[Federal Register Volume 81, Number 251 (Friday, December 30, 2016)]
[Proposed Rules]
[Pages 96704-96990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29483]
[[Page 96703]]
Vol. 81
Friday,
No. 251
December 30, 2016
Part III
Book 2 of 2 Books
Pages 96703-97110
Commodity Futures Trading Commission
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17 CFR Parts 1, 15, 17, et al.
Position Limits for Derivatives; Proposed Rule
Federal Register / Vol. 81 , No. 251 / Friday, December 30, 2016 /
Proposed Rules
[[Page 96704]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 15, 17, 19, 37, 38, 140, 150 and 151
RIN 3038-AD99
Position Limits for Derivatives
AGENCY: Commodity Futures Trading Commission.
ACTION: Reproposal.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is reproposing rules to amend part 150 of the Commission's
regulations concerning speculative position limits to conform to the
Wall Street Transparency and Accountability Act of 2010 (``Dodd-Frank
Act'') amendments to the Commodity Exchange Act (``CEA'' or ``Act'').
The reproposal would establish speculative position limits for 25
exempt and agricultural commodity futures and option contracts, and
physical commodity swaps that are ``economically equivalent'' to such
contracts (as such term is used in section 4a(a)(5) of the CEA). In
connection with establishing these limits, the Commission is
reproposing to update some relevant definitions; revise the exemptions
from speculative position limits, including for bona fide hedging; and
extend and update reporting requirements for persons claiming exemption
from these limits. The Commission is also reproposing appendices to
part 150 that would provide guidance on risk management exemptions for
commodity derivative contracts in excluded commodities permitted under
the revised definition of bona fide hedging position; list core
referenced futures contracts and commodities that would be
substantially the same as a commodity underlying a core referenced
futures contract for purposes of the definition of location basis
contract; describe and analyze fourteen fact patterns that would
satisfy the reproposed definition of bona fide hedging position; and
present the reproposed speculative position limit levels in tabular
form. In addition, the Commission proposes to update certain of its
rules, guidance and acceptable practices for compliance with Designated
Contract Market (``DCM'') core principle 5 and Swap Execution Facility
(``SEF'') core principle 6 in respect of exchange-set speculative
position limits and position accountability levels. Furthermore, the
Commission is reproposing 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 position limits certain spread positions, in each
case subject to Commission review. Separately, the Commission is
reproposing 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 February 28, 2017.
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,
(202) 418-5452, [email protected], Riva Spear Adriance, Senior Special
Counsel, (202) 418-5494, [email protected], Hannah Ropp, Surveillance
Analyst, 202-418-5228, [email protected], or Steven Benton, Industry
Economist, (202) 418-5617, [email protected], Division of Market
Oversight; or Lee Ann Duffy, Assistant General Counsel, 202-418-6763,
[email protected], Office of General Counsel, in each case at the
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Introduction
B. The Commission Construes CEA Section 4a(a) To Mandate That
the Commission Impose Position Limits
C. Necessity Finding
II. Proposed Compliance Date
III. Reproposed Rules
A. Sec. 150.1--Definitions
B. Sec. 150.2--Position limits
C. Sec. 150.3--Exemptions
D. Sec. 150.5--Exchange-set speculative position limits and
Parts 37 and 38
E. Part 19--Reports by persons holding bona fide hedging
positions pursuant to Sec. 150.1 of this chapter and by merchants
and dealers in cotton
F. Sec. 150.7--Reporting requirements for anticipatory hedging
positions
G. Sec. 150.9--Process for recognition of positions as non-
enumerated bona fide hedging positions
H. Sec. 150.10--Process for designated contract market or swap
execution facility exemption from position limits for certain spread
positions
I. Sec. 150.11--Process for recognition of positions as bona
fide hedging positions for unfilled anticipated requirements, unsold
anticipated production, anticipated royalties, anticipated services
contract payments or receipts, or anticipatory cross-commodity hedge
positions
J. Miscellaneous regulatory amendments
1. Proposed Sec. 150.6--Ongoing responsibility of DCMs and SEFs
2. Proposed Sec. 150.8--Severability
3. Part 15--Reports--General provisions
4. Part 17--Reports by reporting markets, futures commission
merchants, clearing members, and foreign brokers
5. Part 151--Position limits for futures and swaps, Commission
Regulation 1.47 and Commission Regulation 1.48--Removal
IV. Related Matters
A. Cost-Benefit Considerations
B. Paperwork Reduction Act
C. Regulatory Flexibility Act
V. Appendices
A. Appendix A--Review of Economic Studies
B. Appendix B--List of Comment Letters Cited in this Rulemaking
I. Background
A. Introduction
The Commission has long established and enforced speculative
position limits for futures and options contracts on various
agricultural commodities as authorized by the Commodity Exchange
[[Page 96705]]
Act (``CEA'').\1\ The part 150 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, 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, n. 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.\6\ These proposed amendments
were intended to conform 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'').\7\ 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.\8\ In
addition, the 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.\9\
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),\10\ (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; \11\ and (iii)
revise the exemptions from position limits for transactions normally
known to the trade as spreads.\12\
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\6\ See generally December 2013 Positions Limits Proposal. In
the December 2013 Position Limits Proposal, the Commission proposed
to amend its position limits to also encompass 28 exempt and
agricultural commodity futures and options contracts and the
physical commodity swaps that are economically equivalent to such
contracts.
