.9(a)(3)(v) will be relatively infrequent. Nevertheless, the

Commission believes that it is important to include the requirement in

proposed Sec. 150.9(a)(3)(v) that applicants submit any other

information necessary to enable the exchange to determine, and the

Commission to verify, that it is appropriate to recognize a position as

a non-enumerated bona fide hedge so that DCMs can protect and manage

their markets.

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\140\ Although many commenters have requested that the

Commission retain the pre-Dodd Frank Act standard contained in

current Sec. 1.3(z), 17 CFR 1.3(z), there is explicit and implicit

support in the comments on the December 2013 position limits

proposal for pegging what applicants must demonstrate to the current

statutory provision as amended by the Dodd-Frank Act. One commenter

requested that the Commission ``publicly clarify that hedge

positions are bona fide when they satisfy the hedge definition

codified by Congress in section 4a(c)(2) of the Act, as added by the

Dodd-Frank Act.'' CME Group, on Feb. 10, 2014 (``CL-CME-59718''), at

46. Another commenter supported a ``process for Commission approval

of a `non-enumerated' hedge that . . . complies with the statutory

definition of the term `bona fide hedge.' '' NGSA on Feb. 10, 2014

(``CL-NGSA-59673''), at 2.

CEA section 4a(c)(2) contains standards for positions that

constitute bona fide hedges. The Commission expects that exchanges

will consider the Commission's relevant regulations and

interpretations, when determining whether a position satisfies the

requirements of CEA section 4a(c)(2). However, exchanges may

confront novel facts and circumstances with respect to a particular

applicant's position, dissimilar to facts and circumstances

previously considered by the Commission. In these cases, an exchange

may request assistance from the Commission; see the discussion of

proposed Sec. 150.9(a)(8), below.

\141\ See Sec. 1.47(b)(2), 17 CFR 1.47(b)(2), requiring

detailed information to demonstrate that the futures positions are

economically appropriate to the reduction of risk in the conduct and

management of a commercial enterprise. See also Sec. 1.47(b)(3), 17

CFR 1.47(b)(3), requiring, upon request, such other information

necessary to enable the Commission to determine whether a particular

futures position meets the requirements of the general definition of

bona fide hedging. Under current application processes, market

participants provide similar information to DCMs, make various

representations required by DCMs and agree to certain terms imposed

by DCMs with respect to exemptions granted. The Commission has

recognized that DCMs already consider any information they deem

relevant to requests for exemptions from position limits. See, e.g.,

Rule Enforcement Review of ICE Futures U.S., July 22, 2014, p. 41.

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Under the proposal, the Commission would permit an exchange to

recognize a smaller than requested position for purposes of exchange-

set limits. For instance, an exchange might recognize a smaller than

requested position that otherwise satisfies the requirements of CEA

section 4a(c) if the exchange determines that recognizing a larger

position would be disruptive to the exchange's markets. This is

consistent with current exchange practice. This is also consistent with

DCM and SEF core principles. DCM core principle 5(A) provides that,

``[t]o reduce the potential threat of market manipulation or congestion

(especially during trading during the delivery month), the board of

trade shall adopt for each contract of the board of trade, as is

necessary and appropriate, position limitations or position

accountability for speculators.'' \142\ SEF core principle 6(A)

contains a similar provision.\143\

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\142\ CEA section 5(d)(5)(A), 7 U.S.C. 7(d)(5)(A); Sec. 38.300,

17 CFR 38.300. The Commission proposed, consistent with previous

Commission determinations, a preliminary finding that speculative

position limits are necessary in the December 2013 position limits

proposal. December 2013 position limits proposal, 78 FR at 75685.

\143\ CEA Sec. 5h(f)(6)(A), 7 U.S.C. 7b-3(f)(6)(A); Sec.

38.300, 17 CFR 38.300.

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By requiring in proposed Sec. 150.9(a)(3) that all applicants

submit a core set of information and materials, the Commission

anticipates that all exchanges will develop similar NEBFH application

processes. However, the Commission intends that exchanges have

sufficient discretion to accommodate the needs of their market

participants. The Commission also intends to promote fair and open

access for market participants to obtain recognition of compliant

derivative positions as NEBFHs.

[[Page 38473]]

RFC 11. Is the proposed core set of information required of market

participants adequate for an exchange to review applications for

NEBFHs?

e. Application Process Timeline

Proposed Sec. 150.9(a)(4) sets forth certain timing requirements

that an exchange must include in its rules for the NEBFH application

process. A person intending to rely on an exchange's recognition of a

position as a NEBFH would be required to submit an application in

advance and to reapply at least on an annual basis. This is consistent

with commenters' views and DCMs' current annual exemption review

process.\144\ Proposed Sec. 150.9(a)(4) would require an exchange to

notify an applicant in a timely manner whether the position was

recognized as a NEBFH or rejected, including the reasons for any

rejection.\145\ On the other hand, and consistent with the status quo,

proposed Sec. 150.9(a)(4) would allow the exchange to revoke, at any

time, any recognition previously issued pursuant to proposed Sec.

150.9 if the exchange determines the recognition is no longer in accord

with section 4a(c) of the Act.\146\

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\144\ See, e.g., statement of Ron Oppenheimer on behalf of the

Working Group (supporting an annual NEBFH application), statement of

Erik Haas, Director, Market Regulation, ICE Futures U.S.,

(describing the DCM's annual exemption review process), and

statement of Tom LaSala, Chief Regulatory Officer, CME Group,

(envisioning market participants applying for NEBFHs on a yearly

basis), transcript of the EEMAC open meeting, July 29, 2015, at 40,

53, and 58, available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/emactranscript072915.pdf.

\145\ See, e.g., statement of Ron Oppenheimer on behalf of the

Working Group (noting that exchanges retain the ability to revoke an

exemption if market circumstances warrant), transcript of the EEMAC

open meeting, July 29, 2015, at 57, available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/emactranscript072915.pdf.

\146\ As noted above, the current proposal does not impair the

ability of any market participant to request an interpretation under

Sec. 140.99 for recognition of a position as a bona fide hedge if

an exchange rejects their recognition application or revokes

recognition previously issued. See supra note 78 and accompanying

text.

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The Commission does not propose to prescribe time-limited periods

(e.g., a specific number of days) for submission or review of NEBFH

applications. The Commission proposes only to require that an applicant

must have received recognition for a NEBFH position before such

applicant exceeds any limit then in effect, and that the exchange

administer the process, and the various steps in the process, in a

timely manner. This means that an exchange must, in a timely manner,

notify an applicant if a submission is incomplete, determine whether a

position is an NEBFH, and notify an applicant whether a position will

be recognized, or the application rejected. The Commission anticipates

that rules of an exchange may nevertheless set deadlines for various

parts of the application process. The Commission does not believe that

reasonable deadlines or minimum review periods are inconsistent with

the general principle of timely administration of the application

process. An exchange could also establish different deadlines for a

dual-track application process. The Commission believes that the

individual exchanges themselves are in the best position to evaluate

how quickly each can administer the application process, in order best

to accommodate the needs of market participants. In addition to review

of an exchange's timeline when it submits its rules for its application

process under part 40, the Commission would review the exchange's

timeliness in the context of a rule enforcement review.

RFC 12. The Commission invites comment regarding the discretion

proposed for exchanges to process NEBFH applications in a timely

manner.

f. NEBFH Deemed Recognized Upon Exchange Recognition

Proposed Sec. 150.9(a)(5) makes it clear that the position will be

deemed to be recognized as a NEBFH when an exchange recognizes it;

proposed Sec. 150.9(d) provides the process through which the

exchange's recognition would be subject to review by the

Commission.\147\ As noted above, DCMs currently exercise discretion

with regard to exchange-set limits to approve exemptions meeting the

general definition of bona fide hedge. The Commission works

cooperatively with DCMs to enforce compliance with exchange-set

speculative position limits. The Commission believes a continuation of

this cooperative process, and an extension to the proposed federal

position limits, would be consistent with the policy objectives in CEA

section 4a(3)(B).\148\

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\147\ See supra notes 121-123 and accompanying text; see also

the discussion of proposed Sec. 150.9(d), review of applications by

the Commission, below. Exchange recognition of a position as a NEBFH

would allow the market participant to exceed the federal position

limit until such time that the Commission notified the market

participant to the contrary, pursuant to the proposed review

procedure that the exchange action was dismissed. That is, if a

party were to hold positions pursuant to a NEBFH recognition granted

by the exchange, such positions would not be subject to federal

position limits, unless or until the Commission were to determine

that such NEBFH recognition is inconsistent with the CEA or CFTC

regulations thereunder. Under this framework, the Commission would

continue to exercise its authority in this regard by reviewing an

exchange's determination and verifying whether the facts and

circumstances in respect of a derivative position satisfy the

requirements of the Commission's general definition of bona fide

hedging position in Sec. 150.1. If the Commission determines that

the exchange-granted recognition is inconsistent with section 4a(c)

of the Act and the Commission's general definition of bona fide

hedging position in Sec. 150.1, a market participant would be

required to reduce the derivative position or otherwise come into

compliance with position limits within a commercially reasonable

amount of time.

\148\ 7 U.S.C. 6a(3)(B).

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g. Market Participant Reporting Requirements

Proposed Sec. 150.9(a)(6) requires exchanges that elect to process

NEBFH applications to promulgate reporting rules for applicants who

own, hold or control positions recognized as NEBFHs. The Commission

expects that the exchanges will promulgate enhanced reporting rules in

order to obtain sufficient information to conduct an adequate

surveillance program to detect and potentially deter excessively large

positions that may disrupt the price discovery process. At a minimum,

these rules should require applicants to report when an NEBFH position

has been established, and to update and maintain the accuracy of such

reports. These rules should also elicit information from applicants

that will assist exchanges in complying with proposed Sec. 150.9(c)

regarding exchange reports to the Commission.

RFC 13. Should the Commission provide further guidance regarding

the types of information that exchanges should seek to elicit from

reporting rules with respect to NEBFH positions?

h. Transparency to Market Participants

Proposed Sec. 150.9(a)(7) requires an exchange to publish on its

Web site, no less frequently than quarterly, a description of each new

type of derivative position that it recognizes as a NEBFH. The

Commission envisions that each description would be an executive

summary. The description must include a summary describing the type of

derivative position and an explanation of why it qualifies as a NEBFH.

The Commission believes that the exchanges are in the best position

when quickly crafting these descriptions to accommodate an applicant's

desire for trading anonymity while promoting fair and open access for

market participants to information regarding which positions might be

recognized as NEBFHs. As discussed below, the Commission proposes to

spot check these summaries pursuant to proposed Sec. 150.9(e).

RFC 14. Should the Commission prescribe that exchanges publish any

[[Page 38474]]

specific information regarding recognized NEBFHs based on novel facts

and circumstances?

RFC 15. Should the Commission require exchanges to publish summary

statistics, such as the number of recognized NEBFHs based on non-novel

facts and circumstances?

i. Requests for Commission Consideration

An exchange may elect to request the Commission review an NEBFH

application that raises novel or complex issues under proposed Sec.

150.9(a)(8), using the process set forth in proposed Sec. 150.9(d),

discussed below.\149\ If an exchange makes a request pursuant to

proposed Sec. 150.9(a)(8), the Commission, as would be the case for an

exchange, would not be bound by a time limitation. This is because the

Commission proposes only that NEBFH applications be processed in a

timely manner.\150\ Essentially, this proposed provision largely

preserves the Commission's review process under current Sec.

1.47,\151\ except that a market participant first seeks recognition of

a NEBFH from an exchange.

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\149\ If the exchange determines to request under proposed Sec.

150.9(a)(8) that the Commission consider the application, the

exchange must, under proposed Sec. 150.9(a)(4)(v)(C), notify an

applicant in a timely manner that the exchange has requested that

the Commission review the application. This provision provides the

exchanges with the ability to request Commission review early in the

review process, rather than requiring the exchanges to process the

request, make a determination and only then begin the process of

Commission review provided for under proposed Sec. 150.9(d). The

Commission notes that although most of its reviews would occur after

the exchange makes its determination, the Commission could, as

provided for in proposed Sec. 150.9(d)(1), initiate its review, in

its discretion, at any time.

\150\ Novel facts and circumstances may present particularly

complex issues that could benefit from extended consideration, given

the Commission's current resource constraints.

\151\ 17 CFR 1.47.

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RFC 16. Does the proposed flexibility for exchanges to request

Commission review provide market participants with a sufficient process

for review of a potential NEBFH?

ii. Proposed Sec. 150.9(b)--Recordkeeping Requirements

Proposed Sec. 150.9(b) outlines recordkeeping requirements for

exchanges that elect to process non-enumerated bona fide hedge

applications under proposed Sec. 150.9(a). Exchanges must maintain

complete books and records of all activities relating to the processing

and disposition of applications in a manner consistent with the

Commission's existing general regulations regarding recordkeeping,\152\

with certain minor conforming changes. In consideration of the fact

that DCMs currently recognize NEBFHs for periods of up to a year and

that the proposal would require annual updates, the Commission proposes

that exchanges keep books and records until the termination, maturity,

or expiration date of any recognition of a NEBFH and for a period of

five years after such date. Five years should provide an adequate time

period for Commission reviews, whether that be a review of an

exchange's rule enforcement or a review of a market participant's

representations.

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\152\ Requirements regarding the keeping and inspection of all

books and records required to be kept by the Act or the Commission's

regulations are found at Sec. 1.31, 17 CFR 1.31. DCMs and SEFs are

already required to maintain records of their business activities in

accordance with the requirements of Sec. 1.31 and 17 CFR 38.951.

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Exchanges would be required to store and produce records pursuant

to current Sec. 1.31 of the Commission's regulations, and would be

subject to requests for information pursuant to other applicable

Commission regulations including, for example, Sec. 38.5. Consistent

with current Sec. 1.31,\153\ the Commission expects that these records

would be readily accessible until the termination, maturity, or

expiration date of the recognition and during the first two years of

the subsequent five year period.\154\ The Commission does not intend in

proposed Sec. 150.9(b)(1) to create any new obligation for an exchange

to record conversations with applicants, which includes their

representatives; however, the Commission does expect that an exchange

would preserve any written or electronic notes of verbal interactions

with such parties.

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\153\ Proposed Sec. 150.9(b) is analogous to the requirement in

Sec. 1.31 for records to be kept regarding any swap or related cash

forward transaction until the termination, maturity, expiration,

transfer, assignment, or novation date of such transaction and for a

period of five years after such date. 17 CFR 1.31(a)(1). Other

Commission requirements for swap record retention take a similar

approach: DCMs must retain required records with respect to each

swap throughout the life of the swap and for a period of at least

five years following the final termination of the swap, 17 CFR

45.2(c), and the records that exchanges are required to retain shall

be readily accessible throughout the life of the swap and for two

years following the final termination of the swap, 17 CFR

45.2(e)(1).

\154\ In addition, the Commission expects that records required

to be maintained by an exchange pursuant to this section would be

readily accessible during the pendency of any application, and for

two years following any disposition that did not recognize a

derivative position as a bona fide hedge.

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Finally, the Commission emphasizes that parties who avail

themselves of exemptions under proposed Sec. 150.3(a), as revised

herein, are subject to the recordkeeping requirements of Sec.

150.3(g), as well as requests from the Commission for additional

information under Sec. 150.3(h), each as proposed in the December 2013

position limits proposal. The Commission may request additional

information, for example, in connection with review of an

application.\155\

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\155\ In the December 2013 position limits proposal, persons

claiming exemptions under proposed Sec. 150.3 must still ``maintain

complete books and records concerning all details of their related

cash, forward, futures, options and swap positions and transactions.

Furthermore, such persons must make such books and records available

to the Commission upon request under proposed Sec. 150.3(h), which

would preserve the `special call' rule set forth in current 17 CFR

150.3(b).'' 78 FR 75741 (footnote omitted).

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iii. Proposed Sec. 150.9(c)--Exchange Reporting

The Commission proposes, in Sec. 150.9(c)(1), to require an

exchange that elects to process NEBFH applications to submit a weekly

report to the Commission. The proposed report would provide information

regarding each commodity derivative position recognized by the exchange

as an NEBFH during the course of the week. Information provided in the

report would include the identity of the applicant seeking such

recognition, the maximum size of the derivative position that is

recognized by the exchange as an NEBFH,\156\ and, to the extent that

the exchange determines to limit the size of such bona fide hedge

position under the exchange's own speculative position limits program,

the size of any limit established by the exchange.\157\ The Commission

envisions that the proposed report would specify the maximum size and/

or size limitations by contract month and/or type of limit (e.g. spot

month, single month, or all-months-combined), as applicable.\158\ The

proposed report would also provide information regarding any revocation

of,

[[Page 38475]]

or modification to the terms and conditions of, a prior determination

by the exchange to recognize a commodity derivative position as an

NEBFH. In addition, the report would include any summary of a type of

recognized NEBFH that was, during the course of the week, published or

revised on the exchange's Web site pursuant to proposed Sec.

150.9(a)(7).

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\156\ An exchange could determine to recognize all, or a

portion, of the commodity derivative position in respect of which an

application for recognition has been submitted, as an NEBFH,

provided that such determination is made in accordance with the

requirements of proposed Sec. 150.9 and is consistent with the Act

and the Commission's regulations.

\157\ As proposed in the December 2013 position limits proposal,

Sec. 150.5(a)(2)(iii) provides, inter alia, that for any commodity

derivative contract that is subject to a speculative position limit

under Sec. 150.2, an exchange may limit bona fide hedging positions

which the exchange determines are not in accord with sound

commercial practices, or which exceed an amount that may be

established and liquidated in an orderly fashion. Such proposal

largely mirrors the second half of current Sec. 150.5(d), although

updated to specify DCMs instead of ``contract markets'' as well as

to include SEFs.

\158\ An exchange could determine to recognize all, or a

portion, of the commodity derivative position in respect of which an

application for recognition has been submitted, as an NEBFH, for

different contract months or different types of limits (e.g., a

separate limit level for the spot month).

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The proposed weekly report would support the Commission's

surveillance program by facilitating the tracking of NEBFHs recognized

by exchanges,\159\ keeping the Commission informed of the manner in

which an exchange is administering its procedures for recognizing such

NEBFHs. For example, the report would make available to the Commission,

on a regular basis, the summaries of types of recognized NEBFHs that an

exchange posts to its Web site pursuant to proposed Sec. 150.9(a)(7).

This would facilitate any review by the Commission of such summaries,

pursuant to proposed Sec. 150.9(e), and would help to ensure, if the

Commission determines that revisions to a summary are necessary, that

such revisions are carried out in a timely manner by the exchange.

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\159\ The Commission believes that the exchange's assignment of

a unique identifier to each of the non-enumerated bona fide hedge

applications that the exchange receives, and, separately, the

exchange's assignment of a unique identifier to each type of

commodity derivative position that the exchange recognizes as an

NEBFH, would assist the Commission's tracking process. Accordingly,

the Commission suggests that, as a ``best practice,'' the exchange's

procedures for processing NEBFH applications contemplate the

assignment of such unique identifiers. Pursuant to proposed Sec.

150.9(c)(1)(i), an exchange that assigns such unique identifiers

would be required to include the identifiers in the exchange's

weekly report to the Commission.

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In certain instances, information included in the proposed weekly

report may prompt the Commission to request records required to be

maintained by an exchange pursuant to proposed Sec. 150.9(b). For

example, it is proposed that, for each derivative position recognized

by the exchange as an NEBFH, or any revocation or modification of such

recognition, the report would include a concise summary of the

applicant's activity in the cash markets for the commodity underlying

the position. It is the Commission's expectation that this summary

would focus on the facts and circumstances upon which an exchange based

its determination to recognize a commodity derivative position as an

NEBFH, or to revoke or modify such recognition. In light of the

information provided in the summary, or any other information included

in the proposed weekly report regarding the position, the Commission

may decide that it is appropriate to request the exchange's complete

record of the application for recognition of the position as an NEBFH--

in order to determine, for example, whether the application presents

novel or complex issues that merit additional analysis pursuant to

proposed Sec. 150.9(d)(2), or to evaluate whether the disposition of

the application by the exchange was consistent with section 4a(c) of

the Act and the general definition of bona fide hedging position in

Sec. 150.1.

Proposed Sec. 150.9(c)(2) would require an exchange to submit to

the Commission any report made to the exchange by an applicant,

pursuant to proposed Sec. 150.9(a)(6), notifying the exchange that the

applicant owns or controls a commodity derivative position that the

exchange has recognized as an NEBFH.\160\ Unless the Commission

instructs otherwise,\161\ the exchange would be required to submit such

applicant reports to the Commission no less frequently than

monthly.\162\ The exchange's submission of these reports would provide

the Commission with notice that an applicant has taken a commodity

derivative position that the exchange has recognized as an NEBFH, and

would also show the applicant's offsetting positions in the cash

markets. Requiring an exchange to submit these applicant reports to the

Commission would therefore support the Commission's surveillance

program, by facilitating the tracking of NEBFHs recognized by the

exchange, and helping the Commission to ensure that an applicant's

activities conform to the terms of recognition that the exchange has

established.

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\160\ Proposed Sec. 150.9(a)(6) would require an exchange to

have in place rules requiring an applicant to report to the exchange

when the applicant owns, holds or controls a commodity derivative

position that the exchange has recognized as an NEBFH, and for the

applicant to report its offsetting cash positions. Pursuant to

proposed Sec. 150.9(a)(6), such rules must require an applicant to

update and maintain the accuracy of any such report to the exchange.

Accordingly, a exchange's submission to the Commission pursuant to

proposed Sec. 150.9(c)(2) would be expected to include any updates,

corrections or other modifications made by an applicant to a report

previously submitted to the exchange.

\161\ The Commission proposes, in Sec. 150.9(f)(1)(ii), to

delegate to the Director of the Commission's Division of Market

Oversight, or such other employee or employees as the Director may

designate from time to time, the authority to provide instructions

regarding the submission to the Commission of information required

to be reported by an exchange pursuant to proposed Sec. 150.9(c).

\162\ Proposed Sec. 150.9(c)(2) addresses the submission by the

exchange of applicant reports to the Commission. The timeframe

within which an applicant would be required to report to the

exchange that the applicant owns or controls a commodity derivative

position that the exchange has recognized as an NEBFH, would be

established by the exchange in its rules, as appropriate and in

accordance with proposed Sec. 150.9(a)(6). An exchange could decide

to require such a report from an applicant more frequently than

monthly.

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Proposed Sec. 150.9(c)(3)(i) and (ii) would require an exchange,

unless instructed otherwise by the Commission,\163\ to submit weekly

reports under proposed Sec. 150.9(c)(1), and applicant reports under

proposed Sec. 150.9(c)(2). Proposed Sec. 150.9(c)(3)(i) and (ii)

contemplate that, in order to facilitate the processing of such

reports, and the analysis of the information contained therein, the

Commission will establish reporting and transmission standards, and may

require reports to be submitted to the Commission using an electronic

data format, coding structure and electronic data transmission

procedures approved in writing by the Commission, as specified on the

Forms and Submissions page at www.cftc.gov.\164\ Proposed Sec.

150.9(c)(3)(iii) would require such reports to be submitted to the

Commission no later than 9:00 a.m. Eastern time on the third business

day following the report date, unless the exchange is otherwise

instructed by the Commission.\165\

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\163\ The Commission proposes to delegate to the Director of the

Commission's Division of Market Oversight, or such other employee or

employees as the Director may designate from time to time, the

authority to provide instructions for such submissions in proposed

Sec. 150.9(f)(1)(ii).

\164\ The Commission proposes, in Sec. 150.9(f)(1)(ii), to

delegate to the Director of the Commission's Division of Market

Oversight, or such other employee or employees as the Director may

designate from time to time, the authority to specify on the Forms

and Submissions page at www.cftc.gov the manner for submitting to

the Commission information required to be reported by an exchange

pursuant to proposed Sec. 150.9(c), and to determine the format,

coding structure and electronic data transmission procedures for

submitting such information.

\165\ Proposed Sec. 150.9(c)(2) would require reports submitted

to an exchange pursuant to proposed Sec. 150.9(a)(6), from

applicants owning or controlling commodity derivative positions that

the exchange has recognized as NEBFHs, to be submitted to the

Commission no less frequently than monthly. For purposes of proposed

Sec. 150.9(c)(2), the timeframe set forth in proposed Sec.

150.9(c)(3)(iii) would be calculated from the date of a exchange's

submission to the Commission, and not from the date of an

applicant's report to the exchange.

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RFC 17. The Commission requests comment on all aspects of the

proposed reporting requirements.

iv. Proposed Sec. 150.9(d)--Review of Applications by the Commission

One participant at the June 19, 2014 Roundtable on Position Limits

commented that if the Commission were to permit exchanges to administer

a process for NEBFHs, the Commission should continue to do ``a certain

amount

[[Page 38476]]

of de novo analysis and review.'' \166\ The Commission agrees. Proposed

Sec. 150.9(d) provides for Commission review of applications to ensure

that the processes administered by the exchange, as well as the results

of such processes, are consistent with the requirements of CEA section

4a(c) of the Act and the Commission's regulations thereunder.\167\ The

Commission proposes to review records required to be maintained by an

exchange pursuant to proposed Sec. 150.9(b); however, the Commission

may request additional information under proposed Sec. 150.9(d)(1)(ii)

if, for example, the Commission finds additional information is needed

for its own review.

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\166\ John Parsons, Roundtable on Position Limits, June 19,

2014, transcript at p. 135.

\167\ See supra note 66 and accompanying text. As noted above,

under the proposal, the SRO's recognition is tentative, because the

Commission would reserve the power to review the recognition,

subject to the reasonably fixed statutory standards in CEA section

4a(c)(2) (directing the CFTC to define the term bona fide hedging

position) that are incorporated into the Commission's proposed

general definition of bona fide hedging position in Sec. 150.1. The

SRO's recognition would also be constrained by the SRO's rules,

which would be subject to CFTC review under the proposal. The SROs

are parties subject to Commission authority, their rules are subject

to Commission review and their actions are subject to Commission de

novo review under the proposal--SRO rules and actions may be changed

by the Commission at any time. In addition, it should be noted that

the exchange is required to make its determination consistent with

both CEA section 4a(c) and the Commission's general definition of

bona fide hedging position in Sec. 150.1. Further, the Commission

notes that CEA section 4a(c)(1) requires a position to be shown to

be bona fide as defined by the Commission.

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The Commission could decide to review a pending application prior

to disposition by an exchange, but anticipates that it will most likely

review applications after some action has already been taken by an

exchange. The Commission's proposal in Sec. 150.9(d)(2) and (3)

requires the Commission to notify the exchange and the applicable

applicant that they have 10 business days to provide any supplemental

information. This approach provides the exchanges and the particular

market participant with an opportunity to respond to any issues raised

by the Commission.

During the period of any Commission review of an application, an

applicant could continue to rely upon any recognition previously

granted by the exchange. If the Commission determines that remediation

is necessary, the Commission would provide for a commercially

reasonable amount of time for the market participant to comply with

limits after announcement of the Commission's decision under proposed

Sec. 150.9(d)(4). In determining a commercially reasonable amount of

time, the Commission may consider factors such as current market

conditions and the protection of price discovery in the market.\168\

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\168\ In the December 2013 position limits proposal, when

discussing the provision of a commercially reasonable time period as

necessary to exit the market in an orderly manner, the Commission

stated that, generally, it ``believes such time period would be less

than one business day.'' 78 FR 75680 at 75713.

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RFC 18. The Commission requests comments on all aspects of the

proposed review process.

v. Proposed Sec. 150.9(e)--Commission Review of Summaries

While the Commission proposes to rely on the expertise of the

exchanges to summarize and post executive summaries of NEBFHs to their

respective Web sites under proposed Sec. 150.9(a)(7), it also

proposes, in Sec. 150.9(e), to review such executive summaries to

ensure they provide adequate disclosure to market participants of the

potential availability of relief from speculative position limits. The

Commission believes that an adequate disclosure would include generic

facts and circumstances sufficient to alert similarly situated market

participants to the possibility of receiving recognition of a NEBFH.

Such market participants may use this information to help evaluate

whether to apply for recognition of a NEBFH. Thus, adequate disclosure

should help ensure fair and open access to the application process. Due

to resource constraints, the Commission may not be able to pre-clear

each summary, so the Commission proposes to spot check executive

summaries after the fact.

E. Process for Exemption From Position Limits for Certain Spread

Positions

1. Background

The Commission proposes to permit exchanges, by rule, to exempt

from federal position limits certain spread transactions, as authorized

by CEA section 4a(a)(1),\169\ and in light of the provisions of CEA

section 4a(a)(3)(B) and CEA section 4a(c)(2)(B).\170\ In particular,

CEA section 4a(a)(1) provides the Commission with authority to exempt

from position limits transactions normally known to the trade as

``spreads'' or ``straddles'' or ``arbitrage'' or to fix limits for such

transactions or positions different from limits fixed for other

transactions or positions. The Dodd-Frank Act amended the CEA by adding

section 4a(a)(3)(B), which now directs the Commission, in establishing

position limits, to ensure, to the maximum extent practicable and in

its discretion, ``sufficient market liquidity for bona fide hedgers.''

\171\ In addition, the Dodd-Frank Act amendments to the CEA in section

4a(c)(2)(B) limited the definition of a bona fide hedge to only those

positions (in addition to those included under CEA section 4a(c)(2)(A))

\172\ resulting from a swap that was executed opposite a counterparty

for which the transaction would qualify as a bona fide hedging

transaction, in the event the party to the swap is not itself using the

swap as a bona fide hedging transaction. In this regard, the Commission

interprets this statutory definition to preclude spread exemptions for

a swap position that was executed opposite a counterparty for which the

transaction would not qualify as a bona fide hedging transaction.

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\169\ 7 U.S.C. 6a(a)(1) (authorizing the Commission to exempt

transactions normally known to the trade as ``spreads''). DCMs

currently process applications for exemptions from exchange-set

position limits for certain spread positions pursuant to CFMA-era

regulatory parameters. See note 101 for further background.

It should be noted that, in current Sec. 150.3(a)(3), the

Commission exempts spread positions ``between single months of a

futures contract and/or, on a futures-equivalent basis, options

thereon, outside of the spread month, in the same crop year,''

subject to certain limitations. 17 CFR 150.3(a)(3).

\170\ 7 U.S.C. 6a(a)(3)(B) and 7 U.S.C. 6a(c)(2)(B),

respectively.

\171\ CEA section 4a(a)(3)(B) also directs the Commission, in

establishing position limits, to diminish, eliminate, or prevent

excessive speculation; to deter and prevent market manipulation,

squeezes, and corners; and to ensure that the price discovery

function of the underlying market is not disrupted.

\172\ 7 U.S.C. 6a(c)(2)(A). As explained above in note 66, CEA

section 4a(c)(2) generally requires the Commission to define a bona

fide hedging position as a position that in CEA section 4a(c)(2)(A):

Meets three tests (a position (1) is a substitute for activity in

the physical marketing channel, (2) is economically appropriate to

the reduction of risk, and (3) arises from the potential change in

value of current or anticipated assets, liabilities or services);

or, in CEA section 4a(c)(2)(B), reduces the risk of a swap that was

executed opposite a counterparty for which such swap would meet the

three tests.

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Prior to the passage of the Dodd-Frank Act, the Commission

exercised its exemptive authority pertaining to spread transactions in

promulgating current Sec. 150.3. Current Sec. 150.3 provides that the

position limits set in Sec. 150.2 may be exceeded to the extent such

positions are spread or arbitrage positions between single months of a

futures contract and/or, on a futures-equivalent basis, options

thereon, outside of the spot month, in the same crop year; provided,

however, that such spread or arbitrage positions, when combined with

any other net positions in the single month, do not exceed the all-

months limit set forth in Sec. 150.2. In addition, the Commission has

permitted DCMs, in setting their own position

[[Page 38477]]

limits under the terms of current Sec. 150.5(a), to exempt spread,

straddle or arbitrage positions or to fix limits that apply to such

positions which are different from limits fixed for other

positions.\173\

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\173\ Current Sec. 150.5 applies as non-exclusive guidance and

acceptable practices for compliance with DCM core principle 5. See

December 2013 position limits proposal, 78 FR at 75750-2.

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The December 2013 position limits proposal deleted the exemption in

current Sec. 150.3(a)(3) for spread or arbitrage positions between

single months of a futures contract or options thereon, outside the

spot month; the Commission instead proposed to maintain the current

practice in Sec. 150.2 of setting single-month limits at the same

levels as all-months limits, rendering the ``spread'' exemption

unnecessary.\174\ In particular, the spread exemption set forth in

current Sec. 150.3(a)(3) permits a spread trader to exceed single

month limits only to the extent of the all months limit. Since Sec.

150.2 as proposed in the December 2013 position limits proposal sets

single month limits at the same level as all months limits, the

existing spread exemption no longer provides useful relief.

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\174\ December 2013 position limits proposal, 78 FR at 75736.

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Further, the December 2013 position limits proposal would codify

guidance in proposed Sec. 150.5(a)(2)(ii) to allow an exchange to

grant exemptions from exchange-set position limits for intramarket and

intermarket spread positions (as those terms are defined in Sec. 150.1

as proposed in the December 2013 position limits proposal) involving

commodity derivative contracts subject to the federal limits. To be

eligible for exemption under Sec. 150.5(a)(2)(ii) as proposed in the

December 2013 position limits proposal, intermarket and intramarket

spread positions would have to be outside of the spot month for

physical delivery contracts, and intramarket spread positions could not

exceed the federal all-months limit when combined with any other net

positions in the single month. As proposed in the December 2013

position limits proposal, Sec. 150.5(a)(2)(iii) would require traders

to apply to the exchange for any exemption, including spread

exemptions, from its speculative position limit rules.

Several commenters have requested that the Commission provide a

spread exemption to federal position limits.\175\ Of these commenters,

most urged the Commission to recognize spread exemptions in the spot

month as well as non-spot months.\176\ Several of these commenters

noted that the Commission's proposal would permit exchanges to grant

spread exemptions for exchange-set limits in commodity derivative

contracts subject to Federal limits, and recommended that the

Commission establish a process for granting such spread exemptions for

purposes of Federal limits.\177\

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\175\ See, e.g., CL-CMC-59634 at 15; Olam International Ltd. on

February 10, 2014 (``CL-Olam-59658'') at 7; CME Group on February

10, 2014 (``CL-CME -59718'') at 69-71; Citadel LLC on February 10,

2014 (``CL-Citadel-59717'') at 8, 9; Armajaro Asset Management

(``Amajaro'') on February 10, 2014 (``CL-Armajaro-59729'') at 2; ICE

Futures U.S. on February 10, 2014 (``CL-ICEUS-59645'') at 8-10.

\176\ See CL-CMC-59634 at 15; CL-Olam-59658 at 7; CL-CME-59718

at 71; CL-Armajaro-59729 at 2; CL-ICEUS-59645 at 8-10.

\177\ See CL-Olam-59658 at 7; CL-CME-59718 at 71; CL-ICEUS-59645

at 10.

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In response to these comments, the Commission now proposes to

permit exchanges to process and grant applications for spread

exemptions from federal position limits. Most, if not all, DCMs already

have rules in place to process and grant applications for spread

exemptions from exchange-set position limits pursuant to Part 38 of the

Commission's regulations (in particular, current Sec. Sec. 38.300 and

38.301) and current Sec. 150.5. As noted above, the Commission has a

long history of overseeing the performance of the DCMs in granting

appropriate spread exemptions under current exchange rules regarding

exchange-set position limits and believes that it would be efficient,

and in the best interest of the markets, in light of current resource

constraints, to rely on the exchanges to process applications for

spread exemptions from federal position limits. In addition, the

Commission observes because many market participants may be familiar

with current DCM practices regarding spread exemptions, permitting DCMs

to build on current practice may lower the burden on market

participants and reduce duplicative filings at the exchanges and the

Commission. As noted, this plan would permit exchanges to provide

market participants with spread exemptions, pursuant to exchange rules

submitted to the Commission; however, the Commission would retain the

authority to review--and, if necessary, reverse--the exchanges'

actions.

RFC 19. Would permitting exchanges to process applications for

spread exemptions from federal limits, subject to Commission review,

provide for an efficient implementation of the Commission's statutory

authority to exempt such spread positions?

2. Spread Exemption Proposal

i. Proposed Sec. 150.10(a)--Requirements for Application Process

The Commission contemplates in proposed Sec. 150.10(a)(1) that

exchanges may voluntarily elect to process spread exemption

applications, by filing new rules or rule amendments with the

Commission pursuant to part 40 of the Commission's regulations.\178\

The proposed process under Sec. 150.10(a) is substantially similar to

that described above for proposed Sec. 150.9(a). For example, proposed

Sec. 150.10(a)(1) provides that, with respect to a commodity

derivative position for which an exchange elects to process spread

exemption applications, (i) the exchange must list for trading at least

one component of the spread or must list for trading at least one

contract that is a referenced contract included in at least one

component of the spread; and (ii) any such exchange contract must be

actively traded and subject to position limits for at least one year on

that exchange. As noted with respect to the process outlined above for

proposed Sec. 150.9(a), the Commission believes it is appropriate that

an exchange may process spread exemptions only if it has at least one

year of experience overseeing exchange-set position limits in an

actively traded referenced contract that is in the same commodity as

that of at least one component of the spread. The Commission believes

that an exchange may not be familiar enough with the specific needs and

differing practices of the participants in those markets for which an

individual exchange does not list any actively traded referenced

contract in a particular commodity. If a component of a spread is not

actively traded on an exchange that elects to process spread exemption

applications, such exchange might not be incentivized to protect or

manage the relevant commodity market, and the interests of such

exchange might not be aligned with the policy objectives of the

Commission as expressed in CEA section 4a(a)(3)(B). The Commission

expects that an individual exchange will describe how it will determine

whether a particular component of a spread is actively traded in its

rule submission, based on its familiarity with the specific needs and

differing practices of the participants in the relevant market.

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\178\ See note 63, regarding Commission authority to recognize

spreads under CEA section 4a(a)(1). Any action of the exchange to

recognize a spread, pursuant to rules filed with the Commission,

would be subject to review and revocation by the Commission.

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[[Page 38478]]

Consistent with the restrictions regarding the offset of risks

arising from a swap position in CEA section 4a(c)(2)(B), proposed Sec.

150.10(a)(1) would not permit an exchange to recognize a spread between

a commodity index contract and one or more referenced contracts. That

is, an exchange may not grant a spread exemption where a bona fide

hedge position could not be recognized for a pass through swap offset

of a commodity index contract.\179\

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\179\ This proposal is consistent with the Commission's

interpretation in the December 2013 position limits proposal that

CEA section 4a(c)(2)(b) is a mandate from Congress to narrow the

scope of what constitutes a bona fide hedge in the context of index

trading activities. ``Financial products are not substitutes for

positions taken or to be taken in a physical marketing channel.

Thus, the offset of financial risks from financial products is

inconsistent with the proposed definition of bona fide hedging for

physical commodities.'' December 2013 position limits proposal, 78

FR at 75740. See also the discussion of the temporary substitute

test, id. at 75708-9.

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The Commission notes that for inter-commodity spreads in which

different components of the spread are traded on different exchanges,

the exemption granted by one exchange would be recognized by the

Commission as an exemption from federal limits for the applicable

referenced contract(s), but would not bind the exchange(s) that list

the other components of the spread to recognize the exemption for

purposes of that other exchange(s)' position limits. In such cases, a

trader seeking such inter-commodity spread exemptions would need to

apply separately for a spread exemption from each exchange-set position

limit.

Proposed Sec. 150.10(a)(2) specifies the type of spreads that an

exchange may exempt from position limits, including calendar spreads;

quality differential spreads; processing spreads (such as energy

``crack'' or soybean ``crush'' spreads); and product or by-product

differential spreads. This list is not exhaustive, but reflects common

types of spread activity that may enhance liquidity in commodity

derivative markets, thereby facilitating the ability of bona-fide

hedgers to put on and offset positions in those markets. For example,

trading activity in many commodity derivative markets is concentrated

in the nearby contract month, but a hedger may need to offset risk in

deferred months where derivative trading activity may be less active. A

calendar spread trader could provide such liquidity without exposing

himself or herself to the price risk inherent in an outright position

in a deferred month. Processing spreads can serve a similar function.

For example, a soybean processor may seek to hedge his or her

processing costs by entering into a ``crush'' spread, i.e., going long

soybeans and short soybean meal and oil. A speculator could facilitate

the hedger's ability to do such a transaction by entering into a

``reverse crush'' spread (i.e., going short soybeans and long soybean

meal and oil). Quality differential spreads, and product or by-product

differential spreads, may serve similar liquidity-enhancing functions

when spreading a position in an actively traded commodity derivatives

market such as CBOT Wheat against a position in another actively traded

market, such as MGEX Wheat.

The Commission anticipates that a spread exemption request might

include spreads that are ``legged in,'' that is, carried out in two

steps, or alternatively are ``combination trades,'' that is, all

components of the spread are executed simultaneously.

This proposal would not limit the granting of spread exemptions to

positions outside the spot month, unlike the existing spread exemption

provisions in current Sec. 150.3(a)(3), or in Sec. 150.5(a)(2)(ii) as

proposed in the December 2013 position limits proposal. The proposal

herein responds to specific requests of commenters to permit spread

exemptions in the spot month. For example, the CME recommended ``the

Commission reaffirm in DCMs the discretion to apply their knowledge of

individual commodity markets and their judgement, as to whether

allowing intermarket spread exemptions in the spot month for physical-

delivery contracts is appropriate.'' \180\

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\180\ See CL-CME-59718 at 71.

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The Commission proposes to revise the December 2013 position limits

proposal in the manner described above because, as noted in the

examples above, permitting spread exemptions in the spot month would

further one of the four policy objectives set forth in section

4a(a)(3)(b) of the Act: To ensure sufficient market liquidity for bona

fide hedgers.\181\ This policy objective is incorporated into the

proposal in its requirements that: (i) The applicant provide detailed

information demonstrating why the spread position should be exempted

from position limits, including how the exemption would further the

purposes of CEA section 4a(a)(3)(B); \182\ and (ii) the exchange

determines whether the spread position (for which a market participant

was seeking an exemption) would further the purposes of CEA section

4a(a)(3)(B).\183\ Moreover, the Commission retains the ability to

review the exchange rules as well as to review how an exchange enforces

those rules.\184\

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\181\ CEA section 4a(a)(3)(B)(iii); 7 U.S.C. 6a(a)(3)(B)(iii).

See also the discussion of proposed Sec. 150.10(a)(3)(ii), below.

\182\ See proposed Sec. 150.10(a)(3)(ii).

\183\ See proposed Sec. 150.10(a)(4)(vi).

\184\ The Commission could, for example, revoke or confirm

exchange-granted exemptions.

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The Commission, however, remains concerned, among other things,

about protecting the price discovery process in the core referenced

futures contracts, particularly as those contracts approach expiration.

Accordingly, as an alternative, the Commission is also considering

whether to prohibit an exchange from granting spread exemptions that

would be applicable during the lesser of the last five days of trading

or the time period for the spot month.

RFC 20: Are there concerns regarding the applicability of spread

exemptions in the spot month that the Commission should consider?

Should the Commission, parallel to the requirements of current Sec.

1.3(z)(2), provide that such spread positions not be exempted during

the lesser of the last five days of trading or the time period for the

spot month? \185\

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\185\ See also supra notes 56 and 132 and accompanying text.

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RFC 21: If the Commission permits exchanges to grant spread

positions applicable in the spot month, should recognition of NEBFH

positions be conditioned upon additional filings similar to the

proposed Form 504 that is required for the proposed conditional spot

month limit exemption? \186\ Proposed Form 504 would require additional

information on the market participant's cash market holdings for each

day of the spot month period. Under this alternative, market

participants would submit daily cash position information to an

exchange in a format determined by the exchange, which would then be

required to forward that information to the Commission in a process

similar to that proposed under Sec. 150.10(c)(2).

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\186\ The conditional spot month limit exemption and the related

Form 504 were discussed in the December 2013 position limits

proposal (78 FR 75680 at 75736-8). A copy of the proposed form was

submitted to the Federal Register (id. at 75803-8) to ensure the

public had the opportunity to comment on the information required by

the proposed form. The Commission estimated the number of market

participants that would be required to file the form in the December

2013 position limits proposal (id. at 75783). Commenters are

encouraged to review and comment on proposed Form 504 in the context

of this current proposal.

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RFC 22: Alternatively, if the Commission permits exchanges to grant

[[Page 38479]]

spread exemptions applicable in the spot month, should the Commission

require market participants to file proposed Form 504 with the

Commission? Under this alternative, the relevant cash market

information would be submitted directly to the Commission, eliminating

the need for the exchange to intermediate. The Commission would adjust

the title of proposed Form 504 to clarify that the form would be used

for all daily spot month cash position reporting purposes, not just the

proposed requirements of the conditional spot month limit exemption in

proposed Sec. 150.3(c).

Proposed 150.10(a)(3) sets forth a core set of information and

materials that all applicants must submit to enable an exchange to

determine, and the Commission to verify, whether the facts and

circumstances attendant to a position further the policy objectives of

CEA section 4a(a)(3)(B). In particular, the applicant must demonstrate,

and the exchange must determine, that exempting the spread position

from position limits would, to the maximum extent practicable, ensure

sufficient market liquidity for bona fide hedgers, but not unduly

reduce the effectiveness of position limits to diminish, eliminate or

prevent excessive speculation; deter and prevent market manipulation,

squeezes, and corners; and ensure that the price discovery function of

the underlying market is not disrupted.\187\

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\187\ See also infra note 192 and accompanying text (describing

the DCM's responsibility under its application process to make this

determination in a timely manner).

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One DCM, ICE Futures U.S., currently grants certain types of spread

exemptions that the Commission is concerned may not be consistent with

these policy objectives.\188\ ICE Futures U.S. allows ``cash-and-

carry'' spread exemptions to exchange-set limits, which permit a market

participant to hold a long position greater than the speculative limit

in the spot month and an equivalent short position in the following

month in order to guarantee a return that, at minimum, covers its

carrying charges, i.e., the cost of financing, insuring, and storing

the physical inventory until the next expiration.\189\ Market

participants are able to take physical delivery in the nearby month and

redeliver the same product in a deferred month, often at a profit. The

Commission notes that while market participants are permitted to re-

deliver the physical commodity, they are under no obligation to do so.

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\188\ See ICE Futures U.S. Rule 6.29(e).

\189\ Carrying charges include insurance, storage fees, and

financing costs, as well as other costs such as aging discounts that

are specific to individual commodities. The ICE Futures U.S. rules

require an applicant to provide: (i) Its cost of carry; (ii) the

minimum spread at which the applicant will enter into a straddle

position and which would result in an profit for the applicant; and

(iii) the quantity of stocks in exchange-licensed warehouses that it

already owns. The applicant's entire long position carried into the

notice period must have been put on as a spread at a differential

that covers the applicant's cost of carry. See Rule Enforcement

Review of ICE Futures U.S., July 22, 2014 (``ICE Futures U.S. Rule

Enforcement Review''), at 44-45, available at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/dcmruleenf.

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ICE Futures U.S.'s rules condition the cash-and-carry spread

exemption upon the applicant's agreement that ``before the price of the

nearby contract month rises to a premium to the second (2nd) contract

month, it will liquidate all long positions in the nearby contract

month.'' \190\ The Commission understands that ICE Futures U.S.

requires traders to provide information about their expected cost of

carry, which is used by the exchange to determine the levels by which

the trader has to reduce the position. Those exit points are then

communicated to the applicant when the exchange responds to the

trader's hedge exemption request.

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\190\ ICE Futures U.S. Rule 6.29(e) (at the time of the target

period of the ICE Futures U.S. Rule Enforcement Review (June 15,

2011 to June 15, 2012), the cash-and-carry provision currently found

in ICE Futures U.S. Rule 6.29(e) was found in ICE Futures U.S. Rule

6.27(e)). Further, under the exchange's rules, additional conditions

may also apply.

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The Commission is considering whether to impose on the exchange a

requirement to ensure exit points in cash-and-carry spread exemptions

are appropriate to facilitate an orderly liquidation in the expiring

futures contract. The Commission is concerned that a large demand for

delivery on cash and carry positions may distort the price of the

expiring futures price upwards. This may particularly be a concern in

those commodity markets where the cash spot price is discovered in the

expiring futures contract.

In a recent Rule Enforcement Review, ICE Futures U.S. opined that

such exemptions are ``beneficial for the market, particularly when

there are plentiful warehouse stocks, which typically is the only time

when the opportunity exists to utilize the exemption,'' maintaining

that the exchange's rules and procedures are effective in ensuring

orderly liquidations.\191\ The Commission remains concerned, however,

about these exemptions and their impact on the spot month price. The

Commission is still reviewing the effectiveness of the exchange's cash-

and-carry spread exemptions and the procedure by which they are

granted.

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\191\ ICE Futures U.S. Rule Enforcement Review, at 45.

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As an alternative to providing exchanges with discretion to

consider granting cash-and-carry spread exemptions, the Commission is

considering prohibiting cash-and-carry spread exemptions to position

limits. In this regard, the Commission does not grant such exemptions

to current federal position limits. As another alternative, the

Commission is considering permitting exchanges to grant cash-and-carry

spread exemptions, but would require suitable safeguards be placed on

such exemptions. For example, the Commission could require cash-and-

carry spread exemptions be conditioned on a market participant reducing

positions below speculative limit levels in a timely manner once

current market prices no longer permit entry into a full carry

transaction, rather than the less stringent condition of ICE Futures

U.S. that a trader reduce positions ``before the price of the nearby

contract month rises to a premium to the second (2nd) contract month.''

RFC 23: Do cash-and-carry spread exemptions further the policy

objectives of the Act, as outlined in proposed Sec. 150.10(a)(3)? Why

or why not? Do cash and carry spread exemptions facilitate an orderly

liquidation? Do these exemptions impede convergence or distort the

price of the expiring futures contract?

RFC 24: If cash-and-carry spread exemptions are allowed, what

conditions should be placed on the exemptions? For example, on what

basis should a trader be required to exit futures positions above

position limit levels? Should such exemptions be conditioned, for

example, to require a market participant to reduce the positions below

speculative limit levels in a timely manner once current market prices

no longer permit entry into a full carry transaction? Are there other

types of spread exemptions that may not further the policy objectives

of CEA section 4a and, thus, should be prohibited or conditioned?

RFC 25: With cash-and-carry spread exemptions still under review by

the Commission, should the proposed rules allow such exemptions to be

granted under proposed Sec. 150.10? Why or why not?

RFC 26: If the proposed rules do not prohibit such exemptions, an

exchange could determine that cash-and-carry spread exemptions--or

another type of spread exemption--further the policy objectives in

proposed Sec. 150.10(a)(3) and so begin to grant such exemptions from

federal position limits. If, after finishing its review, the Commission

[[Page 38480]]

disagrees with the exchange's determination, is the proposed process in

Sec. 150.10(d) for reviewing exemptions sufficient to address any

concerns raised?

Under the proposal, an exchange's rules would require an applicant

to submit to the exchange a core set of information and materials that

would include, at a minimum: (i) A description of the spread position

for which the application is submitted, including details on all

components of the spread; (ii) detailed information to demonstrate why

the spread position should be exempted from position limits, including

how the exemption would further the purposes of CEA section

4a(a)(3)(B); and (iii) a statement concerning the maximum size of all

gross positions in derivative contracts to be acquired by the applicant

during the year after the application is submitted. Further, an

exchange would not be permitted to grant a spread exemption request

that would be contrary to the requirements for a pass-through swap

offset position in CEA section 4a(c)(2)(B), which the Commission

interprets to preclude spread exemptions for a swap position that was

executed opposite a counterparty for which the transaction would not

qualify as a bona fide hedging transaction. The requirement that an

applicant specify a maximum size of all gross positions to be acquired

will enable an exchange to more effectively set a cap on a market

participant's spread position. Such a cap could reasonably take into

account the specific liquidity needs of the marketplace and the ability

of the spread position to be put on and offset in an orderly fashion

and without causing market disruptions. The Commission expects that an

exchange would be particularly attentive to the size of any component

of a spread position it permits to be held in the spot month in light

of its obligation to consider, in granting such spread exemptions, the

goals of deterring and preventing market manipulation, squeezes, and

corners.

RFC 27: Does the application process solicit sufficient information

for an exchange to consider whether a spread exemption would, to the

maximum extent practicable, further the policy objectives of CEA

section 4a(a)(3)(B)? For example, how would an exchange determine

whether an applicant for a spread exemption may provide liquidity, such

that the goal of ensuring sufficient market liquidity for bona-fide

hedgers would be furthered by the spread exemption?

RFC 28: How would exchanges oversee or monitor exemptions that have

been granted, and, if the exchange determines it necessary, revoke the

exemption?

Proposed Sec. 150.10(a)(4) sets forth certain timing requirements

that an exchange must include in its rules for the spread application

process. While these timing requirements are similar to those under

proposed Sec. 150.9(a)(4),\192\ the exchange under proposed Sec.

150.10(a)(4) must also determine in a timely manner whether the facts

and circumstances attendant to a position further the policy objectives

of CEA section 4a(a)(3)(B).\193\ Finally, the spread exemption

application processes proposed in Sec. 150.10(a)(5), (6), (7), and (8)

are all substantially similar to those proposed under Sec.

150.9(a)(5), (6), (7), and (8).

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\192\ For example, proposed 150.9(a)(4) provides that: (i) A

person intending to rely on a exchange's exemption from position

limits would be required to submit an application in advance and to

reapply at least on an annual basis; (ii) the exchange would be

required to notify an applicant in a timely manner whether the

position was exempted, and reasons for any rejection; and (iii) the

exchange would be able to revoke, at any time, any recognition

previously issued pursuant to proposed Sec. 150.9 if the exchange

determined the recognition was no longer in accord with section

4a(c) of the Act.

\193\ See supra note 171 and accompanying text.

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ii. Recordkeeping and Reporting Requirements, and Review of

Applications and Summaries by Commission

The proposed processes under Sec. 150.10(b) Recordkeeping, Sec.

150.10(c) Reports to the Commission; Sec. 150.10(d) Review of

Applications by the Commission; Sec. 150.10(e) Review of Summaries by

the Commission; and Sec. 150.10(f) Delegation of Authority to the

Director of the Division of Market Oversight are substantially similar

to the corresponding provisions in Sec. 150.9(b) through (f), as

described above.\194\ Hence, the Commission does not repeat the

discussion here.

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\194\ See the discussion of the NEBFH application process in

Sections II(C)(3)(ii)-(v) of the Supplementary Information above.

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RFC 29: Is it appropriate to have the same processes under Sec.

150.10(b) through (f) for spread exemptions as proposed for NEBFHs

outlined under Sec. 150.09(b) through (f)? If no, explain why and how

those processes should differ.

F. Recognition of Positions as Enumerated Anticipatory Bona Fide Hedges

1. Background

In the December 2013 position limits proposal, the Commission

proposed Sec. 150.7, requirements for anticipatory bona fide hedging

position exemptions,\195\ to replace current Sec. 1.48,\196\ which

provides requirements for classification of certain anticipatory bona

fide hedge positions under current Sec. 1.3(z)(2) (i)(B) or (ii)(C) of

the Commission's regulations. As proposed in the December 2013 position

limits proposal, Sec. 150.7 would require market participants to file

statements with the Commission regarding certain anticipatory hedges,

which would become effective absent Commission action or inquiry ten

days after submission.\197\ The Commission now proposes to supplement

the process proposed in the December 2013 position limits proposal by

allowing exchanges, as an alternative, to review requests for

recognition of such enumerated anticipatory bona fide hedging

exemptions pursuant to exchange rules submitted to the Commission.

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\195\ As proposed in the December 2013 position limits proposal,

Sec. 150.7 provides a process for recognition as bona fide hedge

positions for: Unfilled anticipated requirements, unsold anticipated

production, anticipated royalties, anticipated service contract

payments or receipts, or anticipatory cross-commodity hedges under

the provisions of paragraphs (3)(iii), (4)(i), (4)(iii), 4(iv) or

(5), respectively, of the definition of bona fide hedging position

in Sec. 150.1. These types of anticipatory positions do not

implicate commodity index contracts, in contrast to the positions

discussed in notes 134 and 180 and the accompanying text.

\196\ 17 CFR 1.48 (providing a process for persons to

demonstrate NEBFH falls within the scope of Sec. 1.3(z)(1)). As

noted in the December 2013 position limits proposal, ``On September

28, 2012, the District Court for the District of Columbia vacated

the part 151 Rulemaking with the exception of the amendments to

Sec. 150.2. 887 F. Supp. 2d 259 (D.D.C. 2012). Vacating the part

151 Rulemaking, with the exception of the amendments to Sec. 150.2,

means that as things stand now, it is as if the Commission had never

adopted any part of the part 151 Rulemaking other than the

amendments to Sec. 150.2.'' December 2013 position limits proposal,

78 FR at 75740, note 478.

Current Sec. 1.48 can be found at https://www.gpo.gov/fdsys/browse/collectionCfr.action?collectionCode=CFR&searchPath=Title+17%2FChapter+I%2FPart+1%2FSubjgrp&oldPath=Title+17%2FChapter+I%2FPart+1&isCollapsed=true&selectedYearFrom=2010&ycord=594.

\197\ See December 2013 position limits proposal, 78 FR at

75746.

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In response to the December 2013 position limits proposal, the

Commission has received comments that suggested that the exchanges

would be better equipped to recognize non-enumerated hedge positions

and anticipatory hedging positions.

For example, one commenter noted that the exchanges have a long

history of enforcing position limits and are in a much better position

than the Commission to judge the applicant's hedging needs and to set

an appropriate level for the hedge.\198\ According to another

commenter, providing the

[[Page 38481]]

exchanges with the ability to grant hedge exemptions for federal limits

in conjunction with the grant of an exchange hedge exemption would

create consistency and efficiency, and take advantage of the expertise

gained by exchanges in granting hedge exemptions from position limits

over many years.\199\ A third asserted that the proposed requirement to

file Form 704 is ``unduly burdensome and commercially impracticable,''

and requests that the Commission ``allow the exchanges to continue to

grant annual hedge exemptions, which do not include onerous reporting

requirements.'' \200\ A fourth commenter requested that the Commission

consider incorporating the proposed position limits regime into the

existing framework managed by the exchanges, stating that market

participants and exchanges alike are comfortable and have a unique

familiarity with the current futures-exchange-set position limits and

aggregation processes, and have developed an effective working

relationship.\201\ This commenter also stated its belief that the

current framework regarding hedge exemptions provides commercial market

participants with the efficacy and the timeliness needed to ensure they

are able to hedge their risks.\202\

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\198\ CL-AGA-60382 at 13.

\199\ PAAP on February 10, 2014 (``CL-PAAP-59664'') at 3.

\200\ BG Energy on February 10, 2014 (``CL-BG Energy-59656'') at

11.

\201\ EDF Trading on March 30, 2015 (``CL-EDF-60398'') at 3-4.

\202\ CL-EDF-60398 at 5.

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2. Enumerated Anticipatory Bona Fide Hedge Exemption Proposal

While the Commission continues to consider comments regarding

proposed Sec. 150.7, it is expected that a number of anticipatory bona

fide hedging positions will be enumerated in the final rule, as

proposed.\203\ In this current proposal, the Commission proposes that

exchanges, pursuant to exchange rules submitted to the Commission,

could review requests for recognition of such enumerated anticipatory

bona fide hedging exemptions, as an alternative to the process set

forth in the December 2013 position limits proposal that required

market participants to file a statement with the Commission.\204\

Similar to the current DCM rule framework and application process noted

above for the recognition of NEBFH positions for purposes of exchange

limits, most, if not all, DCMs already have some sort of framework and

application process allowing market participants to request exemptions

from exchange position limits for anticipatory bona fide hedge

positions.

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\203\ As noted above, the December 2013 position limits proposal

provided a process, under Sec. 150.7, for recognition as bona fide

hedging positions for unfilled anticipated requirements, unsold

anticipated production, anticipated royalties, anticipated service

contract payments or receipts, or anticipatory cross-commodity

hedges under the provisions of paragraphs (3)(iii), (4)(i),

(4)(iii), 4(iv) or (5), respectively, of the definition of bona fide

hedging position in Sec. 150.1. See supra note 196 and accompanying

text.

\204\ See December 2013 position limits proposal, 78 FR at

75746.

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Proposed Sec. 150.11 would permit exchanges to recognize certain

anticipatory bona fide hedge positions, such as unfilled anticipated

requirements, unsold anticipated production, anticipated royalties,

anticipated service contract payments or receipts, or anticipatory

cross-commodity hedges. Under proposed Sec. 150.11, market

participants could continue to work with exchanges to request the

exemption. In addition, proposed Sec. 150.11 would allow exchanges to

adopt a shorter timeline for processing the exemption applications than

under Sec. 150.7 as proposed in the December 2013 position limits

proposal. Under proposed Sec. 150.11, an exchange could potentially

recognize a position as a bona fide hedge in fewer than ten days after

filing. In contrast, Sec. 150.7 as proposed in the December 2013

position limits proposal, would provide the Commission with a full ten

days after receipt of a filing to reject the position as a bona fide

hedge before a filing would become effective.

The process under proposed Sec. 150.11(a) is like the process

under proposed Sec. 150.9(a) described above. For example, an exchange

with at least one year of experience and expertise administering

position limits could elect to adopt rules to recognize commodity

derivative positions as enumerated anticipatory bona fide hedges.

However, it is different from the process under proposed Sec. 150.9(a)

in that the Commission does not propose to permit separate processes

for applications based on novel versus non-novel facts and

circumstances. The Commission determined to define certain anticipatory

positions as enumerated bona fide hedges when it adopted current Sec.

1.3(z)(2). The December 2013 position limits proposal does not change

this determination. Consequently, the Commission does not anticipate

that applications for recognition of enumerated anticipatory bona fide

hedge positions would be based on novel facts and circumstances. For

the same reason, proposed Sec. 150.11(a) does not require exchanges to

post summaries of any enumerated anticipatory bona fide hedge

positions. Other simplifications follow from this difference.

In addition, the application process established by exchanges under

proposed Sec. 150.11(a) addresses the information exchanges should

elicit in the application process by citing to the information required

under Sec. 150.7(d) as proposed in the December 2013 position limits

proposal. Moreover, the reporting requirements for applicants under

proposed Sec. 150.11(a)(5) differ from the reporting requirements

under proposed Sec. 150.9(a)(6). Under proposed Sec. 150.11(a)(5),

applicants would be required to file a report with the Commission

pursuant to Sec. 150.7 as proposed in the December 2013 position

limits proposal and a copy with the exchange. Proposed Sec.

150.9(a)(6), on the other hand, requires the applicant to file reports

with the exchange recognizing the position, and additionally requires

under proposed Sec. 150.9(c)(2) that the exchange would provide such

information to the Commission on a monthly basis.

RFC 30: The Commission requests comments on all aspects of proposed

Sec. 150.11, including whether the Commission should consider any

other factors in addition to those listed in proposed Sec.

150.11(a)(1)(i), (ii), (iii), (iv) and (v).

Finally, in order to correct some errors, the Commission is

proposing technical edits to Sec. 150.7 as it was proposed in the

December 2013 position limits proposal. The reference to paragraph (f)

in the last sentence in Sec. 150.7(b) as proposed in the December 2013

position limits proposal should instead be a reference to paragraph

(h). And the introductory language to Sec. 150.7(h) as proposed in the

December 2013 position limits proposal, ``Sales or purchases of

commodity derivative contracts considered to be bona fide hedging

positions under paragraphs 3(iii)(A) or 4(i) of the bona fide hedging

position definition in Sec. 150.1 . . .'' should instead read as ``. .

. under paragraphs 3(iii)(A), 4(i), 4(iii) or 4(iv) of the bona fide

hedging position definition in Sec. 150.1, or any cross-commodity

hedges thereof, . . . .''

G. Delegation of Authority

The Commission proposes to delegate certain of its authorities

under proposed Sec. 150.9, Sec. 150.10 and Sec. 150.11 to the

Director of the Commission's Division of Market Oversight, or such

other employee or employees as the Director may designate from time to

time. Proposed Sec. 150.9(f)(1)(ii), Sec. 150.10(f)(1)(ii) and Sec.

150.11(e)(1)(ii)

[[Page 38482]]

would delegate the Commission's authority to the Division of Market

Oversight (``DMO'') to provide instructions regarding the submission of

information required to be reported to the Commission by an exchange,

and to specify the manner and determine the format, coding structure,

and electronic data transmission procedures for submitting such

information. Proposed Sec. 150.9(f)(1)(v) and Sec. 150.10(f)(1)(v)

would delegate the Commission's review authority under proposed Sec.

150.9(e) and Sec. 150.10(e), respectively, to DMO with respect to

summaries of types of recognized non-enumerated bona fide hedges, and

types of spread exemptions, that are required to be posted on an

exchange's Web site pursuant to proposed Sec. 150.9(a)(7) and Sec.

150.10(a)(7), respectively.

Proposed Sec. 150.9(f)(1)(i), Sec. 150.10(f)(1)(i) and Sec.

150.11(e)(1)(i) would delegate the Commission's authority to DMO to

agree to or reject a request by an exchange to consider an application

for recognition of an NEBFH or enumerated anticipatory bona fide hedge,

or an application for a spread exemption. Proposed Sec.

150.9(f)(1)(iii), Sec. 150.10(f)(1)(iii) and Sec. 150.11(e)(1)(iii)

would delegate the Commission's authority to review any application for

recognition of an NEBFH or enumerated anticipatory bona fide hedge, or

application for a spread exemption, and all records required to be

maintained by an exchange in connection with such application. Proposed

Sec. 150.9(f)(1)(iii), Sec. 150.10(f)(1)(iii) and Sec.

150.11(e)(1)(iii) would also delegate the Commission's authority to

request such records, and to request additional information in

connection with such application from the exchange or from the

applicant.

Proposed Sec. 150.9(f)(1)(iv) and Sec. 150.10(f)(1)(iv) would

delegate the Commission's authority, under proposed Sec. 150.9(d)(2)

and Sec. 150.10(d)(2), respectively, to determine that an application

for recognition of an NEBFH, or an application for a spread exemption,

requires additional analysis or review, and to provide notice to the

exchange and the particular applicant that they have 10 days to

supplement such application.

The Commission does not propose to delegate its authority under

proposed Sec. 150.9(d)(3) or Sec. 150.10(d)(3) to make a final

determination as to the exchange's disposition. The Commission believes

that if an exchange's disposition raises concerns regarding consistency

with the Act or presents novel or complex issues, then the Commission

should make the final determination, after taking into consideration

any supplemental information provided by the exchange or the applicant.

However, the Commission proposes, in Sec. 150.11(e)(iv), to

delegate its authority to determine, under proposed Sec. 150.11(d)(2),

that it is not appropriate to recognize a commodity derivative position

as an enumerated anticipatory bona fide hedge, or that the disposition

by an exchange of an application for such recognition is inconsistent

with the filing requirements of proposed Sec. 150.11(a)(2). The

delegation would also provide DMO with the authority, after any such

determination was made, to grant the applicant a reasonable amount of

time to liquidate its commodity derivative position or otherwise come

into compliance. This proposed combined delegation takes into account

that applications processed by an exchange under proposed Sec. 150.11

would be for positions that should satisfy the requirements for

enumerated hedges set forth in the Commission's rules, and should

therefore be less likely to raise novel issues of interpretation, or

novel issues with respect to consistency with the filing requirements

of proposed Sec. 150.11(a)(2), than applications processed under

proposed Sec. 150.9 or Sec. 150.10. Such delegation is consistent

with the Commission's longstanding delegation to DMO of its authority

to review applications for recognition of enumerated bona fide hedges

under current Sec. 1.48, as well as consistent with the more

streamlined approach to Commission review of enumerated anticipatory

bona fide hedge applications in proposed Sec. 150.7.

RFC 31: The Commission invites comments on its proposed delegation

of authority in Sec. 150.11(e)(iv), and on all other aspects of its

proposed delegation of authority in Sec. 150.9(f), Sec. 150.10(f) and

Sec. 150.11(e).

H. Related Changes to Sec. 150.3 and Sec. 150.5--Exemptions and

Exchange-Set Speculative Position Limits

In the December 2013 position limits proposal, the Commission

proposed to replace both current Sec. 150.3, which establishes

exemptions from federal position limits, and current Sec. 150.5(a),

which provides guidance to DCMs for exchange-set position limits. The

changes to Sec. 150.3 as proposed in the December 2013 position limits

proposal would have provided for recognition of enumerated bona fide

hedge positions, but would not have exempted any spread positions from

federal limits. For any commodity derivative contracts subject to

federal position limits, Sec. 150.5(a)(2) as proposed in the December

2013 position limits proposal would have established requirements under

which exchanges could recognize exemptions from exchange-set position

limits, including hedge exemptions and spread exemptions. Because the

Commission is now proposing to permit exchanges to recognize NEBFH

positions under proposed Sec. 150.9, to grant spread exemptions from

federal limits under proposed Sec. 150.10, and to recognize certain

enumerated anticipatory bona fide hedge positions under proposed Sec.

150.11, the Commission proposes corresponding changes to Sec. 150.3

\205\ and Sec. 150.5(a)(2).

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\205\ As noted above, in the regulatory text below where the

CFTC sets out the proposed changes to the CFR, the Commission has

designated certain appendices and subsections, such as appendices

(A) through (D), Sec. 150.3(a)(ii),Sec. 150.3(a)(iii), and Sec.

150.5(a)(3) through (6), among others, as ``[Reserved].'' For the

avoidance of doubt, the Commission is still reviewing comments

received on such reserved provisions and does not seek further

comment on such reserved provisions. See supra preamble Section II.

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Further, in the December 2013 position limits proposal, the

Commission proposed Sec. 150.5(b) to establish requirements and

acceptable practices for commodity derivative contracts not subject to

federal position limits. The Commission now proposes to revise Sec.

150.5(b)(5) as proposed in the December 2013 position limits proposal

to permit exchanges to recognize NEBFHs, as well as spreads, to conform

to the instant proposal. The Commission notes that it is no longer

proposing to prohibit recognizing spreads during the spot month,

although such exemptions would not have been permitted under Sec. Sec.

150.5(a)(2) or (b)(5) as proposed in the December 2013 position limits

proposal. Instead, this current proposal would, in part, maintain the

status quo: Exchanges that currently recognize spreads in the spot

month under current Sec. 150.5(a) will be able to continue to do

so.\206\ However, exchanges would be responsible for determining

whether recognizing spreads, including spreads in the spot month, would

further the policy objectives in section 4a(3) of the Act.

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\206\ Under current Sec. 150.5(a), a DCM may exempt from

exchange-set speculative position limits any position normally known

to the trade as a spread, straddle, or arbitrage position.

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I. Changes to the Definitions of Futures-Equivalent, Intermarket Spread

Position, and Intramarket Spread Position

1. Changes to the Definition of ``Futures-Equivalent''

In the December 2013 position limits proposal, the Commission

proposed to broaden the definition of the term ``futures-equivalent''

found in current Sec. 150.1(f) of the Commission's

[[Page 38483]]

regulations,\207\ and to expand upon clarifications included in the

current definition relating to adjustments and computation times.\208\

The Dodd-Frank Act amendments to CEA section 4a,\209\ in part, direct

the Commission to apply aggregate federal position limits to physical

commodity futures contracts and to swaps contracts that are

economically equivalent to such physical commodity futures contracts on

which the Commission has established limits. In order to aggregate

positions in futures, options and swaps contracts, it is necessary to

adjust the position sizes, since such contracts may have varying units

of trading (e.g., the amount of a commodity underlying a particular

swap contract could be larger than the amount of a commodity underlying

a core referenced futures contract). The Commission proposed to adjust

position sizes to an equivalent position based on the size of the unit

of trading of the core referenced futures contract. The December 2013

position limits proposal would extend the current definition of

``futures equivalent'' in current Sec. 150.1(f), that is applicable

only to an option contract, to both options and swaps.

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\207\ 17 CFR 150.1(f) currently defines ``futures-equivalent''

only for an option contract, adjusting the open position in options

by the previous day's risk factor, as calculated at the close of

trading by the exchange.

\208\ The December 2013 position limits proposal defines

``futures-equivalent'' for: (1) An option contact, adjusting the

position size by an economically reasonable and analytically

supported risk factor, computed as of the previous day's close or

the current day's close or contemporaneously during the trading day;

and (2) a swap, converting the position size to an economically

equivalent amount of an open position in a core referenced futures

contract. See December 2013 position limits proposal, 78 FR at

75698-9.

\209\ Amendments to CEA section 4a(1) authorize the Commission

to extend position limits beyond futures and option contracts to

swaps traded on an exchange and swaps not traded on an exchange that

perform or affect a significant price discovery function with

respect to regulated entities. 7 U.S.C. 6a(a)(1). In addition, under

new CEA sections 4a(a)(2) and 4a(a)(5), speculative position limits

apply to agricultural and exempt commodity swaps that are

``economically equivalent'' to DCM futures and option contracts. 7

U.S.C. 6a(a)(2) and (5).

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The Commission now proposes two further clarifications to the

definition of the term ``futures-equivalent.'' First, the Commission

proposes to address circumstances in which a referenced contract for

which futures equivalents must be calculated is itself a futures

contract. This may occur, for example, when the referenced contract is

a futures contract that is a mini-sized version of the core referenced

futures contract (e.g., the mini-corn and the corn futures

contracts).\210\ The Commission proposes to clarify in proposed Sec.

150.1 that the term ``futures-equivalent'' includes a futures contract

which has been converted to an economically equivalent amount of an

open position in a core referenced futures contract. This clarification

mirrors the expanded definition of ``futures-equivalent'' in the

December 2013 position limits proposal, as it would pertain to swaps.

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\210\ Under current Sec. 150.2, for purposes of compliance with

federal position limits, positions in regular sized and mini-sized

contracts are aggregated. The Commission's practice of aggregating

futures contracts, when a DCM lists for trading two or more futures

contracts with substantially identical terms, is to scale down a

position in the mini-sized contract, by multiplying the position in

the mini-sized contract by the ratio of the unit of trading in the

mini-sized contract to that of the regular sized contract. See

paragraph (b)(2)(D) of app. C to part 38 of the Commission's

regulations for guidance regarding the contract size or trading unit

for a futures or futures option contract.

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Second, the Commission proposes to clarify the definition of the

term ``futures-equivalent'' to provide that, for purposes of

calculating futures equivalents, an option contract must also be

converted to an economically equivalent amount of an open position in a

core referenced futures contract. This clarification addresses

situations, for example, where the unit of trading underlying an option

contract (that is, the notional quantity underlying an option contract)

may differ from the unit of trading underlying a core referenced

futures contract.\211\

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\211\ For an example of a futures-equivalent conversion of a

swaption, see example 6, WTI swaptions, app. A to part 20 of the

Commission's regulations.

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These clarifications are consistent with the methodology the

Commission used to provide its analysis of unique persons over

percentages of the proposed position limit levels in the December 2013

position limits proposal.\212\

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\212\ See Table 11 in the December 2013 position limits

proposal, 78 FR at 75731-3.

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2. Changes to the Definitions of ``Intermarket Spread Position'' and

``Intramarket Spread Position''

In the December 2013 position limits proposal, the Commission

proposed to add to current Sec. 150.1 new definitions of the terms

``intermarket spread position'' and ``intramarket spread position.''

\213\ In connection with its proposal to permit exchanges to process

applications for exemptions from federal position limits for certain

spread positions, the Commission now proposes to expand the definitions

of these terms as proposed in the December 2013 position limits

proposal.

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\213\ In the December 2013 position limits proposal, the

Commission proposed to define an ``intermarket spread position'' as

``a long position in a commodity derivative contract in a particular

commodity at a particular designated contract market or swap

execution facility and a short position in another commodity

derivative contract in that same commodity away from that particular

designated contract market or swap execution facility.'' The

Commission also proposed to define an ``intramarket spread

position'' as ``a long position in a commodity derivative contract

in a particular commodity and a short position in another commodity

contract in the same commodity on the same designated contract

market or swap execution facility.'' See December 2013 position

limits proposal, 78 FR at 75699-700.

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The Commission now proposes to define an ``intermarket spread

position'' to mean ``a long (short) position in one or more commodity

derivative contracts in a particular commodity, or its products or its

by-products, at a particular designated contract market, and a short

(long) position in one or more commodity derivative contracts in that

same, or similar, commodity, or its products or its by-products, away

from that particular designated contract market.'' Similarly, the

Commission now proposes to define an ``intramarket spread position'' to

mean ``a long position in one or more commodity derivative contracts in

a particular commodity, or its products or its by-products, and a short

position in one or more commodity derivative contracts in the same, or

similar, commodity, or its products or its by-products, on the same

designated contract market.''

The expanded definitions that the Commission now proposes would

take into account that a market participant may take positions in

multiple commodity derivative contracts to establish an intermarket

spread position or an intramarket spread position. The expanded

definitions would also take into account that such spread positions may

be established by taking positions in derivative contracts in the same

commodity, in similar commodities, or in the products or by-products of

the same or similar commodities. By way of example, the expanded

definitions would include a short position in a crude oil derivative

contract and long positions in a gasoline derivative contract and a

diesel fuel derivative contract (collectively, a reverse crack spread).

RFC 32: The Commission invites comment on all aspects of its

proposed expanded definitions of ``intermarket spread position'' and

``intramarket spread position.''

III. Related Matters

A. Cost-Benefit Considerations

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

costs and benefits of its actions before promulgating a regulation

under the

[[Page 38484]]

CEA or issuing certain orders. Section 15(a) further specifies that the

costs and benefits shall be evaluated in light of five broad areas of

market and public concern: (1) Protection of market participants and

the public; (2) efficiency, competitiveness, and financial integrity of

futures markets; (3) price discovery; (4) sound risk management

practices; and (5) other public interest considerations. The Commission

considers the costs and benefits resulting from its discretionary

determinations with respect to the Section 15(a) factors.

In December 2013, the Commission proposed, among other things, to

establish speculative position limits for 28 contracts, to revise the

process recognizing certain market participant positions as bona fide

hedges, and to revise exemptions for spreads.\214\ The December 2013

position limits proposal invited the public to comment on the

Commission's consideration of the costs and benefits of the proposals,

identify and assess any costs and benefits not discussed therein, as

well as, provide possible alternative proposals.

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\214\ 78 FR 75680-842.

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As discussed in Sections I and II of this release, the Commission

now proposes: (a) To delay implementing the requirements of SEF core

principle 6(B) and DCM core principle 5(B) with respect to the setting

and monitoring of position limits for swaps; (b) to revise the process

for recognizing certain positions as non-enumerated bona fide hedges;

(c) to revise the process for exempting spreads, as well as expanding

the types of spreads that may be exempted from position limits; and (d)

to add a recognition process for enumerated anticipatory bona fide

hedges. This release, in large part, is a response to comments to the

December 2013 position limits proposal. As discussed earlier,

commenters urged the Commission to rely on the exchanges' long-standing

experience in overseeing position limits, recognizing bona fide hedges,

and reviewing spreads.

This supplemental proposal adds new provisions to and otherwise

modifies some of the proposed rules identified and discussed in the

December 2013 position limits proposal. The baseline against which the

Commission considers the benefits and costs of this supplemental

proposal is the same as that employed in the December 2013 position

limits proposal: The statutory requirements of the CEA and the

Commission regulations now in effect--in particular the Commission's

Part 150 regulations and rules 1.47 and 1.48.\215\

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\215\ See chart listing current regulations, December 2013

position limits proposal at 75712.

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1. Guidance for DCM Core Principle5(B), SEF Core Principle 6(B), and

Part 150

As explained in Section IIA above, the Commission received comments

in response to the December 2013 position limits proposal that most

exchanges do not have the ability to effectively monitor all swap

positions held by a market participant across exchanges. The Commission

now proposes to amend its guidance regarding DCM core principle 5(B)

and SEF core principle 6(B), and add Appendix E to Part 150. The

proposed amendments would have the effect of delaying the

implementation of exchanges' obligation to adopt swap position limits

until there is sufficient access to swap position information regarding

market participants' swap positions.

ii. Baseline

The baselines for these changes are DCM Core Principle 5, SEF Core

Principle 6, and Part 150.

iii. Benefits and Costs

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

costs and benefits of its discretionary actions with respect to rules

and orders. Though guidance, the Commission is also considering the

costs and benefits of changes to the proposed amendments to the

appendices to parts 37, 38, and 150 of the Commission's regulations. As

discussed in Section IIA, the Commission appreciates that the proposed

amendments to guidance will delay implementation of exchanges'

obligation to monitor and enforce federal position limits for swaps. As

a result, this delay will likely confer benefits and will likely reduce

costs. For instance, exchanges and market participants will benefit

from not investing in technology and personnel to assess position

limits. Instead, both exchanges and market participants will be able to

allocate such resources to other functions, like surveillance and

product innovation, within the businesses. In terms of costs, the

Commission believes that there might be a cost to the market associated

with this delay because excessive positions cannot be monitored in

real-time by exchanges.\216\

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\216\ As stated in Section IIA, the Commission foresees various

possibilities in remediating this current inability to monitor

position limits in real-time in the future.

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iv. Request for Comment

RFC 33: The Commission requests comment on its consideration of the

benefits and costs associated with the proposed amendments to guidance.

Are there additional costs and benefits that the Commission should

consider? Has the Commission misidentified any costs or benefits?

Commenters are encouraged to include both quantitative and qualitative

assessments of benefits as well as data, or other information of

support for such assessments. Are there additional alternatives that

the Commission has not identified? If so, please describe these

additional alternatives and provide a discussion of the associated

qualitative and quantitative costs and benefits.

2. Section 150.1--Definitions

a. Bona Fide Hedging Position

i. Summary of Changes

As discussed earlier, the Commission proposed in December 2013 a

new definition of bona fide hedging position in proposed Sec. 150.1,

to replace the current definition in Sec. 1.3(z). The December 2013

position limits proposal proposed a general definition of bona fide

hedging position that contained two requirements for a bona fide

hedging position: An incidental test and an orderly trading

requirement.\217\ The Commission is now proposing the following changes

to proposed Sec. 150.1. First, the Commission is proposing to strike

the opening paragraph to the definition of bona fide hedging position

in proposed Sec. 150.1. By removing the opening paragraph, the

Commission has eliminated the incidental test and orderly trading

requirement from the general definition of bona fide hedging position.

Second, the Commission is proposing to add sub-part 150.1(2)(i)(D)(2)

to the definition of bona fide hedging position. The proposed addition

reiterates the Commission's authority to permit exchanges to recognize

bona fide positions and those positions are subject to CEA section

4a(c) standards as well as Commission review.

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\217\ See December 2013 Position Limits Proposal at 75706-7.

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ii. Baseline

The baseline for this change is the definition for ``bona fide

hedging transactions and positions for excluded commodities,'' set

forth in current Sec. 1.3(z).\218\

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\218\ 17 CFR 1.3(z).

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[[Page 38485]]

iii. Benefits and Costs

In the December 2013 position limits proposal, the Commission

discussed the benefits and costs associated with the proposed

amendments to the definition of bona fide hedging position.\219\ In

this proposal, the Commission proposes changes that were not discussed

in the December 2013 position limits proposal. The changes to the

definition of bona fide hedging position discussed herein provide

substantive benefits and costs.

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\219\ December 2013 position limits proposal at 75761-64.

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In terms of benefits, the Commission has made the definition of

bona fide hedging position conform more closely to the CEA's statutory

language by eliminating the incidental test. As explained in Section

IIB3(ii), the Commission considers the incidental test superfluous

because the idea of commercial cash market activities is covered in the

economically appropriate test. Therefore, by discarding the incidental

test, market participants benefit from greater regulatory certainty and

less redundancy.

By deleting the orderly trading requirement from the definition of

bona fide hedging position, the Commission seeks to eliminate a source

of potential confusion for exchanges and market participants. The

Commission sets forth a definition that is consistent with the CEA.

More directly, CEA 4c(a)(5) separately states that intentional or

reckless disregard for orderly trading execution is unlawful. Thus,

market participants benefit from having a definition that lessens or

eliminates the confusion between having two different standards, that

is, an orderly-trading requirement and an intentional or reckless

disregard standard.

The addition of proposed sub-part 150.1(2)(i)(D)(2) to the

definition of bona fide hedging position represents a non-substantive

modification. The actual benefits and costs associated with this

proposed sub-part arise from recognitions under proposed Sec.

150.9(a).

iv. Request for Comment

RFC 34: The Commission requests comment on its consideration of the

benefits and costs associated with the proposed revisions to the

definition of ``bona fide hedging position.'' Are there additional

costs and benefits that the Commission should consider? Has the

Commission misidentified any costs or benefits? Commenters are

encouraged to include both quantitative and qualitative assessments of

benefits as well as data and other information of support for such

assessments.

RFC 35: Futures contracts function to hedge price risk because they

lock-in prices and quantities at designated points in time. Futures

contracts, thereby, create price certainty for market

participants.\220\ Thus, the Commission believes that bona fide hedging

positions need to ultimately result in hedging against some form of

price risk as discussed in Section IIB3(i), above. Is the Commission

reasonable in concluding that by eliminating the incidental test market

participants will benefit from regulatory certainty and reduced

compliance costs because they need only focus on price risk or other

risks that can be transformed into price risk?

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\220\ Futures contracts and futures equivalents are tools by

which market participants can lock-in price risk. They are limited

in that regard. Other derivatives contracts, however, enable market

participants to hedge other types of risk, beyond price risks,

because contract terms and conditions can be tailored to the

specific risks.

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RFC 36: It is challenging to interpret the orderly-trading

requirement in the context of the over-the-counter swaps market and

permitted off-exchange transactions as discussed in Section IIB3(ii),

above. Given this challenge, is it reasonable for the Commission to

conclude that by eliminating the orderly-trading requirement, market

participants benefit from avoiding the compliances costs of an unclear

requirement?

RFC 37: The Commission recognizes that there exist alternatives to

the proposed definition of ``bona fide hedging position.'' These

alternatives include: (i) Maintaining the status quo in current Sec.

1.3(z), or (ii) pursuing the changes in the December 2013 position

limits proposal.\221\ Are there additional alternatives that the

Commission has not identified? If so, please describe these additional

alternatives and provide a discussion of the associated qualitative and

quantitative costs and benefits.

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\221\ The costs and benefits of these alternatives were

discussed in the December 2013 position limits proposal at 75761-64.

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b. Futures Equivalent

i. Summary of Changes

In the December 2013 position limits proposal, the Commission

proposed to expand the definition of ``futures-equivalent'' from the

narrow scope of an option contract. The term ``futures-equivalent,'' as

proposed in the December 2013 position limits proposal, would include

certain options contracts and swaps, converted to economically

equivalent amounts. The Commission now proposes two further revisions

to the definition of ``futures-equivalent.'' First, the Commission

proposes to clarify that the term ``futures-equivalent'' includes a

futures contract which has been converted to an economically equivalent

amount of an open position in a core referenced futures contract.

Second, the Commission proposes to clarify that, for purposes of

calculating futures equivalents, an option contract must also be

converted into an economically-equivalent amount of an open position in

a core referenced futures contract.

ii. Baseline

The baseline for this change to the definition of ``futures

equivalent'' is the current Sec. 150.1(f) definition of ``futures-

equivalent''.

iii. Benefits and Costs

As explained in the December 2013 position limits proposal, the

Commission's view is that non-substantive changes to the definitional

provisions of Sec. 150.1 do not have any benefit or cost implications.

With the exception of the term ``bona fide hedging position,'' any

benefits or costs attributable to substantive definitional changes and

additions to Sec. 150.1 as proposed in the December 2013 position

limits proposal were considered in the discussion of the rule in which

such new or amended term was proposed to be operational.\222\

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\222\ December 2013 position limits proposal at 75761.

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The Commission also explained in 2013 that the definition of

``futures-equivalent'' in current Sec. 150.1(f) was too narrow in

light of the Dodd-Frank Act amendments to CEA section 4a. To conform to

the statutory changes and to fit within the broader position limits

regime, the Commission proposed a more descriptive definition of

``futures-equivalent'' in the December 2013 position limits proposal.

Upon further review, the Commission is now proposing to add more

explanatory text to the ``futures-equivalent'' definition so that it

comports better with the statutory changes. The proposed revisions

reflect more clearly the Commission's intent as discussed in the

December 2013 position limits proposal. Thus, the Commission believes

that there are no cost or benefit implications to these further

clarifications.

iv. Request for Comment

RFC 38: Are there any benefits or costs associated with the

proposed revisions to the definition of ``futures equivalent''? If yes,

commenters are encouraged to include both quantitative and qualitative

assessments of these

[[Page 38486]]

costs and benefits, as well as data or other information to support

such assessments.

RFC 39: The Commission recognizes that one possible alternative to

the clarifications made to the ``futures-equivalent'' definition is to

retain the definition of ``futures-equivalent'' as proposed in the

December 2013 position limits proposal. Additional alternatives may

exist as well. The Commission requests comment on whether an

alternative to what is proposed would result in a superior cost-benefit

profile, with support for any such position provided.

c. Intermarket Spread Position and Intramarket Spread Position

i. Summary of Changes

Current part 150 does not contain definitions for the terms

``intermarket spread position'' or ``intramarket spread position.'' In

the December 2013 position limits proposal, the Commission proposed

definitions for both terms. The Commission now proposes to expand the

scope of these two definitions. The expanded definitions would now

include positions in multiple commodity derivative contracts so that

market participants can establish an intermarket spread position or an

intramarket spread position that would be taken into account under the

proposed position limits regime and exemption processes. The expanded

definitions also would cover spread positions established by taking

positions in derivative contracts in the same commodity, in similar

commodities, or in the products or by-products of the same or similar

commodities.

ii. Baseline

Current Sec. 150.1 does not include definitions for the terms

``intermarket spread position'' and ``intramarket spread position.''

Therefore, the baseline is a market where ``intermarket'' and

``intramarket'' spread positions are not explicitly exempted from

federal position limits.

iii. Benefits and Costs

The proposed changes to ``intermarket spread position'' and

``intermarket spread positions'' broaden the scope of the two terms in

comparison to the definitions proposed in the December 2013 position

limits proposal. In the Commission's view, the proposed changes are

only operative in proposed Sec. Sec. 150.3, 150.5 and 150.10, which

address exemptions from position limits for certain spread positions.

The two definitions operate in conjunction with proposed Sec. 150.10,

which sets forth a proposed process for exchanges to administer spread

exemptions, because the proposed definitions and proposed Sec. 150.10,

together, will enable market participants to obtain relief from

position limits for these types of spreads, among others.

iv. Request for Comment

RFC 40: Are there benefits or costs associated with the definitions

of ``intermarket spread position'' and ``intramarket spread position''?

If yes, commenters are specifically encouraged to include both

quantitative and qualitative assessments of these costs and benefits,

as well as data or other information to support such assessments.

RFC 41: The Commission recognizes that one possible alternative to

the proposed definitions of ``intermarket spread position'' and

``intramarket spread position'' is to retain the definitions proposed

in the December 2013 position limits proposal. Additional alternatives

may exist as well. The Commission requests comment on whether an

alternative to what is proposed would result in a superior cost-benefit

profile, with support for any such alternative provided.

3. Section 150.3--Exemptions

a. Rule Summary

CEA Section 4a(a)(7) authorizes the Commission to exempt,

conditionally or unconditionally, any person, swap, futures contract,

or option--as well as any class of the same--from the position limits

requirements that the Commission establishes. In the December 2013

position limits proposal, the Commission proposed revisions to current

Sec. 150.3(a) \223\ The 2013 revisions would have provided for

Commission recognition of enumerated bona fide hedge positions, and

provided guidance about seeking relief from the Commission for non-

enumerated positions, but would not have exempted any spread positions

from federal limits. In this supplemental proposal, the Commission is

proposing in Sec. 150.3(a)(1) that commodity derivative positions

recognized by exchanges as NEBFHs under proposed Sec. 150.9 or

enumerated anticipatory bona fide hedge positions under proposed Sec.

150.11, and certain exempt spread positions under Sec. 150.10, may

exceed federal position limits established under Sec. 150.2 as

proposed in the December 2013 position limits proposal. Proposed Sec.

150.3(a)(1) should not be read alone but in conjunction with proposed

Sec. Sec. 150.9, 150.10, and 150.11.

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\223\ See 17 CFR 150.3 (list of exemptions that may exceed

position limits set forth in Sec. 150.2).

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As discussed above in more detail, the Commission has proposed to

delay the requirement that exchanges set position limits on swaps

because, among other reasons, of the impracticability of exchanges

being able to enforce swap position limits. As a result, the Commission

believes that it would be unlikely that exchanges would establish

exchange-set limits and, thus, market participants would not have a

need for exemptions to exchange-set limits for swaps.

b. Baseline

The baseline is the same as it was in the December 2013 position

limits proposal: Current Sec. 150.3 of the Commission's regulations.

c. Benefits and Costs

The costs and benefits associated with the changes to proposed

Sec. 150.3 will be considered in the sections that discuss proposed

Sec. Sec. 150.9, 150.10, and 150.11.

4. Section 150.5--Exemptions From Exchange-Set Limits

a. Rule Summary

In the December 2013 position limits proposal, the Commission

proposed to replace current Sec. 150.5(a), which provides guidance to

exchanges for exchange-set limits. For any commodity derivative

contracts subject to federal position limits, Sec. 150.5(a)(2) as

proposed in the December 2013 position limits proposal, would have

established requirements under which exchanges could recognize

exemptions from exchange-set position limits, including hedge

exemptions and spread exemptions. Because the Commission is now

proposing to permit exchanges to recognize NEBFH positions under

proposed Sec. 150.9, to grant spread exemptions from federal limits

under proposed Sec. 150.10, and to recognize certain enumerated

anticipatory bona fide hedge positions under proposed Sec. 150.11, the

Commission proposes related changes to Sec. 150.5(a)(2). For commodity

derivative contracts not subject to federal position limits, the

Commission now proposes to revise Sec. 150.5(b)(5), as proposed in the

December 2013 position limits proposal, to permit exchanges to

recognize NEBFHs, as well as spreads. The Commission notes that it is

no longer proposing to prohibit recognizing spreads during the spot

month, although such exemptions would not have been permitted under

Sec. Sec. 150.5(a)(2) or (b)(5), as proposed in the December 2013

position limits proposal.

[[Page 38487]]

b. Baseline

The baseline is the same as it was in the December 2013 position

limits proposal: The current reasonable discretion afforded to

exchanges to exempt market participant from their exchange-set position

limits.

c. Benefits and Costs

The costs and benefits associated with the changes to proposed

Sec. 150.5 will be discussed in the sections that discuss proposed

Sec. Sec. 150.9, 150.10, and 150.11.

5. Section 150.9--Exchange Recognition of NEBFHs

In response to comments to the December 2013 position limits

proposal, the Commission now proposes to permit exchanges to elect to

administer a process to recognize certain commodity derivative

positions as NEBFHs under proposed Sec. 150.9. Subject to certain

conditions set forth in proposed Sec. 150.3(a)(1), positions

recognized as NEBFHs by exchanges pursuant to the proposed Sec. 150.9

application process would be exempt from federal position limits.

Proposed Sec. 150.9 works in concert with the following three proposed

rules:

Proposed Sec. 150.3(a)(1)(i), with the effect that

recognized NEBFH positions may exceed federal position limits;

proposed Sec. 150.5(a)(2), with the effect that

recognized NEBFH positions may exceed exchange-set position limits for

contracts subject to federal position limits; and

proposed Sec. 150.5(b)(5), with the effect that

recognized NEBFH positions may exceed exchange-set position limits for

contracts not subject to federal position limits.

a. Rule Summary

The proposed NEBFH process has six sub-parts: (a) Through (f). The

first three sub-parts--Sec. 150.9(a), (b), and (c)--require exchanges

that elect to have an NEBFH process and market participants that seek

relief under the NEBFH process to carry out certain duties and

obligations. The latter three sub-parts--Sec. 150.9(d), (e), and (f)--

delineate the Commission's role and obligations in reviewing NEBFH

recognition requests.

i. Sec. 150.9(a)--Exchange-Administered NEBFH Application Process

In sub-part (a) of proposed Sec. 150.9, the Commission identifies

the process and information required for an exchange to assess whether

it should grant a market participant's request that its derivative

position(s) be recognized as an NEBFH. As an initial step under

proposed Sec. 150.9(a)(1), exchanges that voluntarily elect to process

NEBFH applications are required to notify the Commission of their

intention to do so by filing new rules or rule amendments with the

Commission under part 40 of the Commission's regulations. In proposed

Sec. 150.9(a)(2), the Commission offers guidelines for exchanges to

establish adaptable application processes by permitting different

processes for ``novel'' versus ``substantially similar'' applications

for NEBFH recognitions. Proposed Sec. 150.9(a)(3) describes in general

terms the type of information that exchanges should collect from

applicants. Proposed Sec. 150.9(a)(4) obliges applicants and exchanges

to act timely in their submissions and notifications, respectively, and

that exchanges retain revocation authority. Proposed Sec. 150.9(a)(5)

provides that the position will be deemed recognized as an NEBFH when

an exchange recognizes it. Proposed Sec. 150.9(a)(6) instructs

exchanges to have rules requiring applicants that receive NEBFH

recognitions to report those positions and offsetting cash positions.

Proposed Sec. 150.9(a)(7) requires an exchange to publish on their Web

site descriptions of unique types of derivative positions recognized as

NEBFHs based on novel facts and circumstances.

ii. Sec. 150.9(b)--NEBFH Recordkeeping Requirements

Under proposed Sec. 150.9(b), exchanges would be required to

maintain complete books and records of all activities relating to the

processing and disposition of NEBFH applications. As explained in

proposed Sec. 150.9(b)(1) through (b)(2), the Commission instructs

exchanges to retain applicant-submission materials, exchange notes, and

determination documents. Moreover, consistent with current Sec. 1.31,

the Commission expects that these records would be readily accessible

until the termination, maturity, or expiration date of the bona fide

hedge recognition and during the first two years of the subsequent,

five-year retention period.

iii. Sec. 150.9(c)--NEBFH Reporting Requirements

The Commission proposes weekly and monthly reporting obligations by

exchanges for positions recognized as NEBFHs. Both reports also will be

subject to the Commission's proposed formatting requirements as

explained in proposed Sec. 150.9(c)(3). In addition to submitting

reports to the Commission, proposed Sec. 150.9(c)(1)(ii) provides that

exchanges post NEBFH summaries on their Web sites.

iv. Sec. 150.9(d) and (e)--Commission Review

The Commission proposes that under certain circumstances market

participants and exchanges must respond to Commission requests.

b. Baseline

For the NEBFH process, the baseline for NEBFH subject to federal

position limits is current Sec. 1.47. For NEBFH exemptions to

exchange-set position limits, the baseline is the current exchange

regulations and practices as well as the Commission's guidance to

exchanges in current Sec. 150.5(d), which provides, generally, that an

exchange may recognize bona fide hedging positions in accordance with

the general definition of bona fide hedging position in current Sec.

1.3(z)(1).

c. Benefits

The Commission recognizes that there are positions that reduce

price risks incidental to commercial operations. For that reason, among

others, such positions that are considered to be bona fide hedging

positions under CEA Section 4a(c) are not subject to position limits.

Market participants have several options regarding bona fide hedging

positions. A market participant could conclude that a commodity

derivative position comports with the definition of bona fide hedging

position under Sec. 150.1, as proposed in the December 2013 position

limits proposal. Also as discussed in the December 2013 position limits

proposal, market participants may request a staff interpretive letter

under Sec. 140.99 or seek exemptive relief under CEA section 4(a)(7).

The Commission proposes in this supplemental proposal another option

for participants to hold commodity derivative positions that exceed

speculative limits: They may file an application with an exchange for

recognition of an NEBFH under proposed Sec. 150.9.

While all of the aforementioned options are viable, proposed Sec.

150.9 in this supplemental proposal outlines a framework similar to

existing exchange practices that recognize non-enumerated bona fide

hedge exemptions to exchange-set limits. These practices are familiar

to many market participants. As a consequence, there are sizeable

benefits to the proposed Sec. 150.9 process that are not easily

quantifiable. The benefits are heavily dependent on the individual

characteristics of the applicant, its use of commodity derivatives, its

commercial needs, and market idiosyncrasies. Because of these varying

characteristics, a qualitative

[[Page 38488]]

discussion is more appropriate, and therefore, discussed herein.

Under proposed Sec. 150.9, the Commission will be able to leverage

exchanges' existing practices and expertise in administering

exemptions. Thus, proposed Sec. 150.9 should reduce the need to invent

new procedures to recognize NEBFHs. For example, many exchanges already

evaluate hedging strategies in connection with setting and enforcing

exchange-set position limits; thus, many exchanges should be able

readily to identify bona fide hedges.\224\ Exchanges also may be

familiar with the applicant-market participant's needs and practices so

there would be an advanced understanding for why certain trading

strategies are pursued. Furthermore, by having the availability of the

exchange's analysis and a macro-view of the markets, which includes the

Commission's access to regulatory swap data, the Commission would

likely be better informed should it become necessary for the Commission

to review a determination under proposed Sec. 150.9(d), and determine

whether a commodity derivative position should be recognized as an

NEBFH. This may benefit market participants, in the form of

administrative efficiency, because the Commission would be able to

initiate its review based on materials already submitted by the

applicant under proposed Sec. 150.9, as well as the analysis by the

exchanges.

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\224\ See note 108 (for text of 17 CFR 1.47 and discussion). For

a discussion on the history of exemptions, see December 2013

position limits proposal at 75703-06.

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For applicants seeking recognition of an NEBFH, proposed Sec.

150.9 should reduce duplicative efforts because applicants would be

saved the expense of applying to both an exchange for relief from

exchange-set position limits and to the Commission for relief from

federal limits. Because many exchanges already possess similar

application processes and market participants are probably somewhat

accustomed to the exchanges' existing application processes,

administrative certainty should be increased in the form of reduced

application-production time by market participants and reduced response

time by exchanges.

Another probable benefit of proposed Sec. 150.9 is the creation

and retention of records that may be used as reference material in the

future for similar bona fide hedge recognition requests either by

relevant exchanges or the Commission. Over time, retained records will

help the Commission to ensure that an exchange's determinations are

internally consistent and consistent with the Act and the Commission's

regulations thereunder. There is also the additional benefit that

records would be accessible if they are needed for a potential

enforcement action.

An exchange's submission of reports under proposed Sec. 150.9(c)

would provide the Commission with notice that an applicant has taken a

commodity derivative position that the exchange has recognized as an

NEBFH, and also would show the applicant's offsetting positions in the

cash markets. This is beneficial to the public because such reports

would support the Commission's surveillance program. Reports would

facilitate the tracking of NEBFHs recognized by the exchanges, and

would assist the Commission in ensuring that a market participant's

activities conform to the exchange's terms of recognition and to the

Act. The web-posting of summaries also would benefit market

participants in general by providing transparency and open access to

the NEBFH recognition process. In addition, reporting and posting gives

market participants seeking recognition of an NEBFH an understanding of

the types of commodity derivative positions an exchange may recognize

as an NEBFH, thereby providing greater administrative and legal

certainty.

d. Costs

To a large extent, exchanges and market participants have incurred

already many of the compliance costs associated with proposed Sec.

150.9 because most, if not all, exchanges currently administer similar

processes for recognizing NEBFHs. Nevertheless, the Commission has

detailed a number of the readily-quantifiable costs for exchanges and

market participants associated with processing NEBFH recognitions under

proposed Sec. 150.9 in Tables A1 to G1, below. The Commission

estimates that six entities would elect to process NEBFH applications

and file new rules or rule amendments pursuant to part 40 of the

Commission's regulations. Even though the number of applicants and

associated applications will likely vary based on the referenced

contract, the Commission forecasts the number of applicants based on

the Commission's past experience. The costs are broken down in the

tables below. In short, most of the quantified costs are related to the

time, effort, and materials that will be spent on producing,

processing, reviewing, granting, and retaining applications for NEBFH

recognitions.

There are, however, other costs that are not easily quantified.

These are qualitative costs that are related to the specific attributes

and needs of individual market participants that are hedging. Given

that qualitative costs are highly-specific, the Commission believes

that market participants would choose to incur Sec. 150.9-related

costs only if doing so is less costly than complying with position

limits and not executing the desired hedge position. Thus, by providing

market participants with an option to apply for relief from speculative

position limits under proposed Sec. 150.9, the Commission believes it

is offering market participants a way to ease overall compliance costs

because it is reasonable to assume that entities would seek recognition

of NEBFHs only if the outcome of doing so justifies the costs. The

Commission also believes that market participants would consider how

the costs of applying for recognition of an NEBFH under proposed Sec.

150.9 would compare to the costs of requesting a staff interpretive

letter under Sec. 140.99, or seeking exemptive relief under CEA

section 4a(a)(7). Likewise, exchanges must consider qualitative costs

in their decision to create an NEBFH application process or revise an

existing program.

The Commission acknowledges that there may also be other costs to

market participants if the Commission disagrees with an exchange's

decision to recognize an NEBFH under proposed Sec. 150.9 or under an

independent Commission request or review under proposed Sec. 150.9(d)

or (e). These costs would include time and effort spent by market

participants associated with a Commission review. In addition, market

participants would lose amounts that the Commission can neither predict

nor quantify if it became necessary to unwind trades or reduce

positions were the Commission to conclude that an exchange's

disposition of an NEBFH application is inconsistent with section 4a(c)

of the Act and the general definition of bona fide hedging position in

Sec. 150.

The Commission recognizes that costs may result if the Commission

disagrees with an exchange's disposition of an NEBFH application under

proposed Sec. 150.9, the Commission, however, believes such situations

would be limited based on the history of exchanges approving similar

applications for exemptions to exchange-set limits. Exchanges have

strong incentives to protect market participants from the harms that

position limits are intended to prevent, such as manipulation, corners,

and squeezes. In addition, an exchange that recognizes a market

participant's NEBFH that enables the participant to exceed position

limits must then deter

[[Page 38489]]

the same market participant from trading in a manner that causes

adverse price impacts on the market. For example, this might mean that

as part of recognizing a NEBFH, the exchange directs the market

participant to execute no more than ten contracts per day over a five-

day period rather than executing 50 contracts in one trading day. This

approach may be necessary for the exchange to ensure sufficient market

liquidity because the exchange believes that the particular contract

market cannot absorb the execution of 50 contracts by one market

participant in one day without an inordinately large price impact. If

the exchange fails to deter (or instruct), other market participants

will likely face greater costs in the form of transactions fees and

other trading-implementation costs, which includes foregone trading

opportunities because market prices moved against the trader and

prevented the trader from executing at the desired prices. In other

words, the exchange's mismanagement of the market participant that took

advantage of the NEBFH would cause the other market participants' costs

to implement trades to increase. Such an outcome would likely discredit

the exchange and the proposed Sec. 150.9 program, as well as reduce

the exchange's overall trading commissions. The Commission believes

that the exchanges have little incentive to engage in such behavior

because of reputational risk and economic incentives.

i. Costs To Create or Amend Exchange Rules for NEBFH Application

Programs

The Commission believes that exchanges electing to process NEBFH

applications under proposed Sec. 150.9(a) are likely to already

administer similar processes and would need to file with the Commission

amendments to existing exchange rules rather than create new rules. The

exchanges would only have to file amendments once. As discussed in the

Paperwork Reduction Act discussion below, the Commission forecasts an

average annual filing cost of $610 per exchange that files new rules or

modifications per proposed process that an exchange adopts.

Table A1

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

Total average Total average

Proposed regulation/file or amend rules Total average labor costs per annual cost per

labor hours hour exchange

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

Sec. 150.9(a)(1)......................................... 5 $122 $610

[5 x $122]

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

ii. Costs To Review Applications Under Proposed Processes

An exchange that elects to process applications also will incur

costs related to the review and disposition of such applications

pursuant to proposed Sec. 150.9(a). For example, exchanges will need

to expend resources on reviewing and analyzing the facts and

circumstances of each application to determine whether the application

meets the standards established by the Commission. Exchanges also will

need to expend effort in notifying applicants of the exchanges'

disposition of recognition or exemption requests. The Commission

believes that exchanges electing to process NEBFH applications under

proposed Sec. 150.9(a) are likely to have processes for the review and

disposition of such applications currently in place. As such, an

e3.xchange's cost to comply with the proposed rules are likely to be

incrementally less costly than having to create process from inception

because the exchange would already have staff, policies, and procedures

established to accomplish its duties under the proposed rules. Thus,

the Commission has forecast that the average annual cost for each

exchange to process applications for NEBFH recognitions is $122,850.

Table B1

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

Average total

Total average Total average hours for total Total average Total average

Proposed regulation/review applications applications labor hours per applications labor costs per annual cost per

processed per application reviewed per hour exchange

exchange exchange

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

Sec. 150.9(a)(2)................................................. 185 5 925 $122 $112,850

[185 x 5] [$122 x 925]

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

iii. Costs To Post Summaries for NEBFH Recognitions

Exchanges that elect to process the applications under proposed

Sec. 150.9 will incur costs to publish on their Web sites summaries of

the unique types of NEBFH positions. The Commission has estimated an

average annual cost of $18,300 for the web-posting of NEBFH summaries.

[[Page 38490]]

Table C1

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

Average total

Total average Total average hours for total Total average Total average

Proposed regulation/web-posting summaries per labor hours per applications labor costs per annual cost per

exchange application reviewed per hour exchange

exchange

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

Sec. 150.9(a).................................................... 30 5 150 $122 18,300

[30 x 5] [150 x $122]

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

iv. Costs To Market Participants Who Would Seek NEBFH Relief From

Position Limits

Under proposed Sec. 150.9(a)(3), market participants must submit

applications that provide sufficient information to allow the exchanges

to determine, and the Commission to verify, whether it is appropriate

to recognize such position as an NEBFH. These applications would be

updated annually. Proposed Sec. 150.9(a)(6) would require applicants

to file a report with the exchanges when an applicant owns, holds, or

controls a derivative position that has been recognized as an NEBFH.

The Commission estimates that each market participant seeking relief

from position limits under proposed Sec. 150.9 would likely incur

approximately $2,440 annually in application costs.\225\

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

\225\ Assuming that exchanges administer exemptions to exchange-

set limits, these costs are incrementally higher.

Table D1

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

Average total

Number of Total average Total average hours for each Total average Total average

Proposed regulation/market participants seeking market applications labor hours per application labor costs per annual cost per

relief from position limits participants per market application filed per hour market

participant exchange participant

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

Sec. 150.9(a)(3), (6)........................... 222 5 4 20 $122 $2,440

[4 x 5] [20 x $122]

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

v. Costs for NEBFH Recordkeeping

The Commission believes that exchanges that currently process

applications for spread exemptions and bona fide hedging positions

maintain records of such applications as required pursuant to other

Commission regulations, including Sec. 1.31. The Commission, however,

also believes that the proposed rules may confer additional

recordkeeping obligations on exchanges that elect to process

applications for NEBFHs. The Commission estimates that each exchange

electing to administer the proposed NEBFH process would likely incur

approximately $3,660 annually to retain records for each proposed

process.

Table E1

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

Total average

Total average Total average annual

Proposed regulation/recordkeeping Number of DCMs labor hours for labor costs per recordkeeping

recordkeeping hour cost per

exchange

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

Sec. 150.9(b)............................. 6 30 $122 $3,660

[30 x $122]

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

vi. Costs for Weekly and Monthly NEBFH Reporting to the Commission

The Commission anticipates that exchanges that elect to process

NEBFH applications will be required to file two types of reports. The

Commission is aware that five exchanges currently submit reports each

month, on a voluntary basis, which provide information regarding

exchange-processed exemptions of all types. The Commission believes

that the content of such reports is similar to the information required

of the reports in proposed rule Sec. 150.9(c), but the frequency of

such required reports would increase under the proposed rule. The

Commission estimates an average cost of approximately $19,032 per

exchange for weekly reports under proposed Sec. 150.9(c).

[[Page 38491]]

Table F1

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

Total average

Estimated Estimated Average reports Total average annual

Proposed regulation/weekly reporting number of DCMs number of hours annually by labor costs per reporting cost

per response each exchange hour per exchange

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

Sec. 150.9(c).................................................... 6 3 52 $122 $19,032

[3 x 52 x $122]

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

For the monthly report, the Commission anticipates a minor cost for

exchanges because the proposed rules would require exchanges

essentially to forward to the Commission notices received from

applicants who own, hold, or control the positions that have been

recognized or exempted. The Commission estimates an average cost of

approximately $2,928 per exchange for monthly reports under proposed

Sec. 150.9(c).

Table G1

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

Total average

Estimated Average Total average annual

Proposed regulation/monthly reporting Estimated number of hours reports labor costs per reporting

number of DCMs per response annually by hour average cost

each exchange per exchange

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

Sec. 150.9(c).................................................... 6 2 12 $122 $2,928

[2 x 12 x $122]

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

vii. Costs Related to Subsequent Monitoring

Exchanges would have additional surveillance costs and duties with

respect to NEBFH that the Commission believes would be integrated with

their existing self-regulatory organization surveillance activities as

an exchange.

e. Request for Comment

RFC 42. The Commission requests comment on its considerations of

the benefits of proposed Sec. 150.9. Are there additional benefits

that the Commission should consider? Has the Commission misidentified

any benefits? Commenters are encouraged to include both quantitative

and qualitative assessments of these benefits, as well as data or other

information to support such assessments.

RFC 43. The Commission requests comment on its considerations of

the costs of proposed Sec. 150.9. Are there additional costs that the

Commission should consider? Has the Commission misidentified any costs?

What other relevant cost information or data, including alternative

cost estimates, should the Commission consider and why? Commenters are

encouraged to include both quantitative and qualitative assessments of

these benefits, as well as data or other information to support such

assessments.

RFC 44. The Commission requests comment on whether a Commission

administered process promotes more consistent and efficient decision-

making. Commenters are encouraged to include both quantitative and

qualitative assessments, as well as data or other information to

support such assessments.

RFC 45. The Commission recognizes there exist alternatives to

proposed Sec. 150.9. These include such alternatives as: (1) Not

permitting exchanges to administer any process to recognize NEBFHs; or

(2) maintaining the status quo. The Commission requests comment on

whether an alternative to what is proposed would result in a superior

cost-benefit profile, with support for any such position provided.

RFC 46. The Commission requests comment on whether the options for

recognizing NEBFHs outlined in the December 2013 position limits

proposal are superior from a cost-benefit perspective to proposed Sec.

150.9.\226\ If yes, please explain why.

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

\226\ 78 FR at 75711-73.

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

6. Section 150.10--Spread Exemptions

As discussed in Section IID above, the Commission has the authority

under CEA section 4a(a)(1) to exempt certain spreads from position

limits. Before the Dodd-Frank Act, the Commission exempted certain

spreads from position limits under current Sec. 150.3. In the December

2013 position limits proposal, the Commission proposed changing current

Sec. 150.3 to eliminate exemptions for spreads outside the spot month,

and placed limitations on inter- and intramarket spreads.\227\ After

reviewing comments, the Commission has refined its spread exemption

proposal to permit spread exemptions from federal position limits, and,

combined with changes to the definitions of ``intermarket spread

position'' and ``intramarket spread position,'' authorized such spreads

to exceed position limits during spot and non-spot months.

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

\227\ For cost-benefit discussion on spread exemptions, see

December 2013 position limits proposal at 75774-76.

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

a. Rule Summary

The Commission proposes to authorize exchanges to exempt spread

positions from federal position limits. The proposed Sec. 150.10

process lists four types of spreads as defined and proposed in Sec.

150.1 of the December 2013 positions limits proposal and modified in

this supplemental proposal. Proposed Sec. 150.10 works in concert with

the following three proposed rules:

Proposed Sec. 150.3(a)(1)(iv), with the effect that

exempt spread positions may exceed federal position limits;

proposed Sec. 150.5(a)(2), with the effect that exempt

spread positions may exceed exchange-set position limits for contracts

subject to federal position limits; and

proposed Sec. 150.5(b)(5)(ii)(C), with the effect that

exempt spread positions may exceed exchange-set position limits for

contracts not subject to federal position limits.

[[Page 38492]]

The proposed Sec. 150.10 process is analogous to the application

process for recognition of NEBFHs under proposed Sec. 150.9. The

proposed spread exemption process has six sub-parts: (a) Through (f).

The first three sub-parts--Sec. 150.10(a), (b), and (c)--require

exchanges that elect to have a spread exemption process, and market

participants that seek relief under the spread exemption process, to

carry out certain duties and obligations. The latter four sub-parts--

Sec. 150.10(d), (e), and (f)--delineate the Commission's role and

obligations in reviewing requests for spread exemptions.

i. Section 150.10(a)--Exchange-Administered Spread Exemption

In sub-part (a) of proposed Sec. 150.10, the Commission identifies

the process and information required for an exchange to grant a market

participant's request that its derivative position(s) be recognized as

an exempt spread position. As an initial step under proposed Sec.

150.10(a)(1), exchanges that voluntarily elect to process spread

exemption applications are required to notify the Commission of their

intention to do so by filing new rules or rule amendments with the

Commission under part 40 of the Commission's regulations. In proposed

Sec. 150.10(a)(2), the Commission identifies four types of spreads

that an exchange may approve. Proposed Sec. 150.10(a)(3) describes in

general terms the type of information that exchanges should collect

from applicants. Proposed Sec. 150.10(a)(4) obliges applicants and

exchanges to act timely in their submissions and notifications,

respectively, and require exchanges to retain revocation authority.

Proposed Sec. 150.10(a)(6) instructs exchanges to have rules requiring

applicants who receive spread exemptions to report those positions,

including each component of the spread. Proposed Sec. 150.10(a)(7)

requires exchanges to publish on its Web site a summary describing the

type of spread position and explaining why it was exempted.

ii. Section 150.10(b)--Spread Exemption Recordkeeping Requirements

Exchanges must maintain complete books and records of all

activities relating to the processing and disposition of spread

exemption applications under proposed Sec. 150.10(b). This is similar

to the record retention obligations of exchanges for positions

recognized as NEBFHs.

iii. Section 150.10(c)--Spread Exemption Reporting Requirements

Exchanges would have weekly and monthly reporting obligations for

spread exemptions under proposed Sec. 150.10(c). This is similar to

the reporting obligations of exchanges for positions recognized as

NEBFHs.

b. Baseline

For the proposed spread exemption process for positions subject to

federal limits, the baseline is CEA section 4a(a)(1). In that statutory

section, the Commission is authorized to recognize certain spread

positions. That statutory provision is currently implemented in a

limited calendar-month spread exemption in Sec. 150.3(a)(3). For

exchange-set position limits, the baseline for spreads is the guidance

in current Sec. 150.5(a), which provides generally that exchanges may

recognize exemptions for positions that are normally known to the trade

as spreads.

c. Benefits

CEA section 4a(a)(1) authorizes the Commission to exempt certain

spreads from speculative position limits. In exercising this authority,

the Commission recognizes that spreads can have considerable benefits

for market participants and markets. The Commission now proposes a

spread exemption framework that utilizes existing exchanges-resources

and exchanges-expertise so that fair access and liquidity are promoted

at the same time market manipulations, squeezes, corners, and any other

conduct that would disrupt markets are deterred and prevented. Building

on existing exchange processes preserves the ability of the Commission

and exchanges to monitor markets and trading strategies while reducing

burdens on exchanges that will administer the process, and market

participants, who will utilize the process.

In addition to these benefits, there are other benefits related to

proposed Sec. 150.10 that would inure to markets and market

participant. Yet, there is difficulty in quantifying these benefits

because benefits are dependent on the characteristics, such as

operation size and needs, of the market participants that would seek

spread exemptions, and the markets in which the participants trade.

Accordingly, the Commission considers the qualitative benefits of

proposed Sec. 150.10.

For both exchanges and market participants, proposed Sec. 150.10

would likely alleviate compliance burdens to the status quo. Exchanges

would be able to build on established procedures and infrastructure. As

stated earlier, many exchanges already have rules in place to process

and grant applications for spread exemptions from exchange-set position

limits pursuant to Part 38 of the Commission's regulations (in

particular, current Sec. 38.300 and Sec. 38.301) and current Sec.

150.5. In addition, exchanges may be able to use the same staff and

electronic resources that would be used for proposed Sec. 150.9 and

Sec. 150.11. Market participants also may benefit from spread-

exemption reviews by exchanges that are familiar with the commercial

needs and practices of market participants seeking exemptions. Market

participants also might gain legal and regulatory clarity and

consistency that would help in developing trading strategies.

Proposed Sec. 150.10 would authorize exchanges to approve spread

exemptions that permit market participants to continue to enhance

liquidity, rather than being restricted by a position limit. For

example, by allowing speculators to execute intermarket and intramarket

spreads in accordance with proposed Sec. 150.3(a)(1)(iv) and Sec.

150.10, speculators would be able to hold a greater amount of open

interest in underlying contract(s), and, therefore, bona fide hedgers

may benefit from any increase in market liquidity. Spread exemptions

might lead to better price continuity and price discovery if market

participants who seek to provide liquidity (for example, through entry

of resting orders for spread trades between different contracts)

receive a spread exemption and, thus, would not otherwise be

constrained by a position limit.

Here are two examples of positions that could benefit from the

spread exemption in proposed Sec. 150.10:

Reverse crush spread in soybeans on the CBOT subject to an

intermarket spread exemption. In the case where soybeans are processed

into two different products, soybean meal and soybean oil, the crush

spread is the difference between the combined value of the products and

the value of soybeans. There are two actors in this scenario: The

speculator and the soybean processor. The spread's value approximates

the profit margin from actually crushing (or mashing) soybeans into

meal and oil. The soybean processor may want to lock in the spread

value as part of its hedging strategy, establishing a long position in

soybean futures and short positions in soybean oil futures and soybean

meal futures, as substitutes for the processor's expected cash market

transactions (purchase of the anticipated inputs for

[[Page 38493]]

processing and sale of the anticipated products). On the other side of

the processor's crush spread, a speculator takes a short position in

soybean futures against long positions in soybean meal futures and

soybean oil futures. The soybean processor may be able to lock in a

higher crush spread, because of liquidity provided by such a speculator

who may need to rely upon a spread exemption. It is important to

understand that the speculator is accepting basis risk represented by

the crush spread, and the speculator is providing liquidity to the

soybean processor. The crush spread positions may result in greater

correlation between the futures prices of soybeans and those of soybean

oil and soybean meal, which means that prices for all three products

may move up or down together in a closer manner.

Wheat spread subject to intermarket spread exemptions.

There are two actors in this scenario: The speculator and the wheat

farmer. In this example, a farmer growing hard wheat would like to

reduce the price risk of her crop by shorting a MGEX wheat futures.

There, however, may be no hedger, such as a mill, that is immediately

available to trade at a desirable price for the farmer. There may be a

speculator willing to offer liquidity to the hedger; the speculator may

wish to reduce the risk of an outright long position in MGEX wheat

futures through establishing a short position in CBOT wheat futures

(soft wheat). Such a speculator, who otherwise would have been

constrained by a position limit at MGEX or CBOT, may seek exemptions

from MGEX and CBOT for an intermarket spread, that is, for a long

position in MGEX wheat futures and a short position in CBOT wheat

futures of the same maturity. As a result of the exchanges granting an

intermarket spread exemption to such a speculator, who otherwise may be

constrained by limits, the farmer might be able to transact at a higher

price for hard wheat than might have existed absent the intermarket

spread exemptions. Under this example, the speculator is accepting

basis risk between hard wheat and soft wheat, reducing the risk of a

position on one exchange by establishing a position on another

exchange, and potentially providing liquidity to a hedger. Further,

spread transactions may aid in price discovery regarding the relative

protein content for each of the hard and soft wheat contracts.

Finally, the Commission is no longer proposing to prohibit

recognizing and exempting spreads during the spot and non-spot month as

explained in the preamble. There may be considerable benefits that

evolve from spreads exempted during the spot month, in particular.

Besides enhancing the opportunity for market participants to use

strategies involving spread trades into the spot month, this proposed

relief may improve price discovery in the spot month for market

participants. And, as in the intermarket wheat example above, the

proposed spread relief in the spot month may better link prices between

two markets, e.g., the price of MGEX wheat futures and the price of

CBOT wheat futures. Put another way, the prices in two different but

related markets for substitute goods may be more highly correlated,

which benefits market participants with a price exposure to the

underlying protein content in wheat generally, rather than that of a

particular commodity.

d. Costs

Similar to proposed Sec. 150.9, exchanges and market participants

may have made already many of the financial outlays for administering

the application process and applying for spread exemptions,

respectively. Because of that history, the Commission is able to

quantify some of the costs that will arise from proposed Sec. 150.10

in Tables A3 through E3, below. Like the costs for proposed Sec.

150.9, the Commission estimates that six entities would elect to

process spread-exemption applications and file new rules or rule

amendments pursuant to part 40 of the Commission's regulations, and the

number of spread exemption applicants and applications will likely vary

based on the referenced contract. Relying on its past experience, the

Commission forecasts the number of applicants and breaks down the

annual costs in the tables below. Most of the monetary costs are

related to the time, effort, and materials spent for administering and

retaining records for spread exemptions.

Although the Commission is able to quantify some costs, other costs

related to proposed Sec. 150.10 are not easily quantifiable. As

previously stated, other costs are more dependent on individual markets

and market participants seeking a spread exemption, and are more

readily considered qualitatively. Because costs, quantitative or

qualitative, can be particular, the Commission believes that market

participants will determine whether costs associated with seeking a

proposed Sec. 150.10 spread exemption are worth the benefits. If the

costs are too high, then market participants may choose not to apply

for a spread exemption and not to execute a spread transaction that

would exceed position limits. For instance, speculators that execute

exempted spreads would bear the risk of adverse price changes in the

spread, but a speculator who does not receive an exemption may be

unwilling to bear the higher risk of an outright position, if a

position limit would restrict her ability to establish a risk reducing

position in another contract. In general, the Commission believes that

proposed Sec. 150.10 should provide exchanges and market participants

greater regulatory and administrative certainty and that costs will be

small relative to the benefits of having an additional trading tool

under proposed Sec. 150.10.

Note: The activities that are priced in the following Tables A2 to

G2 are similar, if not the same types of activities discussed in the

section affiliated with Tables A1 through G1, for proposed Sec. 150.9.

Unless there is a significant difference in the anticipated acts to

implement proposed Sec. 150.10, the Commission will not re-describe

the activities valued in Tables A2 through G2.

Table A2--Costs To Create or Amend Exchange Rules for Spread-Exemption

Application Reviews

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

Proposed Total average Total average

regulation/ file Total average labor costs per annual cost per

or amend rules labor hours hour exchange

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

Sec. 5 $122 $610

150.10(a)(1) [5 x $122]

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

[[Page 38494]]

Table B2--Costs To Review Spread-Exemption Applications

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

Average total

Total average Total average hours for total Total average Total average

Proposed regulation/ review applications applications labor hours per applications labor costs per annual cost per

processed per application reviewed per hour exchange

exchange exchange

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

Sec. 150.10(a)(2)................................................ 50 5 250 $122 $30,500

[50 x 5] [$122 x 250]

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

Table C2--Cost To Post Spread-Exemption Summaries

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

Average total

Total average Total average hours for total Total average Total average

Proposed regulation/web-posting summaries per labor hours applications labor costs annual cost

exchange per application reviewed per per hour per exchange

exchange

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

Sec. 150.10(a)................................................... 10 5 50 $122 $6,100

[10 x 5] [50 x $122]

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

Regarding the following Table D2, note that reports are also

required to be sent to the Commission in the case of exempt spread

positions under Sec. 150.10(a)(5).

Table D2--Costs to Market Participants Who Would Seek Spread-Exemption Relief From Position Limits

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

Average total

Number of Total average Total average hours for each Total average Total average

Proposed regulation/market participants seeking market applications labor hours application labor costs annual cost

relief from position limits participants per market per filed per per hour per market

participant application exchange participant

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

Sec. 150.10(a)(3), (6).......................... 25 2 3 6 $122 $732

[2 x 3] [6 x $122]

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

Table E2--Costs for Spread-Exempt Recordkeeping

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

Total average

Total average Total average annual

Proposed regulation/ recordkeeping Number of DCMs labor hours labor costs recordkeeping

for per hour cost per

recordkeeping exchange

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

Sec. 150.10(b)............................ 6 30 $122 $3,660

[30 x $122]

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

Table F2--Costs for Weekly Spread-Exemption Reporting

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

Estimated Average Total average

Estimated number of reports Total average annual

Proposed regulation/reporting number of DCMs hours per annually by labor costs reporting cost

response each exchange per hour per exchange

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

Sec. 150.10(c) [weekly].......................................... 6 3 52 $122 $19,032

[3 x 52 x $122]

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

[[Page 38495]]

Table G2--Costs for Monthly Spread-Exemption Reporting

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

Total average

Estimated Average Total average annual

Proposed regulation/monthly reporting Estimated number of reports labor costs reporting

number of DCMs hours per annually by per hour average cost

response each exchange per exchange

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

Sec. 150.10(c)................................................... 6 2 12 $122 $2,928

[2 x 12 x $122]

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

Exchanges would have additional surveillance costs and duties that

the Commission believes would be integrated with their existing self-

regulatory organization surveillance activities as an exchange. For

example, exchanges that elect to grant spread exemptions will have to

adapt and develop procedures to determine whether a particular spread

exemption furthers the goals of CEA section 4a(a)(3)(B) as well as

monitor whether applicant speculators are, in fact, providing liquidity

to other market participants.

Other costs could arise from proposed Sec. 150.11 if the

Commission disagrees with an exchanges' disposition of a spread

application, or costs from a Commission request or review under

proposed Sec. 150.11(d) or (e). These costs are not easily quantified

because they depend on the specifics of the Commission's request or

review.

e. Request for Comment

RFC 47. The Commission requests comment on its considerations of

the benefits of proposed Sec. 150.10. Are there additional benefits

that the Commission should consider? Has the Commission misidentified

any benefits? Commenters are encouraged to include both quantitative

and qualitative assessments of benefits as well as data or other

information of support such assessments.

RFC 48. The Commission requests comment on its considerations of

the costs of proposed Sec. 150.10. Are there additional costs that the

Commission should consider? Has the Commission misidentified any costs?

What other relevant cost information or data, including alternative

cost estimates, should the Commission consider and why? Commenters are

encouraged to include both quantitative and qualitative assessments of

costs as well as data or other information of support such assessments.

RFC 49. The Commission recognizes that there exist alternatives to

proposed Sec. 150.10. These alternatives include: (i) Maintaining the

status quo, or (ii) pursuing the changes in the December 2013 position

limits proposal. The Commission requests comment on whether retaining

the framework for spread exemptions as proposed in the December 2013

position limits proposal is superior from a cost-benefit perspective to

proposed Sec. 150.10. If yes, please explain why. The Commission

requests comment on whether any alternatives to proposed Sec. 150.10

would result in a superior cost-benefit profile, with support for any

such alternative provided.

7. Section 150.11--Enumerated Anticipatory Bona Fide Hedges

After reviewing comments in response to the December 2013 position

limits proposal, the Commission is now proposing another method by

which market participants may have enumerated anticipatory bona fide

hedge positions recognized. As proposed in the December 2013 position

limits proposal, Sec. 150.7 would require market participants to file

statements with the Commission regarding certain anticipatory hedges

which would become effective absent Commission action or inquiry ten

days after submission. The second method in proposed Sec. 150.11 is an

exchange-administered process to determine whether certain enumerated

anticipatory bona fide hedge positions, such as unfilled anticipated

requirements, unsold anticipated production, anticipated royalties,

anticipated service contract payments or receipts, or anticipatory

cross-commodity hedges should be recognized as bona fide hedge

positions. Proposed Sec. 150.11 works in concert with the following

three proposed rules:

Proposed Sec. 150.3(a)(1)(i), with the effect that

recognized anticipatory enumerated bona fide hedge positions may exceed

federal position limits;

proposed Sec. 150.5(a)(2), with the effect that

recognized anticipatory enumerated bona fide hedge positions may exceed

exchange-set position limits for contracts subject to federal position

limits; and

proposed Sec. 150.5(b)(5), with the effect that

recognized anticipatory enumerated bona fide hedge positions may exceed

exchange-set position limits for contracts not subject to federal

position limits.

a. Rule Summary

The proposed Sec. 150.11 process is somewhat analogous to the

application process for recognition of NEBFHs under proposed Sec.

150.9. The proposed Sec. 150.11 recognition process for enumerated

anticipatory bona fide hedge positions has five sub-parts: (a) through

(e). The first three sub-parts--Sec. 150.11(a), (b), and (c)--require

exchanges that elect to have a process for recognizing enumerated

anticipatory bona fide hedge positions, and market participants that

seek position-limit relief for such positions, to carry out certain

duties and obligations. The fourth and fifth sub-parts--Sec.

150.11(d), and (e)--delineate the Commission's role and obligations in

reviewing requests for recognition of enumerated anticipatory bona fide

hedge positions.

i. Section 150.11(a)--Exchange-Administered Enumerated Anticipatory

Bona Fide Hedge Process

Under proposed Sec. 150.11(a)(1), exchanges that voluntarily elect

to process enumerated anticipatory bona-fide hedge applications are

required to notify the Commission of their intention to do so by filing

new rules or rule amendments with the Commission under part 40 of the

Commission's regulations. In proposed Sec. 150.11(a)(2), the

Commission identifies certain types of information necessary for the

application, including information required under proposed Sec.

150.7(d). In proposed Sec. 150.11(a)(3), the Commission states that

applications must be updated annually and that the exchanges have ten

days in which to recognize an enumerated anticipatory bona fide hedge.

In addition, exchanges must retain authority to revoke recognitions.

Proposed Sec. 150.11(a)(4) states that once an enumerated anticipatory

bona fide hedge has been recognized by an exchange, the position will

be deemed to be recognized. Proposed Sec. 150.11(a)(5) discusses

[[Page 38496]]

reports that must be filed by applicants holding exempted an enumerated

anticipatory bona fide hedge positions. Proposed 150.11(a)(6) explains

that exchanges may choose to seek Commission review of an application

and the Commission has ten days in which to respond.

ii. Section 150.11(b)--Enumerated Anticipatory Bona Fide Hedge

Recordkeeping Requirements

Exchanges must maintain complete books and records of all

activities relating to the processing and disposition of spread-

exemption applications under proposed Sec. 150.11(b). This is similar

to the record-retention obligations of exchanges for positions

recognized as NEBFHs under proposed Sec. 150.9, and exempted as

spreads under proposed Sec. 150.10.

iii. Section 150.11(c)--Enumerated Anticipatory Bona Fide Hedge

Reporting Requirements

Exchanges would have weekly reporting obligations under proposed

Sec. 150.11(c). Unlike NEBFHs and spreads, exchanges would have no

monthly reporting or web-posting obligations for enumerated

anticipatory bona fide hedges.

b. Baseline

The baseline is the same as it was in the December 2013 position

limits proposal: The current filing process detailed in current Sec.

1.48.

c. Benefits

There are significant benefits that would likely accrue should

proposed Sec. 150.11 be adopted. Similar to the benefits for

recognizing positions as NEBFH positions under Sec. 150.9, recognizing

anticipatory positions as bona fide hedges under Sec. 150.11 would

provide market participants with potentially a more expeditious

recognition process than the Commission proposal for a 10-day

Commission recognition process under proposed 150.7. The benefit of

prompter recognitions, though, is not readily quantifiable, and, in

most circumstances, is subject to the characteristics and needs of

markets as well as market participants. So while it is challenging to

quantify the benefits that would likely be associated with proposed

Sec. 150.11, there are qualitative benefits that the Commission can

discuss.

For example, exchanges would be able to use existing resources and

knowledge in the administration and assessment of enumerated

anticipatory bona fide hedge positions. The Commission and exchanges

have evaluated these types of positions for years (as discussed in the

December position limits proposal). Utilizing this experience and

familiarity would likely produce such benefits as prompt but reasoned

decision making and streamlined procedures. In addition, proposed Sec.

150.11 permits exchanges to act in less than ten days--a timeframe that

would be less than the Commission's process under current Sec. 1.48,

or under Sec. 150.7 as proposed in the December 2013 position limits

proposal.\228\ This could potentially enable commercial market

participants to pursue trading strategies in a more timely fashion to

advance their commercial and hedging needs to reduce risk.

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

\228\ See discussion in December 2013 position limits proposal

at 75745-46.

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Proposed Sec. 150.11, similar to proposed Sec. 150.9 and Sec.

150.10, also would provide the benefit of enhanced record-retention and

reporting of positions recognized as enumerated anticipatory bona fide

hedges. As previously discussed, records retained for specified periods

would enable exchanges to develop consistent practices and afford the

Commission accessible information for review, surveillance, and

enforcement efforts. Likewise, weekly reporting under Sec. 150.11

would facilitate the tracking of positions, provide transparency to the

enumerated anticipatory bona fide hedge process to the public, and

improve open access and administrative and legal certainty.

d. Costs

The costs for proposed Sec. 150.11 are similar to the costs for

proposed Sec. Sec. 150.9 and 150.10, with many of the cost

considerations not changing. The costs that can be quantified are in

Tables A3 through G3. Other costs associated with proposed Sec.

150.11, like those for proposed Sec. Sec. 150.9 and 150.10, are more

qualitative in nature and hinge on specific market and participant

attributes. With this in mind, the Commission believes that exchanges

and market participants will incur the costs related to Sec. 150.11 if

they believe that administering the process under proposed Sec.

150.11, or applying for recognition under proposed Sec. 150.11 and

establishing a recognized position, respectively, are less costly than

not administering the process under proposed Sec. 150.11 recognitions,

or not executing such trades, respectively.

Other costs could arise from proposed Sec. 150.11 if the

Commission disagrees with an exchange's disposition of an enumerated

anticipatory bona fide hedge position application, or costs from a

Commission request or review under proposed Sec. 150.11(d) These costs

would include time and effort spent by market participants associated

with a Commission review. In addition, market participants would lose

amounts that the Commission can neither predict nor quantify if it

became necessary to unwind trades or reduce positions were the

Commission to conclude that an exchange's disposition of an enumerated

anticipatory bona fide hedge application is not appropriate or is

inconsistent with the Act. The Commission believes that such

disagreements will be rare based on the Commission's past experience

and review of exchanges' efforts. Nevertheless, the Commission notes

that assessing whether a position is for the reduction of risk arising

from anticipatory needs or excessive speculation is complicated.

Note: For a general description of proposed rules identified in the

following Tables A3 to E3, see Section IIIA5, above.

Table A3--Costs To Create or Amend Exchange Rules for Enumerated Anticipatory Bona Fide Hedge Applications

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

Total average Total average

Proposed regulation/file or amend rules Total average labor costs per annual cost per

labor hours hour exchange

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

Sec. 150.11(a)(1).......................................... 5 $122 $610

[5 x $122]

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

[[Page 38497]]

Table B3--Costs To Review Enumerated Anticipatory Bona Fide Hedge Applications

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

Average total

Total average Total average hours for total Total average Total average

Proposed regulation/review applications applications labor hours per applications labor costs per annual cost per

processed per application reviewed per hour exchange

exchange exchange

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

Sec. 150.11(a)(2)................................................ 50 5 250 $122 $30,500

[$122 x 250]

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

Table C3--Costs to Market Participants Who Would Seek Enumerated Anticipatory Bona Fide Hedge Relief From Position Limits

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

Average total

Number of Total average Total average hours for each Total average Total average

Proposed regulation/market participants seeking market applications labor hours per application labor costs per annual cost per

relief from position limits participants per market application filed per hour market

participant exchange participant

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

Sec. 150.11(a)(2), (6).......................... 25 2 3 6 $122 $732

[2 x 3] [6 x $122]

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

Table D3--Costs for Enumerated Anticipatory Bona Fide Hedge Recordkeeping

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

Total average

Total average Total average annual

Proposed regulation/recordkeeping Number of DCMs labor hours for labor costs per recordkeeping

recordkeeping hour cost per exchange

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

Sec. 150.11(b)......................... 6 30 $122 $3,660

[30 x $122]

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

Table E3--Costs for Enumerated Anticipatory Bona Fide Hedge Weekly Reporting

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

Average Total average

Estimated Estimated reports Total average annual

Proposed regulation/weekly reporting number of DCMs number of hours annually by labor costs per reporting cost

per response each exchange hour per exchange

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

Sec. 150.11(c)................................................... 6 3 52 $122 $19,032

[3 x 52 x $122]

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

Exchanges would have additional surveillance costs and duties that

the Commission believes would be integrated with their existing self-

regulatory organization surveillance activities as an exchange.

f. Request for Comment

RFC 50. The Commission requests comment on its considerations of

the benefits of proposed Sec. 150.11. Are there additional benefits

that the Commission should consider? Has the Commission misidentified

any benefits? Commenters are encouraged to include both quantitative

and qualitative assessments of these benefits, as well as data or other

information to support such assessments.

RFC 51. The Commission requests comment on its considerations of

the costs of proposed Sec. 150.11. Are there additional costs that the

Commission should consider? Has the Commission misidentified any costs?

What other relevant cost information or data, including alternative

cost estimates, should the Commission consider and why? Commenters are

encouraged to include both quantitative and qualitative assessments of

these costs, as well as data or other information to support such

assessments.

RFC 52. The Commission recognizes that there may exist alternatives

to proposed Sec. 150.11, such as maintaining the status quo, or

adopting only Sec. 150.7 as proposed in the December 2013 position

limits proposal.\229\ The Commission requests comment on whether

alternatives to proposed Sec. 150.11 would result in a superior cost-

benefit profile, with support for any such alternative provided. The

Commission requests comment on whether the framework for recognizing

enumerated anticipatory bona fide hedging positions as proposed in the

December 2013 position limits proposal would be superior from a cost-

benefit perspective to proposed Sec. 150.11. If yes, please explain

why.

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\229\ See December 2013 position limits proposal at 75776-77.

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

8. CEA Section 15(a) Factors

CEA section 15(a) requires the Commission to consider the costs and

benefits of its actions in light of five factors, which it proposes to

do below. The Commission welcomes comments on its discussion of the

proposed rules in this supplemental proposal and the CEA 15(a) factors.

i. Protection of Market Participants and the Public

The imposition of position limits is intended to protect the

markets and market participants from manipulation and excessive

speculation. Yet, there are

[[Page 38498]]

circumstances where position limits may be exceeded by bona fide hedge

positions or spread positions, as provided in the CEA. By proposing the

rules in this supplemental proposal, the Commission is offering market

participants several reasonable alternatives by which they may

establish bona fide hedge positions or spread positions that exceed

position limits. The proposed alternatives require, among other things,

exchanges to document and record their decisions to recognize bona fide

hedge positions or to exempt spread positions. The Commission believes

that the discipline of having exchanges review and document such

decisions protects hedgers, speculators, and markets from abuse of

recognitions and exemptions. In general, exchanges have strong

incentives, such as preserving the revenue from trading, maintaining

credibility, and protecting markets and market participants from

excessive speculation, manipulation, corners, and squeezes. In

addition, the proposed rules would enable the Commission to protect

markets and market participants because the Commission would be able to

perform second-level reviews of exchange-administered processes

regarding exemptions from speculative position limits, if necessary,

and have available documentation for surveillance and enforcement

actions.

RFC 53: Does permitting the exchanges to administer application

processes for NEBFHs, spread exemptions, and enumerated anticipatory

bona fide hedges further the goals of CEA section 4a(a)(3)(B) and

properly protect market participants and the public? Please explain.

RFC 54: Does permitting the exchanges to administer application

processes for NEBFHs, spread exemptions, and enumerated anticipatory

bona fide hedges affect excess speculation? Please explain.

RFC 55: Will the ability to assume larger positions by way of

exemptions under this supplemental proposal facilitate effective market

manipulation by market participants availing themselves of such

exemptions? Are existing safeguards and deterrents to market

manipulation sufficient to prevent manipulation or does the Commission

need to impose position limits without exchange-granted exemptions to

prevent manipulation, prophylactically? Please explain.

ii. Efficiency, Competitiveness, and Financial Integrity of Futures

Markets

Market manipulation and excessive speculation harm the efficiency,

competitiveness, and financial integrity of markets. Position limits

are intended to prevent market manipulation and excessive speculation.

There are, however, positions that may exceed position limits, such as

those permitted by proposed Sec. Sec. 150.9, 150.10, and 150.11, that

promote market efficiency and competitiveness. For example, the

proposed rules require an exchange to consider the policy objectives of

position limits, prior to granting a spread exemption. If a market

participant exerts market power, it might adversely affect market

integrity because other market participants might perceive the

underlying pricing process to be unfair. The proposed rules are

designed, in part, to give exchanges the ability and information to

guard against accumulation and exercise of market power that may result

from excessive speculation, and, therefore, promote financial integrity

and confidence in the markets.

RFC 56: Is market integrity adversely affected by the proposed

rules in this supplemental proposal? If so, how might the Commission

mitigate any harmful impact?

RFC 57: Should the Commission provide more guidance to exchanges on

how to assess recognitions under this supplemental proposal, for

example, guidance on cash-and-carry spreads, or any other spreads

involving the spot-month contract?

RFC 58: What costs and benefits would accrue to exchanges and

market participants should the Commission provide additional guidance

to exchanges on how to assess recognitions under this supplemental

proposal? Please explain.

RFC 59: Are there any anti-competitive effects between exchanges,

or exchanges and SEFs, because the rules proposed in this supplemental

proposal have the practical effect of allowing exchanges to recognize

and grant exemptions from position limits? If so, what are they? Please

explain.

iii. Price Discovery

The Commission believes that the recognition and exemption

processes proposed to be administered by exchanges in this supplemental

proposal will foster liquidity and potentially improve price discovery.

Because exchanges possess knowledge about the commercial needs of

market participants and the needs of markets, the proposed rules will

enable exchanges to recognize and exempt positions in a timely and

reasonable manner to help facilitate more stable prices. With more

stable prices, market participants will have the ability to trade in

and out of derivative positions more easily and with lower costs of

execution.

RFC 60: How might the rules proposed in this supplemental proposal

affect price discovery? Please explain.

RFC 61: How might the rules proposed in this supplement proposal

affect liquidity?

RFC 62: Will price discovery be improved on exchanges because of

the exemptions outlined in this supplemental proposal?

RFC 63: How might spread exemptions that go into the spot month

affect price discovery?

RFC 64: What price-discovery costs and benefits would accrue for

spread exemptions that go into the spot month? Please explain.

iv. Sound Risk Management Practices

Under the proposed rules, market participants must explain and

document the methods behind their hedging strategies to exchanges, and

exchanges would have to evaluate them. As a result, the Commission

believes that the exchange-administered processes discussed in this

supplemental proposal should help market participants, exchanges, the

Commission, and the public to understand better the risk management

techniques and objectives of various market participants.

RFC 65: How might the rules proposed in this supplemental proposal

affect sound risk management practices?

v. Other Public Interest Considerations

Except as discussed above, the Commission has not identified any

other public interest considerations.

RFC 66: Are there any other public interest considerations that the

Commission should consider?

RFC 67: The Commission seeks comments on all aspects of its cost

and benefit considerations. To the extent that any of the proposed

rules in this supplemental proposal have an impact on activities

outside the United States, the Commission requests comment on whether

the associated costs and benefits are likely to be different from those

associated with their impact on activities within the United States;

and, if so, in what particular ways and to what extent. While at this

point in time the Commission does not foresee any other costs or

benefits that might be associated with the cross-border implications of

this proposal, it seeks further any comment on this topic. For

instance, would price discovery move to a foreign board of trade

because of this proposed rulemaking? On all issues, commenters are

encouraged to supply data and quantify where practical.

[[Page 38499]]

RFC 68: The Commission requests comment on whether there will be

any lost benefits related to position limits because of the

recognitions and exemptions in the proposed rules in this supplemental

proposal.

9. CEA Section 15(b) Considerations

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

public interest to be protected by the antitrust laws and to endeavor

to take the least anticompetitive means of achieving the objectives,

policies and purposes of the CEA, before promulgating a regulation

under the CEA or issuing certain orders. The Commission preliminarily

believes that the rules and guidance proposed in this supplemental

notice of proposed rulemaking are consistent with the public interest

protected by the antitrust laws.

The Commission acknowledges that, with respect to exchange

qualifications to recognize or grant NEBFHs, spread exemptions, and

anticipatory bona fide hedges for federal position limit purposes, the

threshold experience requirements that it proposes will advantage

certain more-established incumbent DCMs (``incumbent DCMs'') over

smaller DCMs seeking to expand or future entrant DCMs (collectively

``entrant DCMs'') or SEFs.\230\ Specifically, incumbent DCMs--based on

their past track records of listing actively traded reference contracts

and setting and administering exchange-set limits applicable to those

contracts for at least a year--will be immediately eligible to submit

rules to the Commission under part 40 to process trader applications

for recognition of NEBFHs, spread exemptions,\231\ and anticipatory

bona fide hedges; in contrast, entrant DCMs and SEFs will be foreclosed

until such time as they have met the eligibility criteria to do so.

However, subject to consideration of any comments supporting a contrary

view, the Commission does not perceive that an ability to process

applications for NEBFHs, spread exemptions and/or anticipatory bona

fide hedges is a necessary function for a DCM or SEF to compete

effectively as a trading facility. In the event an incumbent DCM

declines to process a trader's request for hedging recognition or a

spread exemption,\232\ the trader may seek the recognition or exemption

directly from the Commission in order to trade on an entrant DCM or

SEF. Accordingly, the Commission does not view the proposed threshold

experience requirements as establishing a barrier to entry or

competitive restraint likely to facilitate anticompetitive effects in

any relevant antitrust market for contract trading.\233\

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\230\ Proposed rules Sec. Sec. 150.9(a)(1), 150.10(a)(1), and

150.11(a)(1).

\231\ In the case of qualifications to exempt certain spread

positions, the contract may be either a referenced contract or a

component of the spread. See proposed rule Sec. 150.10(a)(1)(i).

\232\ The Commission recognizes that in certain circumstances it

might be in an exchange's economic interest to deny processing a

particular trader's application for hedge recognition or a spread

exemption. For example, this might occur in a circumstance in which

a trader has reached the exchange-set limit and the exchange

determines that liquidity is insufficient to maintain a fair and

orderly contract market if the trader's position increases.

\233\ See, e.g., Brown Shoe Co. v. U.S., 370 U.S. 294, 324-25

(1962) (``The outer boundaries of a product market are determined by

the reasonable interchangeability of use or the cross-elasticity of

demand between the product itself and the substitutes for it'');

U.S. v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 593 (1957)

(``Determination of the relevant market is a necessary predicate to

finding a violation''); Rebel Oil v. Atl. Richfield Co., 51 F. 3d

1421, 1434 (9th Cir. 1995) (``A `market' is any grouping of sales

whose sellers, if unified by a monopolist or a hypothetical cartel

would have market power in dealing with any group of buyers,''

quoting Phillip Areeda & Herbert Hovenkamp, Antitrust Law ] 518.1b,

at 534 (Supp. 1993)).

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The Commission requests comment on any considerations related to

the public interest to be protected by the antitrust laws and potential

anticompetitive effects of the proposal, as well as data or other

information to support such considerations. Is the Commission correct

that the proposed threshold criteria for an exchange to qualify to

process applications for recognition of NEBFHs, spread exemptions, and

enumerated anticipatory bona fide hedges is unlikely to create a

competitive barrier to entry or expansion that will insulate incumbent

DCMs from competition for contract trading or otherwise contribute to

anticompetitive effects in any relevant antitrust market(s) for

contract trading?

B. Regulatory Flexibility Act

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

consider whether the rules they propose will have a significant

economic impact on a substantial number of small entities and, if so,

provide a regulatory flexibility analysis respecting the impact. A

regulatory flexibility analysis or certification typically is required

for ``any rule for which the agency publishes a general notice of

proposed rulemaking pursuant to'' the notice-and-comment provisions of

the Administrative Procedure Act, 5 U.S.C. 553(b). The requirements

related to the proposed amendments fall mainly on registered entities,

exchanges, FCMs, swap dealers, clearing members, foreign brokers, and

large traders. The Commission has previously determined that registered

DCMs, FCMs, swap dealers, major swap participants, eligible contract

participants, SEFs, clearing members, foreign brokers and large traders

are not small entities for purposes of the RFA. While the requirements

under the proposed rulemaking may impact non-financial end users, the

Commission notes that position limits levels apply only to large

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

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

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

significant economic impact on a substantial number of small entities.

The Chairman made the same certification in the 2013 Position Limits

Proposal.

C. Paperwork Reduction Act

1. Overview

The Paperwork Reduction Act (``PRA''), 44 U.S.C. 3501 et seq.,

imposes certain requirements on Federal agencies in connection with

their conducting or sponsoring any collection of information as defined

by the PRA. An agency may not conduct or sponsor, and a person is not

required to respond to, a collection of information unless it displays

a currently valid control number issued by the Office of Management and

Budget (``OMB''). Certain provisions of the proposed rules would result

in amendments to previously-approved collection of information

requirements within the meaning of the PRA. Therefore, the Commission

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

and 5 CFR 1320.11 the information collection requirements proposed in

this rulemaking proposal as an amendment to the previously-approved

collection associated with OMB control number 3038-0013.

If adopted, responses to this collection of information would be

mandatory. The Commission will protect proprietary information

according to the Freedom of Information Act and 17 CFR part 145, titled

``Commission Records and Information.'' In addition, the Commission

emphasizes that section 8(a)(1) of the Act strictly prohibits the

Commission, unless specifically authorized by the Act, from making

public ``data and information that would separately disclose the

business transactions or market positions of any person and trade

secrets or names of customers.'' The Commission also is required to

protect certain information contained in a government system of

[[Page 38500]]

records pursuant to the Privacy Act of 1974.

On December 12, 2013, the Commission published in the Federal

Register a notice of proposed modifications to parts 1, 15, 17, 19, 32,

37, 38, 140, and 150 of the Commission's regulations (as defined above,

the ``December 2013 position limits proposal''). The modifications

addressed, among other things, speculative position limits for 28

exempt and agricultural commodity futures and options contracts and the

physical commodity swaps that are ``economically equivalent'' to such

contracts. The Commission is now proposing revisions to the December

2013 position limits proposal.

Specifically, the Commission is now proposing that the position

limits set forth in Sec. 150.2 may be exceeded to the extent that a

commodity derivative position is recognized, as an NEBFH, exempt spread

position, or enumerated anticipatory bona fide hedge, by a derivatives

contract market or swap execution facility. A designated contract

market or swap execution facility that elects to process applications

pursuant to the proposed rules must file new rules or rule amendments

with the Commission pursuant to Part 40. Such new rules or rule

amendments must comply with certain conditions set forth in proposed

Sec. Sec. 150.9(a), 150.10(a), and/or 150.11(a), as applicable.

Further, such rules must state that in order to apply for an exemption

with a particular designated contract market or swap execution

facility, a person would need to meet certain criteria and file an

application with the relevant derivatives contract market or swap

execution facility in accordance with proposed Sec. Sec. 150.9(a),

150.10(a), or 150.11(a), as applicable.

2. Methodology and Assumptions

It is not possible at this time to accurately determine the number

of respondents affected by the proposed revisions to the December 2013

position limits proposal. This current proposal permits designated

contract markets and swap execution facilities to elect to process

applications for recognition of NEBFHs, exempt spread positions, or

enumerated anticipatory bona fide hedges. Accordingly, the Commission

does not know which, or how many, designated contract markets and swap

execution facilities may elect to offer such recognition processes, or

which, or how many market participants may submit applications.

Further, the Commission is unsure of how many designated contract

markets, swap execution facilities, and market participants not

currently active in the market may elect to incur the estimated burdens

in the future.

These limitations notwithstanding, the Commission has made best-

effort estimations regarding the likely number of affected entities for

the purposes of calculating burdens under the PRA. The Commission used

data currently provided by designated contract markets to estimate the

number of respondents for each of the proposed obligations subject to

the PRA. The Commission estimated the number of exchanges that may

elect to process applications for recognition of NEBFHs, exempt spread

positions, or enumerated anticipatory bona fide hedges, and the number

of market participants who may file for relief from position limit

requirements under the proposed processes. The Commission also used

information from testimony given at Commission advisory committee

meetings. Further, the Commission asked several questions of the five

exchanges that, in the Commission's knowledge, currently process

applications for exemptions to exchange-set position limits, to

ascertain the burdens on the exchanges that may arise should such

exchanges elect to process applications under proposed Sec. Sec.

150.9, 150.10, and/or 150.11. The Commission received responses to its

questions regarding the administration of current exchange processes

for approving exemptions from position limits from representatives of

four exchanges. The Commission preliminarily believes that the burden

estimates provided by these four exchanges are sufficiently

representative of all potentially affected entities, and is providing

average estimates in order to estimate the potential impact on all

entities, particularly those which do not currently process exemption

applications. Thus, the Commission proposes to use these estimates, as

well as figures provided in testimony from the Energy and Environmental

Markets Advisory Committee and Agricultural Advisory Committee

meetings, to calculate burdens for the purposes of the Paperwork

Reduction Act. The Commission welcomes comment on its estimates and the

methodology described above.

The Commission's estimates concerning wage rates are based on 2013

salary information for the securities industry compiled by the

Securities Industry and Financial Markets Association (``SIFMA''). The

Commission is using a figure of $122 per hour, which is derived from a

weighted average of salaries across different professions from the

SIFMA Report on Management & Professional Earnings in the Securities

Industry 2013, modified to account for an 1800-hour work-year, adjusted

to account for the average rate of inflation in 2013. This figure was

then multiplied by 1.33 to account for benefits, and further by 1.5 to

account for overhead and administrative expenses. The Commission

anticipates that compliance with the provisions would require the work

of an information technology professional; a compliance manager; an

accounting professional; and an associate general counsel. Thus, the

wage rate is a weighted national average of salary for professionals

with the following titles (and their relative weight); ``programmer

(average of senior and non-senior)'' (15% weight), ``senior

accountant'' (15%) ``compliance manager'' (30%), and ``assistant/

associate general counsel'' (40%). All monetary estimates below have

been rounded to the dollar.

The Commission welcomes comment on its assumptions and estimates.

3. Collections of Information--Information Provided by Reporting

Entities and Recordkeeping Duties

(a) Requirements for Designated Contract Markets and Swaps Execution

Facilities Filing New or Amended Rules Pursuant to Part 40

Proposed Sec. Sec. 150.9(a), 150.10(a), and 150.11(a) require that

designated contract markets and swap execution facilities file new

rules or rule amendments pursuant to Part 40 of this chapter,

establishing or amending its application process for recognition of

NEBFHs, exempt spread positions, or enumerated anticipatory bona fide

hedges, respectively, consistent with the requirements of proposed

Sec. Sec. 150.9, 150.10, and 150.11. Further, proposed Sec. Sec.

150.9(a), 150.10(a), and 150.11(a) require that designated contract

markets and swap execution facilities post to their Web sites a summary

describing the type of derivative positions that are recognized as

exempt non-enumerated hedge positions.

The Commission estimates that, at most, 6 entities will file new

rules or rule amendments pursuant to Part 40 to elect to process NEBFH

applications. The Commission determined this estimate by analyzing how

many exchanges currently list actively traded contracts for the 28

commodities for which federal position limits will be set, because

proposed Sec. Sec. 150.9(a), 150.10(a), and 150.11(a) require a

referenced contract to be listed by and actively traded on any exchange

that elects to process NEBHF applications for

[[Page 38501]]

recognition of positions in such referenced contract. The Commission

anticipates that the exchanges that elect to process NEBFH applications

under proposed Sec. 150.9(a) are likely to have processes for

recognizing such exemptions currently, and so would need to file

amendments to existing exchange rules rather than adopt new rules. This

filing would be required only once. Thus, the Commission approximates

an average per entity burden of 5 labor hours. At an estimated labor

cost of $122, the Commission estimates an average cost of approximately

$610 per entity for filings under proposed Sec. 150.9(a).

Similarly, the Commission anticipates that the exchanges that elect

to process spread exemption applications under proposed Sec. 150.10(a)

are likely to have processes for recognizing such exemptions currently,

and so would need to file amendments to existing exchange rules rather

than adopt new rules. This filing would be required only once. Thus,

the Commission approximates an average per entity burden of 5 labor

hours. At an estimated labor cost of $122, the Commission estimates an

average cost of approximately $610 per entity for filings under

proposed Sec. 150.10(a).

In addition, the Commission anticipates that the exchanges that

elect to process enumerated anticipatory bona fide hedge applications

under proposed Sec. 150.11(a) are likely to have processes for

recognizing such exemptions currently, and so would need to file

amendments to existing exchange rules rather than adopt new rules. This

filing would be required only once. Thus, the Commission approximates

an average per entity burden of 5 labor hours. At an estimated labor

cost of $122, the Commission estimates an average cost of approximately

$610 per entity for filings under proposed Sec. 150.11(a).

Review and Disposition of Applications

An exchange that elects to process applications may incur a burden

related to the review and disposition of such applications pursuant to

proposed Sec. Sec. 150.9(a), 150.10(a), and 150.11(a). The review of

an application is required to include analysis of the facts and

circumstances of such application to determine whether the application

meets the standards established by the Commission. Exchanges are

required to notify the applicant regarding the disposition of the

application, including whether the application was approved, denied,

referred to the Commission, or requires additional information.

The Commission anticipates that the exchanges that elect to process

NEBFH applications under proposed Sec. 150.9(a) are likely to have

processes for the review and disposition of such applications currently

in place. The Commission preliminarily believes that in such cases,

complying with the proposed rules is likely to be less burdensome

because the exchange would already have staff, policies, and procedures

established to accomplish its duties under the proposed rules. Thus,

the Commission estimates that each exchange would process an average of

185 NEBFH applications per year and that each application would require

5 hours to process, for an average per entity burden of 925 labor hours

annually. At an estimated labor cost of $122, the Commission estimates

an average cost of approximately $112,850 per entity under proposed

Sec. 150.9(a).

The Commission anticipates that the exchanges that elect to process

spread exemption applications under proposed Sec. 150.10(a) are likely

to have processes for the review and disposition of such applications

currently in place. The Commission preliminarily believes that in such

cases, complying with the proposed rules is likely to be less

burdensome because the exchange would already have staff, policies, and

procedures established to accomplish its duties under the proposed

rules. Thus, the Commission estimates that each exchange would process

about 50 spread exemption applications per year and that each

application would require 5 hours to process, for an average per entity

burden of 250 labor hours annually. At an estimated labor cost of $122,

the Commission estimates an average cost of approximately $30,500 per

entity under proposed Sec. 150.10(a).

The Commission anticipates that the exchanges that elect to process

enumerated anticipatory bona fide hedge applications under proposed

Sec. 150.11(a) are likely to have processes for the review and

disposition of such applications currently in place. The Commission

preliminarily believes that in such cases, complying with the proposed

rules is likely to be less burdensome because the exchange would

already have staff, policies, and procedures established to accomplish

its duties under the proposed rules. Thus, the Commission estimates

that each entity would process about 50 anticipatory hedging

applications per year and that each application would require 5 hours

to process, for an average per entity burden of 250 labor hours

annually. At an estimated labor cost of $122, the Commission estimates

an average cost of approximately $30,500 per entity under proposed

Sec. 150.11(a).

Publication of Summaries

Further, exchanges that elect to process the applications under

proposed Sec. Sec. 150.9 and 150.10 may incur burdens to publish on

their Web sites summaries of the unique types of NEBFH positions and

spread positions, respectively. Although this requirement is new even

for exchanges that already have a similar process under exchange-set

limits, the Commission preliminarily believes that the proposed

summaries will not be overly burdensome in part because they are

anticipated to be concise.

The Commission preliminarily believes that complying with the

requirements under proposed Sec. 150.9(a) for summaries of recognized

NEBFHs would require the work of an analyst to write and a supervisor

to approve a summary. The summary would also need to be published on

the exchange's Web site. The Commission estimates that a single summary

would require 5 hours to write, approve, and post. The Commission notes

that exchanges likely would need to post more summaries in the first

year of the process, as over time the applications may become more

routine. The Commission thus estimates that each exchange would post

approximately 30 summaries per year, for an average per entity burden

of 5 labor hours annually. At an estimated labor cost of $122, the

Commission estimates an average cost of approximately $18,300 per

entity under proposed Sec. 150.9(a).

The Commission preliminarily believes that complying with the

requirements under proposed Sec. 150.10(a) for summaries of recognized

spread exemptions would require the work of an analyst to write and a

supervisor to approve the summary. The summary would also need to be

published on the exchange's Web site. The Commission estimates that a

single summary would require 5 hours to write, approve, and post. The

Commission notes that exchanges likely would need to post more

summaries in the first year of the process, as over time the

applications may become more routine. The Commission thus estimates

that each entity would post approximately 10 summaries per year, for an

average per entity burden of 50 labor hours annually. At an estimated

labor cost of $122, the Commission estimates an average cost of

approximately $6,100 per entity under proposed Sec. 150.10(a).

(b) Requirements for Market Participants

Proposed Sec. Sec. 150.9(a)(3), 150.10(a)(3), and 150.11(a)(2),

would require electing

[[Page 38502]]

designated contract markets and swap execution facilities to establish

an application process that elicits sufficient information to allow the

designated contract market or swap execution facility to determine, and

the Commission to verify, whether it is appropriate to recognize a

commodity derivative position as an NEBFH, exempt spread position or

enumerated anticipatory bona fide hedge. Pursuant to Sec. Sec.

150.9(a)(4)(i), 150.10(a)(4), and 150.11(a)(3), an applicant would be

required to update an application at least on an annual basis. Further,

Sec. Sec. 150.9(a)(6), 150.10(a)(6), and 150.11(a)(5) require that any

such applicant file a report with the designated contract market or

swap execution facility (and with the Commission in the case of

150.10(a)(5)) when such applicant owns or controls a derivative

position that such has been recognized as an NEBFH, exempt spread, or

enumerated anticipatory bona fide hedge, respectively.

The Commission anticipates that market participants would be mostly

familiar with the NEBFH application provided by exchanges that

currently process such applications, and thus preliminarily believes

that the burden for applying to an exchange would be minimal.

Information included in the application is required to be sufficient to

allow the exchange to determine, and the Commission to verify, whether

the position meets the requirements of CEA section 4a(c), but specific

data fields are left to the exchanges to determine. The Commission

believes that there would be a slight additional burden for market

participants to submit the notice that must be filed when such

participant owns or controls the position that has been recognized as a

NEBFH.

The Commission estimates that 222 entities will file an average of

5 applications each year to obtain recognition of certain positions as

NEBFHs and that each application, including the notice filing when the

participant owns or controls such positions, would require

approximately 4 burden hours to complete and file. Thus, the Commission

estimates an average per entity burden of 20 labor hours annually. At

an estimated labor cost of $122, the Commission estimates an average

cost of approximately $2,440 per entity for applications under proposed

Sec. 150.9(a)(3).

The Commission anticipates that market participants would be mostly

familiar with the spread exemption application provided by exchanges

that currently process such applications, and thus preliminarily

believes that the burden for applying to an exchange would be minimal.

Information included in the application is required to be sufficient to

allow the exchange to determine, and the Commission to verify, whether

the position fulfills the objectives of CEA section 4a(a)(3)(B), but

specific data fields are left to the exchanges to determine. The

Commission believes that there would be a slight additional burden for

market participants to submit the notice that must be filed when such

participant owns or controls the spread position that has been exempted

from position limits. The Commission estimates that 25 entities will

file an average of 2 applications each year to obtain an exemption for

certain spread positions and that each application, including the

notice filing when the participant owns or controls such positions,

would require approximately 3 burden hours to complete and file. Thus,

the Commission approximates an average per entity burden of 6 labor

hours annually. At an estimated labor cost of $122, the Commission

estimates an average cost of approximately $732 per entity for

applications under proposed Sec. 150.10(a)(2).

The Commission anticipates that market participants would be mostly

familiar with the enumerated anticipatory bona fide hedge application

provided by exchanges that currently process such applications, and

thus preliminarily believes that the burden for applying to an exchange

would be minimal. The application is required to include, at minimum,

the information required under proposed Sec. 150.7(d). The Commission

estimates that 25 entities will file an average of 2 applications each

year to obtain recognition that certain positions are enumerated

anticipatory bona fide hedges and that each application would require

approximately 3 burden hours to complete and file. Thus, the Commission

estimates an average per entity burden of 6 labor hours annually. At an

estimated labor cost of $122, the Commission estimates an average cost

of approximately $732 per entity for applications under proposed Sec.

150.11(a)(2).

(c) Recordkeeping and Reporting

Proposed Sec. Sec. 150.9(b), 150.10(b), and 150.11(b), would

require electing designated contract markets and swap execution

facilities to keep full, complete, and systematic records, which

include all pertinent data and memoranda, of all activities relating to

the processing and disposition of applications for recognition of

NEBFHs, exempt spread positions, and enumerated anticipatory bona fide

hedges. Further, proposed Sec. Sec. 150.9(c), 150.10(c), and

150.11(c), would require designated contract markets and swap execution

facilities that elect to process NEBFH applications to submit to the

Commission a report for each week as of the close of business on Friday

showing various information concerning the derivative positions that

have been recognized by the designated contract market or swap

execution facility as an NEBFH, exempt spread position, or enumerated

anticipatory bona fide hedge position, and for any revocation,

modification or rejection of such recognition. Finally, proposed

Sec. Sec. 150.9(c) and 150.10(c) also require a designated contract

market or swap execution facility that elects to process applications

for NEBFHs and exempt spread positions to submit to the Commission (i)

a summary of any NEBFH and exempt spread position newly published on

the designated contract market or swap execution facility's Web site;

and (ii) no less frequently than monthly, any report submitted by an

applicant to such designated contract market or swap execution facility

pursuant to rules required under proposed Sec. Sec. 150.9(a)(6)and

150.10(a)(6), respectively.

The Commission preliminarily believes that exchanges that currently

process applications for recognition of NEBFHs, exempt spread

positions, and enumerated anticipatory bona fide hedges maintain

records of such applications as required pursuant to other Commission

regulations, including Sec. 1.31. However, the Commission also

believes that the proposed rules may confer additional recordkeeping

obligations on exchanges that elect to process applications for

recognition of NEBFHs, exempt spread positions, and enumerated

anticipatory bona fide hedges. The Commission estimates that 6 entities

will have recordkeeping obligations pursuant to proposed Sec. 150.9.

Thus, the Commission approximates an average per entity burden of 30

labor hours annually. At an estimated labor cost of $122, the

Commission estimates an average cost of approximately $3,660 per entity

for records and filings under proposed Sec. 150.9.

The Commission estimates that 6 entities will have recordkeeping

obligations pursuant to proposed Sec. 150.10. Thus, the Commission

estimates an average per entity burden of 30 labor hours annually. At

an estimated labor cost of $122, the Commission estimates an average

cost of approximately $3,660 per entity for

[[Page 38503]]

records and filings under proposed Sec. 150.10.

The Commission estimates that 6 entities will have recordkeeping

obligations pursuant to proposed Sec. 150.11. Thus, the Commission

estimates an average per entity burden of 30 labor hours annually. At

an estimated labor cost of $122, the Commission estimates an average

cost of approximately $3,660 per entity for records and filings under

proposed Sec. 150.11.

Finally, the Commission anticipates that exchanges that elect to

process applications for recognition of NEBFHs, spread exemptions, and

enumerated anticipatory bona fide hedges will be required to file two

types of reports, as stated above. The Commission understands that 5

exchanges currently submit reports, on a voluntary basis each month,

which provide information regarding exchange-recognized exemptions of

all types. The Commission preliminarily believes that the content of

such reports is similar to the information required of the reports in

proposed Sec. Sec. 150.9(c), 150.10(c), and 150.11(c), but the

frequency of such reports would increase under the proposed rules.

The Commission estimates that 6 entities will have weekly reporting

obligations pursuant to proposed Sec. 150.9(c). The Commission also

estimates that the weekly report will require a burden of approximately

3 hours to complete and submit. Thus, the Commission estimates an

average per entity burden of 156 labor hours annually. At an estimated

labor cost of $122, the Commission estimates an average cost of

approximately $19,032 per entity for weekly reports under proposed

rules 150.9(c).

The Commission estimates that 6 entities will have weekly reporting

obligations pursuant to proposed Sec. 150.10(c). The Commission also

estimates that the weekly report will require a burden of approximately

3 hours to complete and submit. Thus, the Commission estimates an

average per entity burden of 156 labor hours annually. At an estimated

labor cost of $122, the Commission estimates an average cost of

approximately $19,032 per entity for weekly reports under proposed

Sec. 150.10(c).

The Commission estimates that 6 entities will have weekly reporting

obligations pursuant to proposed Sec. 150.11(c). The Commission also

estimates that the weekly report will require a burden of approximately

3 hours to complete and submit. Thus, the Commission approximates an

average per entity burden of 156 labor hours annually. At an estimated

labor cost of $122, the Commission estimates an average cost of

approximately $19,032 per entity for weekly reports under proposed

Sec. 150.11(c).

For the monthly report, the Commission anticipates a minor burden

for exchanges because the proposed rules require exchanges essentially

to forward to the Commission notices received from applicants who own

or control the positions that have been recognized or exempted.

The Commission estimates that 6 entities will have monthly

reporting obligations pursuant to proposed Sec. 150.9(c). The

Commission also estimates that the monthly report will require a burden

of approximately 2 hours to complete and submit. Thus, the Commission

approximates an average per entity burden of 24 labor hours annually.

At an estimated labor cost of $122, the Commission estimates an average

cost of approximately $2,928 per entity for monthly reports under

proposed Sec. 150.9(c).

The Commission estimates that 6 entities will have monthly

reporting obligations pursuant to proposed Sec. 150.10(c). The

Commission also estimates that the monthly report will require a burden

of approximately 2 hours to complete and submit. Thus, the Commission

approximates an average per entity burden of 24 labor hours annually.

At an estimated labor cost of $122, the Commission estimates an average

cost of approximately $2,928 per entity for monthly reports under

proposed Sec. 150.10(c). The above estimates are summarized in the

following table:

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

Average

reports

Type of respondent Estimated number of Report or record annually by Total annual Estimated number of Annual burden

respondents each responses hours per response in fiscal year

respondent

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

a b.................... c.................... d e \234\ f.................... g \235\

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

Exchanges.......................... 6.................... Sec. 150.9(a) Rule 1 6 5.................... 30

Filing.

6.................... Sec. 150.10(a) Rule 1 6 5.................... 30

Filing.

6.................... Sec. 150.11(a) Rule 1 6 5.................... 30

Filing.

6.................... Sec. 150.9(a) 185 1,110 5.................... 5,550

Review.

6.................... Sec. 150.10(a) 50 300 5.................... 1,500

Review.

6.................... Sec. 150.11(a) 50 300 5.................... 1,500

Review.

6.................... Sec. 150.9(a) 30 180 5.................... 900

Summaries.

6.................... Sec. 150.10(a) 10 60 5.................... 300

Summaries.

6.................... Sec. 150.9(a) 1 6 30................... 180

Recordkeeping.

6.................... Sec. 150.10(a) 1 6 30................... 180

Recordkeeping.

6.................... Sec. 150.11(a) 1 6 30................... 180

Recordkeeping.

6.................... Sec. 150.9(a) 52 312 3.................... 936

Weekly Report.

6.................... Sec. 150.10(a) 52 312 3.................... 936

Weekly Report.

6.................... Sec. 150.11(a) 52 312 3.................... 936

Weekly Report.

6.................... Sec. 150.9(a) 12 72 2.................... 144

Monthly Report.

6.................... Sec. 150.10(a) 12 72 2.................... 144

Monthly Report.

Market Participants................ 222.................. Sec. 150.9(a)(3) 5 1,110 4.................... 4,440

Application & Notice.

25................... Sec. 150.10(a)(3) 2 50 3.................... 150

Application & Notice.

25................... Sec. 150.11(a)(2) 2 50 3.................... 150

Application & Notice.

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

Total.......................... 278 (distinct ..................... .............. 4,276 4.26 (average number 18216

entities or persons). of hours per

response).

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

[[Page 38504]]

4. Information Collection Comments

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.

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

\234\ Column b times column d.

\235\ Column e times column f. Burdens have been rounded to the

nearest whole number where appropriate.

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

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

17 CFR Part 37

Registered entities, Registration application, Reporting and

recordkeeping requirements, Swaps, Swap execution facilities.

17 CFR Part 38

Block transaction, Commodity futures, Designated contract markets,

Reporting and recordkeeping requirements, Transactions off the

centralized market.

17 CFR Part 150

Bona fide hedging, Commodity futures, Cotton, Grains, Position

limits, Referenced Contracts, Swaps.

For the reasons stated in the preamble, the Commodity Futures

Trading Commission proposes to amend 17 CFR chapter I as follows:

PART 37--SWAP EXECUTION FACILITIES

0

1. The authority citation for part 37 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, and 12a, as

amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform

and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.

0

2. In Appendix B to part 37, under the heading Core Principle 6 of

Section 5h of the Act--Position Limits or Accountability, revise

paragraphs (A) and (B) to read as follows:

Appendix B to Part 37--Guidance on, and Acceptable Practices in,

Compliance With Core Principles

* * * * *

Core Principle 6 of Section 5h of the Act--Position Limits or

Accountability

(A) In general. To reduce the potential threat of market

manipulation or congestion, especially during trading in the

delivery month, a swap execution facility that is a trading facility

shall adopt for each of the contracts of the facility, as is

necessary and appropriate, position limitations or position

accountability for speculators.

(B) Position limits. For any contract that is subject to a

position limitation established by the Commission pursuant to

section 4a(a), the swap execution facility shall:

(1) Set its position limitation at a level not higher than the

Commission limitation; and

(2) Monitor positions established on or through the swap

execution facility for compliance with the limit set by the

Commission and the limit, if any, set by the swap execution

facility.

(a) Guidance. (1) Until a swap execution facility has access to

sufficient swap position information, a swap execution facility that

is a trading facility need not demonstrate compliance with Core

Principle 6(B). A swap execution facility has access to sufficient

swap position information if, for example:

(i) It has access to daily information about its market

participants' open swap positions; or

(ii) It knows, including through knowledge gained in

surveillance of heavy trading activity occurring on or pursuant to

the rules of the swap execution facility, that its market

participants regularly engage in large volumes of speculative

trading activity that would cause reasonable surveillance personnel

at a swap execution facility to inquire further about a market

participant's intentions or open swap positions.

(2) When a swap execution facility has access to sufficient swap

position information, this guidance is no longer applicable. At such

time, a swap execution facility is required to demonstrate

compliance with Core Principle 6(B).

(b) Acceptable practices. [Reserved]

* * * * *

PART 38--DESIGNATED CONTRACT MARKETS

0

3. The authority citation for part 38 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j,

6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as

amended by the Dodd-Frank Wall Street Reform and Consumer Protection

Act, Pub. L. 111-203, 124 Stat. 1376.

0

4. In Appendix B to part 38, under the heading Core Principle 5 of

section 5(d) of the Act: Position Limitations or Accountability, revise

paragraphs (A) and (B) to read as follows:

Appendix B to Part 38--Guidance on, and Acceptable Practices in,

Compliance With Core Principles

* * * * *

Core Principle 5 of section 5(d) of the Act: POSITION

LIMITATIONS OR ACCOUNTABILITY

(A) IN GENERAL.--To reduce the potential threat of market

manipulation or congestion (especially during trading in the

delivery month), the board of trade shall adopt for each contract of

the board of trade, as is necessary and appropriate, position

limitations or position accountability for speculators.

(B) MAXIMUM ALLOWABLE POSITION LIMITATION.--For any contract

that is subject to a position limitation established by the

Commission pursuant to section 4a(a), the board of trade shall set

the position limitation of the board of trade at a level not higher

than the position limitation established by the Commission.

(a) Guidance. (1) Until a board of trade has access to

sufficient swap position information, a board of trade need not

demonstrate compliance with Core Principle 5(B) with respect to

swaps. A board of trade has access to sufficient swap position

information if, for example:

(i) It has access to daily information about its market

participants' open swap positions; or

(ii) It knows, including through knowledge gained in

surveillance of heavy trading activity occurring on or pursuant to

the rules of the designated contract market, that its market

participants regularly engage in large volumes of speculative

trading activity that would cause reasonable surveillance personnel

at a board of trade to inquire further about a market participant's

intentions or open swap positions.

(2) When a board of trade has access to sufficient swap position

information, this guidance is no longer applicable. At such time, a

board of trade is required to demonstrate compliance with Core

Principle 5(B) with respect to swaps.

[[Page 38505]]

(b) Acceptable Practices. [Reserved]

* * * * *

PART 150--LIMITS ON POSITIONS

0

5. The authority citation for part 150 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).

0

6. Revise Sec. 150.1 to read as follows:

Sec. 150.1 Definitions.

As used in this part--

Bona fide hedging position means--

(1) Hedges of an excluded commodity. For a position in commodity

derivative contracts in an excluded commodity, as that term is defined

in section 1a(19) of the Act:

(i) Such position is economically appropriate to the reduction of

risks in the conduct and management of a commercial enterprise; and

(ii)(A) Is enumerated in paragraph (3), (4) or (5) of this

definition; or

(B) Is recognized as a bona fide hedging position by the designated

contract market or swap execution facility that is a trading facility,

pursuant to such market's rules submitted to the Commission, which

rules may include risk management exemptions consistent with Appendix A

of this part; and

(2) Hedges of a physical commodity. For a position in commodity

derivative contracts in a physical commodity:

(i) Such position:

(A) Represents a substitute for transactions made or to be made, or

positions taken or to be taken, at a later time in a physical marketing

channel;

(B) Is economically appropriate to the reduction of risks in the

conduct and management of a commercial enterprise;

(C) Arises from the potential change in the value of--

(1) Assets which a person owns, produces, manufactures, processes,

or merchandises or anticipates owning, producing, manufacturing,

processing, or merchandising;

(2) Liabilities which a person owes or anticipates incurring; or

(3) Services that a person provides, purchases, or anticipates

providing or purchasing; and

(D) Is--

(1) Enumerated in paragraph (3), (4) or (5) of this definition; or

(2) Recognized as shown to be a non-enumerated bona fide hedges by

either a designated contract market or swap execution facility, each in

accordance with Sec. 150.9(a); or by the Commission; or

(ii)(A) Pass-through swap offsets. Such position reduces risks

attendant to a position resulting from a swap in the same physical

commodity that was executed opposite a counterparty for which the

position at the time of the transaction would qualify as a bona fide

hedging position pursuant to paragraph (2)(i) of this definition (a

pass-through swap counterparty), provided that no such risk-reducing

position is maintained in any physical-delivery commodity derivative

contract during the lesser of the last five days of trading or the time

period for the spot month in such physical-delivery commodity

derivative contract; and

(B) Pass-through swaps. Such swap position was executed opposite a

pass-through swap counterparty and to the extent such swap position has

been offset pursuant to paragraph (2)(ii)(A) of this definition.

(3) Enumerated hedging positions. A bona fide hedging position

includes any of the following specific positions:

(i) Hedges of inventory and cash commodity purchase contracts.

Short positions in commodity derivative contracts that do not exceed in

quantity ownership or fixed-price purchase contracts in the contract's

underlying cash commodity by the same person.

(ii) Hedges of cash commodity sales contracts. Long positions in

commodity derivative contracts that do not exceed in quantity the

fixed-price sales contracts in the contract's underlying cash commodity

by the same person and the quantity equivalent of fixed-price sales

contracts of the cash products and by-products of such commodity by the

same person.

(iii) Hedges of unfilled anticipated requirements. Provided that

such positions in a physical-delivery commodity derivative contract,

during the lesser of the last five days of trading or the time period

for the spot month in such physical-delivery contract, do not exceed

the person's unfilled anticipated requirements of the same cash

commodity for that month and for the next succeeding month:

(A) Long positions in commodity derivative contracts that do not

exceed in quantity unfilled anticipated requirements of the same cash

commodity, and that do not exceed twelve months for an agricultural

commodity, for processing, manufacturing, or use by the same person;

and

(B) Long positions in commodity derivative contracts that do not

exceed in quantity unfilled anticipated requirements of the same cash

commodity for resale by a utility that is required or encouraged to

hedge by its public utility commission on behalf of its customers'

anticipated use.

(iv) Hedges by agents. Long or short positions in commodity

derivative contracts by an agent who does not own or has not contracted

to sell or purchase the offsetting cash commodity at a fixed price,

provided that the agent is responsible for merchandising the cash

positions that are being offset in commodity derivative contracts and

the agent has a contractual arrangement with the person who owns the

commodity or holds the cash market commitment being offset.

(4) Other enumerated hedging positions. A bona fide hedging

position also includes the following specific positions, provided that

no such position is maintained in any physical-delivery commodity

derivative contract during the lesser of the last five days of trading

or the time period for the spot month in such physical-delivery

contract:

(i) Hedges of unsold anticipated production. Short positions in

commodity derivative contracts that do not exceed in quantity unsold

anticipated production of the same commodity, and that do not exceed

twelve months of production for an agricultural commodity, by the same

person.

(ii) Hedges of offsetting unfixed-price cash commodity sales and

purchases. Short and long positions in commodity derivative contracts

that do not exceed in quantity that amount of the same cash commodity

that has been bought and sold by the same person at unfixed prices:

(A) Basis different delivery months in the same commodity

derivative contract; or

(B) Basis different commodity derivative contracts in the same

commodity, regardless of whether the commodity derivative contracts are

in the same calendar month.

(iii) Hedges of anticipated royalties. Short positions in commodity

derivative contracts offset by the anticipated change in value of

mineral royalty rights that are owned by the same person, provided that

the royalty rights arise out of the production of the commodity

underlying the commodity derivative contract.

(iv) Hedges of services. Short or long positions in commodity

derivative contracts offset by the anticipated change in value of

receipts or payments due or expected to be due under an executed

contract for services held by the same person, provided that the

contract for services arises out of the production, manufacturing,

processing, use, or transportation of the commodity

[[Page 38506]]

underlying the commodity derivative contract, and which may not exceed

one year for agricultural commodities.

(5) Cross-commodity hedges. Positions in commodity derivative

contracts described in paragraphs (2)(ii), (3)(i) through (iv), and

(4)(i) through (iv) of this definition may also be used to offset the

risks arising from a commodity other than the same cash commodity

underlying a commodity derivative contract, provided that the

fluctuations in value of the position in the commodity derivative

contract, or the commodity underlying the commodity derivative

contract, are substantially related to the fluctuations in value of the

actual or anticipated cash position or pass-through swap and no such

position is maintained in any physical-delivery commodity derivative

contract during the lesser of the last five days of trading or the time

period for the spot month in such physical-delivery contract.

Futures-equivalent means--

(1) An option contract, whether an option on a future or an option

that is a swap, which has been adjusted by an economically reasonable

and analytically supported risk factor, or delta coefficient, for that

option computed as of the previous day's close or the current day's

close or contemporaneously during the trading day, and converted to an

economically equivalent amount of an open position in a core referenced

futures contract;

(2) A futures contract which has been converted to an economically

equivalent amount of an open position in a core referenced futures

contract; and

(3) A swap which has been converted to an economically equivalent

amount of an open position in a core referenced futures contract.

Intermarket spread position means a long (short) position in one or

more commodity derivative contracts in a particular commodity, or its

products or its by-products, at a particular designated contract market

or swap execution facility, and a short (long) position in one or more

commodity derivative contracts in that same, or similar, commodity, or

its products or its by-products, away from that particular designated

contract market or swap execution facility.

Intramarket spread position means a long position in one or more

commodity derivative contracts in a particular commodity, or its

products or its by-products, and a short position in one or more

commodity derivative contracts in the same, or similar, commodity, or

its products or its by-products, on the same designated contract market

or swap execution facility.

0

7. Revise Sec. 150.3 to read as follows:

Sec. 150.3 Exemptions.

(a) Positions which may exceed limits. The position limits set

forth in Sec. 150.2 may be exceeded to the extent that:

(1) Such positions are:

(i) Bona fide hedging positions that either:

(A) Comply with the definition in Sec. 150.1; or

(B) Are recognized by a designated contract market or swap

execution facility as:

(1) Non-enumerated bona fide hedges in accordance with the general

definition in Sec. 150.1 and the process in Sec. 150.9(a), provided

that the person has not otherwise been notified by the Commission under

Sec. 150.9(d)(4) or by the designated contract market or swap

execution facility under rules adopted pursuant to Sec.

150.9(a)(4)(iv)(B); or

(2) Anticipatory bona fide hedge positions under paragraphs

(3)(iii), (4)(i), (4)(iii), (4)(iv) and (5) of the bona fide hedging

position definition in Sec. 150.1, provided that for anticipatory bona

fide hedge positions under this paragraph the person complies with the

filing requirements found in Sec. 150.7 or the filing requirements

adopted by a designated contract market or swap execution facility in

accordance with Sec. 150.11(a)(3), as applicable;

(ii) [Reserved];

(iii) [Reserved];

(iv) Spread positions recognized by a designated contract market or

swap execution facility in accordance with Sec. 150.10(a), provided

that the person has not otherwise been notified by the Commission under

Sec. 150.10(d)(4) or by the designated contract market or swap

execution facility under rules adopted pursuant to Sec.

150.10(a)(4)(iv)(B); or

(v) Other positions exempted under paragraph (e) of this section;

and that

(2) [Reserved]

(3) [Reserved]

(b) through (j) [Reserved]

0

8. Revise Sec. 150.5 to read as follows:

Sec. 150.5 Exchange-set speculative position limits.

(a) Requirements and acceptable practices for futures and futures

option contracts subject to federal position limits. (1) For any

commodity derivative contract that is subject to a speculative position

limit under Sec. 150.2, a designated contract market or swap execution

facility that is a trading facility shall set a speculative position

limit that is no higher than the level specified in Sec. 150.2.

(2) Exemptions under Sec. 150.3--(i) Grant of exemption. Any

designated contract market or swap execution facility that is a trading

facility may grant exemptions from any speculative position limits it

sets under paragraph (a)(1) of this section, provided that such

exemptions conform to the requirements specified in Sec. 150.3.

(ii) Application for exemption. Any designated contract market or

swap execution facility that grants exemptions under paragraph

(a)(2)(i) of this section:

(A) Must require traders to file an application requesting such

exemption;

(B) Must require, for any exemption granted, that the trader

reapply for the exemption at least on an annual basis; and

(C) May deny any such application, or limit, condition, or revoke

any such exemption, at any time, including if it determines such

positions would not be in accord with sound commercial practices, or

would exceed an amount that may be established and liquidated in an

orderly fashion.

(3) through (6) [Reserved]

(b) Requirements and acceptable practices for futures and future

option contracts that are not subject to the limits set forth in Sec.

150.2, including derivative contracts in a physical commodity as

defined in Sec. 150.1 and in an excluded commodity as defined in

section 1a(19) of the Act--

(1) through (4) [Reserved]

(5) Exemptions--(i) Hedge exemption. Any hedge exemption rules

adopted by a designated contract market or swap execution facility that

is a trading facility must conform to the definition of bona fide

hedging position in Sec. 150.1 or provide for recognition as a non-

enumerated bona fide hedge in a manner consistent with the process

described in Sec. 150.9(a).

(ii) Other exemptions. A designated contract market or swap

execution facility may grant exemptions for:

(A) [Reserved];

(B) [Reserved].

(C) Intramarket spread positions and intermarket spread positions,

each as defined in Sec. 150.1, provided that the designated contract

market or swap execution facility, in considering whether to grant an

application for such exemption, should take into account whether

exempting the spread position from position limits would, to the

maximum extent practicable, ensure sufficient market liquidity for bona

fide hedgers, and not unreasonably reduce the effectiveness of position

limits to:

(1) Diminish, eliminate, or prevent excessive speculation;

(2) Deter and prevent market manipulation, squeezes, and corners;

and

[[Page 38507]]

(3) Ensure that the price discovery function of the underlying

market is not disrupted.

(D) For excluded commodities, a designated contract market or swap

execution facility may grant, in addition to the exemptions under

paragraphs (b)(5)(i) and (b)(5)(ii)(A) through (C) of this section, a

limited risk management exemption pursuant to rules submitted to the

Commission, consistent with the guidance in Appendix A of this part.

(iii) [Reserved]

(6) through (9) [Reserved]

(c) [Reserved]

0

9. Add Sec. 150.9 to read as follows:

Sec. 150.9 Process for recognition of positions as non-enumerated

bona fide hedges.

(a) Requirements for a designated contract market or swap execution

facility to recognize non-enumerated bona fide hedge positions. (1) A

designated contract market or swap execution facility that elects to

process non-enumerated bona fide hedge applications to demonstrate why

a derivative position satisfies the requirements of section 4a(c) of

the Act shall maintain rules, submitted to the Commission pursuant to

part 40 of this chapter, establishing an application process for

recognition of non-enumerated bona fide hedges consistent with the

requirements of this section and the general definition of bona fide

hedging position in Sec. 150.1. A designated contract market or swap

execution facility may elect to process non-enumerated bona fide hedge

applications for positions in commodity derivative contracts only if,

in each case:

(i) The commodity derivative contract is a referenced contract;

(ii) Such designated contract market or swap execution facility

lists such commodity derivative contract for trading;

(iii) Such commodity derivative contract is actively traded on such

designated contract market or swap execution facility;

(iv) Such designated contract market or swap execution facility has

established position limits for such commodity derivative contract; and

(v) Such designated contract market or swap execution facility has

at least one year of experience and expertise administering position

limits for such commodity derivative contract. A designated contract

market or swap execution facility shall not recognize a non-enumerated

bona fide hedge involving a commodity index contract and one or more

referenced contracts.

(2) A designated contract market or swap execution facility may

establish different application processes for persons to demonstrate

why a derivative position constitutes a non-enumerated bona fide hedge

under novel facts and circumstances and under facts and circumstances

substantially similar to a position for which a summary has been

published on such designated contract market's or swap execution

facility's Web site, pursuant to paragraph (a)(7) of this section.

(3) Any application process that is established by a designated

contract market or swap execution facility shall elicit sufficient

information to allow the designated contract market or swap execution

facility to determine, and the Commission to verify, whether the facts

and circumstances in respect of a derivative position satisfy the

requirements of section 4a(c) of the Act and the general definition of

bona fide hedging position in Sec. 150.1, and whether it is

appropriate to recognize such position as a non-enumerated bona fide

hedge, including at a minimum:

(i) A description of the position in the commodity derivative

contract for which the application is submitted and the offsetting cash

positions;

(ii) Detailed information to demonstrate why the position satisfies

the requirements of section 4a(c) of the Act and the general definition

of bona fide hedging position in Sec. 150.1;

(iii) A statement concerning the maximum size of all gross

positions in derivative contracts to be acquired by the applicant

during the year after the application is submitted;

(iv) Detailed information regarding the applicant's activity in the

cash markets for the commodity underlying the position for which the

application is submitted during the past three years; and

(v) Any other information necessary to enable the designated

contract market or swap execution facility to determine, and the

Commission to verify, whether it is appropriate to recognize such

position as a non-enumerated bona fide hedge.

(4) Under any application process established under this section, a

designated contract market or swap execution facility shall:

(i) Require each person intending to exceed position limits to

submit an application, to reapply at least on an annual basis by

updating that application, and to receive notice of recognition from

the designated contract market or swap execution facility of a position

as a non-enumerated bona fide hedge in advance of the date that such

position would be in excess of the limits then in effect pursuant to

section 4a of the Act;

(ii) Notify an applicant in a timely manner if a submitted

application is not complete. If an applicant does not amend or resubmit

such application within a reasonable amount of time after such notice,

a designated contract market or swap execution facility may reject the

application;

(iii) Determine in a timely manner whether a derivative position

for which a complete application has been submitted satisfies the

requirements of section 4a(c) of the Act and the general definition of

bona fide hedging position in Sec. 150.1, and whether it is

appropriate to recognize such position as a non-enumerated bona fide

hedge;

(iv) Have the authority to revoke, at any time, any recognition

issued pursuant to this section if it determines the recognition is no

longer in accord with section 4a(c) of the Act and the general

definition of bona fide hedging position in Sec. 150.1; and

(v) Notify an applicant in a timely manner:

(A) That the derivative position for which a complete application

has been submitted has been recognized by the designated contract

market or swap execution facility as a non-enumerated bona fide hedge

under this section, and the details and all conditions of such

recognition;

(B) That its application is rejected, including the reasons for

such rejection; or

(C) That the designated contract market or swap execution facility

has asked the Commission to consider the application under paragraph

(a)(8) of this section.

(5) An applicant's derivatives position shall be deemed to be

recognized as a non-enumerated bona fide hedge exempt from federal

position limits at the time that a designated contract market or swap

execution facility notifies an applicant that such designated contract

market or swap execution facility will recognize such position as a

non-enumerated bona fide hedge.

(6) A designated contract market or swap execution facility that

elects to process non-enumerated bona fide hedge applications shall

file new rules or rule amendments pursuant to part 40 of this chapter,

establishing or amending requirements for an applicant to file a report

with such designated contract market or swap execution facility when

such applicant owns or controls a derivative position that such

designated contract market or swap execution facility has recognized as

a non-enumerated bona fide hedge, and for such applicant to report the

offsetting cash positions. Such rules

[[Page 38508]]

shall require an applicant to update and maintain the accuracy of any

such report.

(7) After recognition of each unique type of derivative position as

a non-enumerated bona fide hedge, based on novel facts and

circumstances, a designated contract market or swap execution facility

shall publish on its Web site, on at least a quarterly basis, a summary

describing the type of derivative position and explaining why it was

recognized as a non-enumerated bona fide hedge.

(8) If a non-enumerated bona fide hedge application presents novel

or complex issues or is potentially inconsistent with section 4a(c) of

the Act and the general definition of bona fide hedging position in

Sec. 150.1, a designated contract market or swap execution facility

may ask the Commission to consider the application under the process

set forth in paragraph (d) of this section. The Commission may, in its

discretion, agree to or reject any such request by a designated

contract market or swap execution facility.

(b) Recordkeeping. (1) A designated contract market or swap

execution facility that elects to process non-enumerated bona fide

hedge applications shall keep full, complete, and systematic records,

which include all pertinent data and memoranda, of all activities

relating to the processing of such applications and the disposition

thereof, including the recognition by the designated contract market or

swap execution facility of any derivative position as a non-enumerated

bona fide hedge, the revocation or modification of any such

recognition, the rejection by the designated contract market or swap

execution facility of an application, or the withdrawal,

supplementation or updating of an application by the applicant.

Included among such records shall be:

(i) All information and documents submitted by an applicant in

connection with its application;

(ii) Records of oral and written communications between such

designated contract market or swap execution facility and such

applicant in connection with such application; and

(iii) All information and documents in connection with such

designated contract market's or swap execution facility's analysis of

and action on such application.

(2) All books and records required to be kept pursuant to this

section shall be kept in accordance with the requirements of Sec. 1.31

of this chapter.

(c) Reports to the Commission. (1) A designated contract market or

swap execution facility that elects to process non-enumerated bona fide

hedge applications shall submit to the Commission a report for each

week as of the close of business on Friday showing the following

information:

(i) For each commodity derivative position that has been recognized

by the designated contract market or swap execution facility as a non-

enumerated bona fide hedge, and for any revocation or modification of

such a recognition:

(A) The date of disposition,

(B) The effective date of the disposition,

(C) The expiration date of any recognition,

(D) Any unique identifier assigned by the designated contract

market or swap execution facility to track the application,

(E) Any unique identifier assigned by the designated contract

market or swap execution facility to a type of recognized non-

enumerated bona fide hedge,

(F) The identity of the applicant,

(G) The listed commodity derivative contract to which the

application pertains,

(H) The underlying cash commodity,

(I) The maximum size of the commodity derivative position that is

recognized by the designated contract market or swap execution facility

as a non-enumerated bona fide hedge,

(J) Any size limitation established for such commodity derivative

position on the designated contract market or swap execution facility,

and

(K) A concise summary of the applicant's activity in the cash

markets for the commodity underlying the commodity derivative position;

and

(ii) The summary of any non-enumerated bona fide hedge published

pursuant to paragraph (a)(7) of this section, or revised, since the

last summary submitted to the Commission.

(2) Unless otherwise instructed by the Commission, a designated

contract market or swap execution facility that elects to process non-

enumerated bona fide hedge applications shall submit to the Commission,

no less frequently than monthly, any report submitted by an applicant

to such designated contract market or swap execution facility pursuant

to rules required under paragraph (a)(6) of this section.

(3) Unless otherwise instructed by the Commission, a designated

contract market or swap execution facility that elects to process non-

enumerated bona fide hedge applications shall submit to the Commission

the information required by paragraphs (c)(1) and (2) of this section,

as follows:

(i) As specified by the Commission on the Forms and Submissions

page at www.cftc.gov;

(ii) Using the format, coding structure, and electronic data

transmission procedures approved in writing by the Commission; and

(iii) Not later than 9:00 a.m. Eastern time on the third business

day following the date of the report.

(d) Review of applications by the Commission. (1) The Commission

may in its discretion at any time review any non-enumerated bona fide

hedge application submitted to a designated contract market or swap

execution facility, and all records required to be kept by such

designated contract market or swap execution facility pursuant to

paragraph (b) of this section in connection with such application, for

any purpose, including to evaluate whether the disposition of the

application is consistent with section 4a(c) of the Act and the general

definition of bona fide hedging position in Sec. 150.1.

(i) The Commission may request from such designated contract market

or swap execution facility records required to be kept by such

designated contract market or swap execution facility pursuant to

paragraph (b) of this section in connection with such application.

(ii) The Commission may request additional information in

connection with such application from such designated contract market

or swap execution facility or from the applicant.

(2) If the Commission preliminarily determines that any non-

enumerated bona fide hedge application or the disposition thereof by a

designated contract market or swap execution facility presents novel or

complex issues that require additional time to analyze, or that an

application or the disposition thereof by such designated contract

market or swap execution facility is potentially inconsistent with

section 4a(c) of the Act and the general definition of bona fide

hedging position in Sec. 150.1, the Commission shall:

(i) Notify such designated contract market or swap execution

facility and the applicable applicant of the issues identified by the

Commission; and

(ii) Provide them with 10 business days in which to provide the

Commission with any supplemental information.

(3) The Commission shall determine whether it is appropriate to

recognize the derivative position for which such application has been

submitted as a non-enumerated bona fide hedge, or whether the

disposition of such application by such designated contract market or

swap execution facility is consistent with section 4a(c) the Act and

the general definition of bona fide hedging position in Sec. 150.1.

[[Page 38509]]

(4) If the Commission determines that the disposition of such

application is inconsistent with section 4a(c) of the Act and the

general definition of bona fide hedging position in Sec. 150.1, the

Commission shall notify the applicant and grant the applicant a

commercially reasonable amount of time to liquidate the derivative

position or otherwise come into compliance. This notification will

briefly specify the nature of the issues raised and the specific

provisions of the Act or the Commission's regulations with which the

application is, or appears to be, inconsistent.

(e) Review of summaries by the Commission. The Commission may in

its discretion at any time review any summary of a type of non-

enumerated bona fide hedge required to be published on a designated

contract market's or swap execution facility's Web site pursuant to

paragraph (a)(7) of this section for any purpose, including to evaluate

whether the summary promotes transparency and fair and open access by

all market participants to information regarding bona fide hedges. If

the Commission determines that a summary is deficient in any way, the

Commission shall notify such designated contract market or swap

execution facility, and grant to the designated contract market or swap

execution facility a reasonable amount of time to revise the summary.

(f) Delegation of authority to the Director of the Division of

Market Oversight. (1) The Commission hereby delegates, until it orders

otherwise, to the Director of the Division of Market Oversight or such

other employee or employees as the Director may designate from time to

time, the authority:

(i) In paragraph (a)(8) of this section to agree to or reject a

request by a designated contract market or swap execution facility to

consider a non-enumerated bona fide hedge application;

(ii) In paragraph (c) of this section to provide instructions

regarding the submission to the Commission of information required to

be reported by a designated contract market or swap execution facility,

to specify the manner for submitting such information on the Forms and

Submissions page at www.cftc.gov, and to determine the format, coding

structure, and electronic data transmission procedures for submitting

such information;

(iii) In paragraph (d)(1) of this section to review any non-

enumerated bona fide hedge application and all records required to be

kept by a designated contract market or swap execution facility in

connection with such application, to request such records from such

designated contract market or swap execution facility, and to request

additional information in connection with such application from such

designated contract market or swap execution facility or from the

applicant;

(iv) In paragraph (d)(2) of this section to preliminarily determine

that a non-enumerated bona fide hedge application or the disposition

thereof by a designated contract market or swap execution facility

presents novel or complex issues that require additional time to

analyze, or that such application or the disposition thereof is

potentially inconsistent with section 4a(c) of the Act and the general

definition of bona fide hedging position in Sec. 150.1, to notify the

designated contract market or swap execution facility and the

applicable applicant of the issues identified, and to provide them with

10 business days in which to file supplemental information; and

(v) In paragraph (e) of this section to review any summary of a

type of non-enumerated bona fide hedge required to be published on a

designated contract market's or swap execution facility's Web site, to

determine that any such summary is deficient, to notify a designated

contract market or swap execution facility of a deficient summary, and

to grant such designated contract market or swap execution facility a

reasonable amount of time to revise such summary.

(2) The Director of the Division of Market Oversight may submit to

the Commission for its consideration any matter which has been

delegated in this section.

(3) Nothing in this section prohibits the Commission, at its

election, from exercising the authority delegated in this section.

0

10. Add Sec. 150.10 to read as follows:

Sec. 150.10 Process for designated contract market or swap execution

facility exemption from position limits for certain spread positions.

(a) Requirements for a designated contract market or swap execution

facility to exempt from position limits certain positions normally

known to the trade as spreads. (1) A designated contract market or swap

execution facility that elects to process applications for exemptions

from position limits for certain positions normally known to the trade

as spreads shall maintain rules, submitted to the Commission pursuant

to part 40 of this chapter, establishing an application process for

exempting positions normally known to the trade as spreads consistent

with the requirements of this section. A designated contract market or

swap execution facility may elect to process applications for such

spread exemptions only if, in each case:

(i) Such designated contract market or swap execution facility

lists for trading at least one contract that is either a component of

the spread or a referenced contract that is a component of the spread;

and

(ii) The contract in paragraph (a)(1)(i) of this section is

actively traded and has been subject to position limits of the

designated contract market or swap execution facility for at least one

year. A designated contract market or swap execution facility shall not

approve a spread exemption involving a commodity index contract and one

or more referenced contracts.

(2) Spreads that a designated contract market or swap execution

facility may approve under this section include:

(i) Calendar spreads;

(ii) Quality differential spreads;

(iii) Processing spreads; and

(iv) Product or by-product differential spreads.

(3) Any application process that is established by a designated

contract market or swap execution facility under this section shall

elicit sufficient information to allow the designated contract market

or swap execution facility to determine, and the Commission to verify,

whether the facts and circumstances demonstrate that it is appropriate

to exempt a spread position from position limits, including at a

minimum:

(i) A description of the spread position for which the application

is submitted;

(ii) Detailed information to demonstrate why the spread position

should be exempted from position limits, including how the exemption

would further the purposes of section 4a(a)(3)(B) of the Act;

(iii) A statement concerning the maximum size of all gross

positions in derivative contracts to be acquired by the applicant

during the year after the application is submitted; and

(iv) Any other information necessary to enable the designated

contract market or swap execution facility to determine, and the

Commission to verify, whether it is appropriate to exempt such spread

position from position limits.

(4) Under any application process established under this section, a

designated contract market or swap execution facility shall:

(i) Require each person requesting an exemption from position

limits for its spread position to submit an application, to reapply at

least on an annual basis by updating that application, and to receive

approval in

[[Page 38510]]

advance of the date that such position would be in excess of the limits

then in effect pursuant to section 4a of the Act;

(ii) Notify an applicant in a timely manner if a submitted

application is not complete. If an applicant does not amend or resubmit

such application within a reasonable amount of time after such notice,

a designated contract market or swap execution facility may reject the

application;

(iii) Determine in a timely manner whether a spread position for

which a complete application has been submitted satisfies the

requirements of paragraph (a)(4)(vi) of this section, and whether it is

appropriate to exempt such spread position from position limits;

(iv) Have the authority to revoke, at any time, any spread

exemption issued pursuant to this section if it determines the spread

exemption no longer satisfies the requirements of paragraph (a)(4)(vi)

of this section and it is no longer appropriate to exempt the spread

from position limits;

(v) Notify an applicant in a timely manner:

(A) That a spread position for which a complete application has

been submitted has been exempted by the designated contract market or

swap execution facility from position limits, and the details and all

conditions of such exemption;

(B) That its application is rejected, including the reasons for

such rejection; or

(C) That the designated contract market or swap execution facility

has asked the Commission to consider the application under paragraph

(a)(8) of this section; and

(vi) Determine whether exempting the spread position from position

limits would, to the maximum extent practicable, ensure sufficient

market liquidity for bona fide hedgers, and not unreasonably reduce the

effectiveness of position limits to:

(A) Diminish, eliminate or prevent excessive speculation;

(B) Deter and prevent market manipulation, squeezes, and corners;

and

(C) Ensure that the price discovery function of the underlying

market is not disrupted.

(5) An applicant's derivatives position shall be deemed to be

recognized as a spread position exempt from federal position limits at

the time that a designated contract market or swap execution facility

notifies an applicant that such designated contract market or swap

execution facility will exempt such spread position.

(6) A designated contract market or swap execution facility that

elects to process applications to exempt spread positions from position

limits shall file new rules or rule amendments pursuant to part 40 of

this chapter, establishing or amending requirements for an applicant to

file a report with such designated contract market or swap execution

facility when such applicant owns, holds, or controls a spread position

that such designated contract market or swap execution facility has

exempted from position limits, including for such applicant to report

each component of the spread. Such rules shall require such applicant

to update and maintain the accuracy of any such report.

(7) After exemption of each unique type of spread position, a

designated contract market or swap execution facility shall publish on

its Web site, on at least a quarterly basis, a summary describing the

type of spread position and explaining why it was exempted.

(8) If a spread exemption application presents complex issues or is

potentially inconsistent with the purposes of section 4a(a)(3)(B) of

the Act, a designated contract market or swap execution facility may

ask the Commission to consider the application under the process set

forth in paragraph (d) of this section. The Commission may, in its

discretion, agree to or reject any such request by a designated

contract market or swap execution facility.

(b) Recordkeeping. (1) A designated contract market or swap

execution facility that elects to process spread exemption applications

shall keep full, complete, and systematic records, which include all

pertinent data and memoranda, of all activities relating to the

processing of such applications and the disposition thereof, including

the exemption of any spread position, the revocation or modification of

any exemption, the rejection by the designated contract market or swap

execution facility of an application, or the withdrawal,

supplementation or updating of an application by the applicant.

Included among such records shall be:

(i) All information and documents submitted by an applicant in

connection with its application:

(ii) Records of oral and written communications between such

designated contract market or swap execution facility and such

applicant in connection with such application; and

(iii) All information and documents in connection with such

designated contract market's or swap execution facility's analysis of

and action on such application.

(2) All books and records required to be kept pursuant to this

section shall be kept in accordance with the requirements of Sec. 1.31

of this chapter.

(c) Reports to the Commission. (1) A designated contract market or

swap execution facility that elects to process spread exemption

applications shall submit to the Commission a report for each week as

of the close of business on Friday showing the following information:

(i) The disposition of any spread exemption application, including

the exemption of any spread position, the revocation or modification of

any exemption, or the rejection of any application, as well as the

following details:

(A) The date of disposition,

(B) The effective date of the disposition,

(C) The expiration date of any exemption,

(D) Any unique identifier assigned by the designated contract

market or swap execution facility to track the application,

(E) Any unique identifier assigned by the designated contract

market or swap execution facility to a type of exempt spread position,

(F) The identity of the applicant,

(G) The listed commodity derivative contract to which the

application pertains,

(H) The underlying cash commodity,

(I) The size limitations on any exempt spread position, specified

by contract month if applicable, and

(J) Any conditions on the exemption; and

(ii) The summary of any exempt spread position newly published

pursuant to paragraph (a)(7) of this section, or revised, since the

last summary submitted to the Commission.

(2) Unless otherwise instructed by the Commission, a designated

contract market or swap execution facility that elects to process

applications to exempt spread positions from position limits shall

submit to the Commission, no less frequently than monthly, any report

submitted by an applicant to such designated contract market or swap

execution facility pursuant to rules required by paragraph (a)(6) of

this section.

(3) Unless otherwise instructed by the Commission, a designated

contract market or swap execution facility that elects to process

applications to exempt spread positions from position limits shall

submit to the Commission the information required by paragraphs (c)(1)

and (2) of this section, as follows:

(i) As specified by the Commission on the Forms and Submissions

page at www.cftc.gov;

(ii) Using the format, coding structure, and electronic data

transmission

[[Page 38511]]

procedures approved in writing by the Commission; and

(iii) Not later than 9:00 a.m. Eastern time on the third business

day following the date of the report.

(d) Review of applications by the Commission. (1) The Commission

may in its discretion at any time review any spread exemption

application submitted to a designated contract market or swap execution

facility, and all records required to be kept by such designated

contract market or swap execution facility pursuant to paragraph (b) of

this section in connection with such application, for any purpose,

including to evaluate whether the disposition of the application is

consistent with the purposes of section 4a(a)(3)(B) of the Act.

(i) The Commission may request from such designated contract market

or swap execution facility records required to be kept by such

designated contract market or swap execution facility pursuant to

paragraph (b) of this section in connection with such application.

(ii) The Commission may request additional information in

connection with such application from such designated contract market

or swap execution facility or from the applicant.

(2) If the Commission preliminarily determines that any application

to exempt a spread position from position limits, or the disposition

thereof by a designated contract market or swap execution facility,

presents novel or complex issues that require additional time to

analyze, or that an application or the disposition thereof by such

designated contract market or swap execution facility is potentially

inconsistent with the Act, the Commission shall:

(i) Notify such designated contract market or swap execution

facility and the applicable applicant of the issues identified by the

Commission; and

(ii) Provide them with 10 business days in which to provide the

Commission with any supplemental information.

(3) The Commission shall determine whether it is appropriate to

exempt the spread position for which such application has been

submitted from position limits, or whether the disposition of such

application by such designated contract market or swap execution

facility is consistent with the purposes of section 4a(a)(3)(B) of the

Act.

(4) If the Commission determines that it is not appropriate to

exempt the spread position for which such application has been

submitted from position limits, or that the disposition of such

application is inconsistent with the Act, the Commission shall notify

the applicant and grant the applicant a commercially reasonable amount

of time to liquidate the spread position or otherwise come into

compliance. This notification will briefly specify the nature of the

issues raised and the specific provisions of the Act or the

Commission's regulations with which the application is, or appears to

be, inconsistent.

(e) Review of summaries by the Commission. The Commission may in

its discretion at any time review any summary of a type of spread

position required to be published on a designated contract market's or

swap execution facility's Web site pursuant to paragraph (a)(7) of this

section for any purpose, including to evaluate whether the summary

promotes transparency and fair and open access by all market

participants to information regarding spread exemptions. If the

Commission determines that a summary is deficient in any way, the

Commission shall notify such designated contract market or swap

execution facility, and grant to the designated contract market or swap

execution facility a reasonable amount of time to revise the summary.

(f) Delegation of authority to the Director of the Division of

Market Oversight. (1) The Commission hereby delegates, until it orders

otherwise, to the Director of the Division of Market Oversight or such

other employee or employees as the Director may designate from time to

time, the authority:

(i) In paragraph (a)(8) of this section to agree to or reject a

request by a designated contract market or swap execution facility to

consider a spread exemption application;

(ii) In paragraph (c) of this section to provide instructions

regarding the submission to the Commission of information required to

be reported by a designated contract market or swap execution facility,

to specify the manner for submitting such information on the Forms and

Submissions page at www.cftc.gov, and to determine the format, coding

structure, and electronic data transmission procedures for submitting

such information;

(iii) In paragraph (d)(1) of this section to review any spread

exemption application and all records required to be kept by a

designated contract market or swap execution facility in connection

with such application, to request such records from such designated

contract market or swap execution facility, and to request additional

information in connection with such application from such designated

contract market or swap execution facility, or from the applicant;

(iv) In paragraph (d)(2) of this section to preliminarily determine

that a spread exemption application or the disposition thereof by a

designated contract market or swap execution facility presents complex

issues that require additional time to analyze, or that such

application or the disposition thereof is potentially inconsistent with

the Act, to notify the designated contract market or swap execution

facility and the applicable applicant of the issues identified, and to

provide them with 10 business days in which to file supplemental

information; and

(v) In paragraph (e) of this section to review any summary of a

type of spread exemption required to be published on a designated

contract market's or swap execution facility's Web site, to determine

that any such summary is deficient, to notify a designated contract

market or swap execution facility of a deficient summary, and to grant

such designated contract market or swap execution facility a reasonable

amount of time to revise such summary.

(2) The Director of the Division of Market Oversight may submit to

the Commission for its consideration any matter which has been

delegated in this section.

(3) Nothing in this section prohibits the Commission, at its

election, from exercising the authority delegated in this section.

0

11. Add Sec. 150.11 to read as follows:

Sec. 150.11 Process for recognition of positions as bona fide hedges

for unfilled anticipated requirements, unsold anticipated production,

anticipated royalties, anticipated service contract payments or

receipts, or anticipatory cross-commodity hedge positions.

(a) Requirements for a designated contract market or swap execution

facility to recognize certain enumerated anticipatory bona fide hedge

positions. (1) A designated contract market or swap execution facility

that elects to process applications for recognition of positions as

hedges of unfilled anticipated requirements, unsold anticipated

production, anticipated royalties, anticipated service contract

payments or receipts, or anticipatory cross-commodity hedges under the

provisions of paragraphs (3)(iii), (4)(i), (iii), (iv), or (5),

respectively, of the definition of bona fide hedging position in Sec.

150.1 shall maintain rules, submitted to the Commission pursuant to

part 40 of this chapter, establishing an application process for such

anticipatory bona fide hedges consistent with the requirements of this

section. A designated contract market or swap execution facility may

elect to process

[[Page 38512]]

such anticipatory hedge applications for positions in commodity

derivative contracts only if, in each case:

(i) The commodity derivative contract is a referenced contract;

(ii) Such designated contract market or swap execution facility

lists such commodity derivative contract for trading;

(iii) Such commodity derivative contract is actively traded on such

derivative contract market;

(iv) Such designated contract market or swap execution facility has

established position limits for such commodity derivative contract; and

(v) Such designated contract market or swap execution facility has

at least one year of experience and expertise administering position

limits for such commodity derivative contract.

(2) Any application process that is established by a designated

contract market or swap execution facility shall require, at a minimum,

the information required under Sec. 150.7(d).

(3) Under any application process established under this section, a

designated contract market or swap execution facility shall:

(i) Require each person intending to exceed position limits to

submit an application, and to reapply at least on an annual basis by

updating that application, to file the supplemental reports required

under Sec. 150.7(e), and to receive notice of recognition from the

designated contract market or swap execution facility of a position as

a bona fide hedge in advance of the date that such position would be in

excess of the limits then in effect pursuant to section 4a of the Act;

(ii) Notify an applicant in a timely manner if a submitted

application is not complete. If the applicant does not amend or

resubmit such application within a reasonable amount of time after

notification from the designated contract market or swap execution

facility, the designated contract market or swap execution facility may

reject the application;

(iii) Inform an applicant within ten days of receipt of such

application by the designated contract market or swap execution

facility that:

(A) The derivative position for which a complete application has

been submitted has been recognized by the designated contract market or

swap execution facility as a bona fide hedge, and the details and all

conditions of such recognition;

(B) The application is rejected, including the reasons for such

rejection; or

(C) The designated contract market or swap execution facility has

asked the Commission to consider the application under paragraph (a)(6)

of this section; and

(iv) Have the authority to revoke, at any time, any recognition

issued pursuant to this section if it determines the position no longer

complies with the filing requirements under paragraph (a)(2) of this

section.

(4) An applicant's derivatives position shall be deemed to be

recognized as a bona fide hedge at the time that a designated contract

market or swap execution facility notifies an applicant that such

designated contract market or swap execution facility will recognize

such position as a bona fide hedge.

(5) A designated contract market or swap execution facility that

elects to process bona fide hedge applications shall file new rules or

rule amendments pursuant to part 40 of this chapter, establishing or

amending requirements for an applicant to file a report with the

Commission pursuant to Sec. 150.7, and file a copy of such report with

such designated contract market or swap execution facility when such

applicant owns or controls a derivative position that such designated

contract market or swap execution facility has recognized as a bona

fide hedge, and for such applicant to report the offsetting cash

positions. Such rules shall require an applicant to update and maintain

the accuracy of any such report.

(6) A designated contract market or swap execution facility may ask

the Commission to consider any application made under this section. The

Commission may, in its discretion, agree to or reject any such request

by a designated contract market or swap execution facility; provided

that, if the Commission agrees to the request, it will have 10 business

days from the time of the request to carry out its review.

(b) Recordkeeping. (1) A designated contract market or swap

execution facility that elects to process bona fide hedge applications

under this section shall keep full, complete, and systematic records,

which include all pertinent data and memoranda, of all activities

relating to the processing of such applications and the disposition

thereof, including the recognition of any derivative position as a bona

fide hedge, the revocation or modification of any recognition, the

rejection by the designated contract market or swap execution facility

of an application, or withdrawal, supplementation or updating of an

application. Included among such records shall be:

(i) All information and documents submitted by an applicant in

connection with its application;

(ii) Records of oral and written communications between such

designated contract market or swap execution facility and such

applicant in connection with such application; and

(iii) All information and documents in connection with such

designated contract market's or swap execution facility's analysis of

and action on such application.

(2) All books and records required to be kept pursuant to this

section shall be kept in accordance with the requirements of Sec. 1.31

of this chapter.

(c) Reports to the Commission. (1) A designated contract market or

swap execution facility that elects to process bona fide hedge

applications under this section shall submit to the Commission a report

for each week as of the close of business on Friday showing the

following information:

(i) The disposition of any application, including the recognition

of any position as a bona fide hedge, the revocation or modification of

any recognition, as well as the following details:

(A) The date of disposition,

(B) The effective date of the disposition,

(C) The expiration date of any recognition,

(D) Any unique identifier assigned by the designated contract

market or swap execution facility to track the application,

(E) Any unique identifier assigned by the designated contract

market or swap execution facility to a bona fide hedge recognized under

this section;

(F) The identity of the applicant,

(G) The listed commodity derivative contract to which the

application pertains,

(H) The underlying cash commodity,

(I) The maximum size of the commodity derivative position that is

recognized by the designated contract market or swap execution facility

as a bona fide hedge,

(J) Any size limitation established for such commodity derivative

position on the designated contract market or swap execution facility,

and

(K) A concise summary of the applicant's activity in the cash

market for the commodity underlying the position for which the

application was submitted.

(2) Unless otherwise instructed by the Commission, a designated

contract market or swap execution facility that elects to process bona

fide hedge applications shall submit to the Commission the information

required by paragraph (c)(1) of this section, as follows:

[[Page 38513]]

(i) As specified by the Commission on the Forms and Submissions

page at www.cftc.gov;

(ii) Using the format, coding structure, and electronic data

transmission procedures approved in writing by the Commission; and

(iii) Not later than 9:00 a.m. Eastern time on the third business

day following the date of the report.

(d) Review of applications by the Commission. (1) The Commission

may in its discretion at any time review any bona fide hedge

application submitted to a designated contract market or swap execution

facility under this section, and all records required to be kept by

such designated contract market or swap execution facility pursuant to

paragraph (b) of this section in connection with such application, for

any purpose, including to evaluate whether the disposition of the

application is consistent with the Act.

(i) The Commission may request from such designated contract market

or swap execution facility records required to be kept by such

designated contract market or swap execution facility pursuant to

paragraph (b) of this section in connection with such application.

(ii) The Commission may request additional information in

connection with such application from such designated contract market

or swap execution facility or from the applicant.

(2) If the Commission preliminarily determines that any

anticipatory hedge application is inconsistent with the filing

requirements of Sec. 150.11(a)(2), the Commission shall:

(i) Notify such designated contract market or swap execution

facility and the applicable applicant of the deficiencies identified by

the Commission; and

(ii) Provide them with 10 business days in which to provide the

Commission with any supplemental information.

(3) If the Commission determines that the anticipatory hedge

application is inconsistent with the filing requirements of Sec.

150.11(a)(2), the Commission shall notify the applicant and grant the

applicant a commercially reasonable amount of time to liquidate the

derivative position or otherwise come into compliance. This

notification will briefly specify the specific provisions of the filing

requirements of Sec. 150.11(a)(2), with which the application is, or

appears to be, inconsistent.

(e) Delegation of authority to the Director of the Division of

Market Oversight. (1) The Commission hereby delegates, until it orders

otherwise, to the Director of the Division of Market Oversight or such

other employee or employees as the Director may designate from time to

time, the authority:

(i) In paragraph (a)(6) of this section to agree to or reject a

request by a designated contract market or swap execution facility to

consider a bona fide hedge application;

(ii) In paragraph (c) of this section to provide instructions

regarding the submission to the Commission of information required to

be reported by a designated contract market or swap execution facility,

to specify the manner for submitting such information on the Forms and

Submissions page at www.cftc.gov, and to determine the format, coding

structure, and electronic data transmission procedures for submitting

such information;

(iii) In paragraph (d)(1) of this section to review any bona fide

hedge application and all records required to be kept by a designated

contract market or swap execution facility in connection with such

application, to request such records from such designated contract

market or swap execution facility, and to request additional

information in connection with such application from such designated

contract market or swap execution facility or from the applicant; and

(iv) In paragraph (d)(2) of this section to determine that it is

not appropriate to recognize a derivative position for which an

application for recognition has been submitted as a bona fide hedge, or

that the disposition of such application by a designated contract

market or swap execution facility is inconsistent with the Act, and, in

connection with such a determination, to grant the applicant a

reasonable amount of time to liquidate the derivative position or

otherwise come into compliance.

(2) The Director of the Division of Market Oversight may submit to

the Commission for its consideration any matter which has been

delegated in this section.

(3) Nothing in this section prohibits the Commission, at its

election, from exercising the authority delegated in this section.

Appendices A Through D to Part 150 [Reserved]

0

12. Add reserved appendices A through D to part 150.

0

13. Add appendix E to part 150 to read as follows:

Appendix E to Part 150--Guidance Regarding Exchange-Set Speculative

Position Limits

This appendix provides guidance regarding Sec. 150.5, as follows:

Guidance for designated contract markets. (1) Until a board of

trade has access to sufficient swap position information, a board of

trade need not demonstrate compliance with Core Principle 5(B) with

respect to swaps. A board of trade has access to sufficient swap

position information if, for example:

(i) It has access to daily information about its market

participants' open swap positions; or

(ii) It knows, including through knowledge gained in surveillance

of heavy trading activity occurring on or pursuant to the rules of the

designated contract market, that its market participants regularly

engage in large volumes of speculative trading activity, that would

cause reasonable surveillance personnel at an exchange to inquire

further about a market participant's intentions or open swap positions.

(2) When a board of trade has access to sufficient swap position

information, this guidance is no longer applicable. At such time, a

board of trade is required to demonstrate compliance with Core

Principle 5(B) with respect to swaps.

Guidance for swap execution facilities. (1) Until a swap execution

facility that is a trading facility has access to sufficient swap

position information, the swap execution facility need not demonstrate

compliance with Core Principle 6(B). A swap execution facility has

access to sufficient swap position information if, for example:

(i) It has access to daily information about its market

participants' open swap positions; or

(ii) If it knows, including through knowledge gained in

surveillance of heavy trading activity occurring on or pursuant to the

rules of the swap execution facility, that its market participants

regularly engage in large volumes of speculative trading activity that

would cause reasonable surveillance personnel at an exchange to inquire

further about a market participant's intentions or open swap positions.

(2) When a swap execution facility has access to sufficient swap

position information, this guidance is no longer applicable. At such

time, a swap execution facility that is a trading facility is required

to file rules with the Commission to demonstrate compliance with Core

Principle 6 (B).

[[Page 38514]]

Issued in Washington, DC, on May 27, 2016, by the Commission.

Christopher J. Kirkpatrick,

Secretary of the Commission.

Note: The following appendices will not appear in the Code of

Federal Regulations.

Appendices To Position Limits for Derivatives: Certain Exemptions and

Guidance--Commission Voting Summary, Chairman's Statement, and

Commissioner's Statement

Appendix 1--Commission Voting Summary

On this matter, Chairman Massad and Commissioners Bowen and

Giancarlo voted in the affirmative. No Commissioner voted in the

negative.

Appendix 2--Statement of Chairman Timothy G. Massad

Today, the CFTC has taken a significant step toward finalizing

its rules on position limits this year.

The supplemental rule we have unanimously proposed today would

ensure that commercial end-users can continue to engage in bona fide

hedging efficiently for risk management and price discovery. It

would permit the exchanges to recognize certain positions as bona

fide hedges, subject to CFTC oversight.

For years, exchanges have worked with the CFTC's general

definition of a ``bona fide hedging position'' to grant these

exemptions to exchange-set limits. Under this supplemental proposal,

they would do so for federal limits, subject to strict oversight by

the CFTC. Today's action comes after listening closely to the

concerns of market participants, and in particular commercial-end

users, who use these markets every day to hedge commercial risk.

Today's proposal would also make some helpful clarifications to

definitions used in our earlier proposal, including the definition

of ``bona fide hedging position,'' to conform it to the statutory

language.

This proposal is a critical piece of our effort to complete the

position limits rule this year. Another key piece of that effort was

the Commission's 2015 proposal to streamline the process for waiving

aggregation requirements when one entity does not control another's

trading, even if they are under common ownership. We are also

working to review exchange estimates of deliverable supply so that

spot month limits may be set based on current data.

Federal position limits for agricultural contracts have been in

place in our markets for decades, and exchange-set position limits

for most other physical commodity contracts have been in place for

years. It is critical that we fulfill our statutory responsibility

to adopt a position limits rule. As I have said previously, we

appreciate the importance and complexity of the issues surrounding

the position limits rule. No current Commissioner was in office when

these rules were proposed, and therefore we have taken the time to

listen to market participants and consider the proposals very

carefully.

I thank our staff for their excellent work on this proposal. I

also thank my fellow Commissioners Bowen and Giancarlo for their

input and support. And I look forward to hearing the views of market

participants and to completing a position limits rule this year.

Appendix 3--Statement of Commissioner J. Christopher Giancarlo

I support issuing for public comment today's proposal to

supplement and revise the Commission's 2013 proposed rule to

establish federal position limits for certain core referenced

futures, options and swaps contracts. The supplemental proposal

appears responsive to a broad range of public comments. I believe it

is a positive step forward in devising a final rule that will take

into account certain practical realities associated with

administering a workable position limits regime.

The proposal appropriately recognizes that most exchanges do not

have access to sufficient swap positon information to effectively

monitor swap position limits. If adopted, it would seem to relieve

designated contract markets (DCMs) and swap execution facilities

(SEFs) from setting and monitoring exchange limits on swaps until

such time as DCMs and SEFs have access to data that is necessary to

be able to do so. Position limits for swaps would still be set and

monitored by the CFTC. The proposal simply acknowledges that the

Commission cannot require exchanges to do the impossible.

The proposal also recommends changes to the definitions of

``bona fide hedging position,'' ``futures equivalent,''

``intermarket spread position'' and ``intramarket spread position.''

The elimination of the incidental test and the orderly trading

requirement from the general definition of bona fide hedging

position makes sense as the incidental test is already included in

the economically appropriate test and the orderly trading

requirement is addressed in other provisions of the Commodity

Exchange Act (CEA).\1\ Further, as discussed in the preamble,

because the meaning of the orderly trading requirement in the

context of over-the-counter swaps markets is unclear, those markets

will benefit from greater precision by its removal. The proposed

amendments to the definitions of ``futures equivalent,''

``intermarket spread positon'' and ``intramarket spread position''

appear to be helpful clarifications. I look forward to public

comment on whether the proposed changes are appropriate.

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

\1\ See CEA sections 4c(a)(5) and 4c(a)(6).

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

Importantly, the proposal would also allow certain spread

exemptions from federal position limits. It would establish a

process to permit exchanges to recognize exemptions from exchange

and federal position limits for non-enumerated bona fide hedging

positions (NEBFH) and spread positions. The proposal would also

provide an expedited process for exchange recognition of enumerated

anticipatory bona fide hedges.

Exchanges are in the best position to initially recognize the

foregoing exemptions from position limits. They have both the

expertise and the resources \2\ to perform this task in a

responsible way as demonstrated by the long history of DCMs

analyzing and granting requests for NEBFH exemptions in the context

of exchange-set limits. Moreover, the CFTC has a long history of

overseeing the performance of DCMs in doing so. In addition, DCMs

already have a long-existing framework in place for recognizing

exemptions from exchange-set limits with which market participants

are well familiar. The supplemental proposal, when incorporated into

a final rule, would build upon the existing framework for exchange-

set limits. It also would lower unreasonable burdens on market

participants under the Commission's 2013 proposal, including

provisions that would have required hedge exemption applicants to

file duplicative requests with both the CFTC and the exchanges.

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\2\ As noted in footnote 127 of the preamble, from June 15, 2011

to June 15, 2012 ICE Futures U.S. received 142 exemption

applications, 92 of which were granted. From November 1, 2010 to

October 31, 2011 the Market Surveillance Group from the Chicago

Mercantile Exchange (CME) Regulation Department approved 420

exemption applications for products traded on the CME and the

Chicago Board of Trade. This is old data, but one could reasonably

predict that the number of applications have increased over time and

will continue to increase in the future as trading levels increase.

Given its current resources, the CFTC is not in a position to timely

process the hundreds of applications that likely will be filed with

the exchanges each year.

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In short, the supplemental proposal leverages exchange expertise

and resources to enable exemptions to be granted in an efficient and

timely manner without sacrificing market integrity. The Commission

would remain the ultimate arbiter of exemptions from position limits

by retaining the authority to review and reverse any exchange-

granted exemption.

I commend Commission staff for their responsiveness to broad-

based concerns of market participants. I appreciate the

professionalism of my fellow commissioners in persevering to make

this rule more workable. I look forward to taking additional steps

to ensure that the practical issues raised by the agricultural and

end-user communities are addressed in the final rule.

Now and always, prosperity requires durable and vibrant markets.

We must balance regulatory burdens with clear economic benefits if

we are to maintain liquid commodity hedging markets that support our

American way of life.

[FR Doc. 2016-12964 Filed 6-10-16; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: June 13, 2016