\7\ 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 17 CFR 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.
\8\ 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).
\9\ 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.
\10\ See December 2013 Position Limits Proposal, 78 FR at 75706-
11, 75713-18.
\11\ See December 2013 Position Limits Proposal, 78 FR at 75718.
\12\ 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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On June 13, 2016, the Commission published a supplemental proposal
to its December 2013 Position Limits rulemaking.\13\ The supplemental
proposal included revisions and additions to regulations and guidance
proposed in 2013 concerning speculative position limits in response to
comments received on that proposal, and 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, under the 2016 Supplemental Position Limits Proposal,
certain of the regulations proposed in 2013 regarding exemptions from
federal position limits and exchange-set position limits would be
amended to take into account the alternative processes. In connection
with those proposed changes, the Commission proposed 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 proposed 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.
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\13\ Position Limits for Derivatives: Certain Exemptions and
Guidance, 81 FR 38458 (June 13, 2016) (``2016 Supplemental Position
Limits Proposal'').
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After review of the comments responding to both the December 2013
Position Limits Proposal and the 2016 Supplemental Position Limits
Proposal, the Commission, in consideration of those comments, is now
issuing a reproposal (``Reproposal''). The Commission invites comments
on all aspects of this Reproposal.
B. The Commission Preliminarily Construes CEA Section 4a(a) To Mandate
That the Commission Impose Position Limits
1. Introduction
a. The History of Position Limits and the 2011 Position Limits Rule
As part of the Dodd-Frank Act, Congress amended the CEA's position
limits provision, which since 1936 has authorized the Commission (and
its predecessor) to impose limits on speculative positions to prevent
the harms caused by excessive speculation. Prior to the Dodd-Frank Act,
CEA section 4a(a) stated that for the purpose of diminishing,
eliminating or preventing specified burdens on interstate commerce, the
Commission shall, from time to time, after due notice and an
opportunity for hearing, by rule, regulation, or order, proclaim and
fix such limits on the amounts of trading which may be done or
positions which may be held by any person under contracts of sale of
such commodity for future delivery on or subject to the rules of any
contract market as the Commission finds are necessary to
[[Page 96706]]
diminish, eliminate, or prevent such burden.\14\
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\14\ 7 U.S.C. 6a(a) (2006).
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In the Dodd-Frank Act, Congress renumbered a modified version of
CEA section 4a(a) as section 4a(a)(1) and added, among other
provisions, CEA section 4a(a)(2), captioned ``Establishment of
Limitations,'' which provides that in accordance with the standards set
forth in CEA section 4a(a)(1), the Commission shall establish limits on
the amount of positions, as appropriate, other than bona fide hedge
positions, that may be held by any person. CEA section 4a(a)(2) further
provides that for exempt commodities (energy and metals), the limits
required under CEA section 4a(a)(2) shall be established within 180
days after the date of the enactment of CEA section 4a(a)(2); for
agricultural commodities, the limits required under CEA section
4a(a)(2) shall be established within 270 days after the date of the
enactment of CEA section 4a(a)(2).\15\
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\15\ CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2). The Commission
notes that it uses the defined term ``bona fide hedging position''
throughout part 150, rather than ``bona fide hedge positions'' found
in CEA section 4a(a)(2). CEA section 4a(c)(1) uses the term ``bona
fide hedging transactions or positions'' and CEA section 4a(c)(2)
uses the term ``bona fide hedging transaction or position.'' The
Commission interprets all of these terms to mean the same. It should
be noted that the Commission previously imposed transaction volume
limits on ``the amounts of trading which may be done'' as authorized
by CEA section 4a(a)(1), but removed those transaction volume
limits. Elimination of Daily Speculative Trading Limits, 44 FR 7124,
7127 (Feb. 6, 1979).
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These and other changes to CEA section 4a(a) are described in more
detail below.
Pursuant to these amendments, the Commission adopted a position
limits rule in 2011 (``2011 Position Limits Rule'') in a new part
151.\16\ In the 2011 Position Limits Rule, the Commission imposed, in
new part 151, speculative limits in the spot-month and non-spot-months
on 28 physical commodity derivatives ``of particular significance to
interstate commerce.'' \17\ Under the 2011 Position Limits Rule, part
151 used formulas for calculating limit levels that are similar to the
formulas used to calculate previous Commission- and exchange-set
position limits.\18\ The 2011 Position Limits Rule contained provisions
in part 151 that implemented the statutory exemption for bona fide
hedging.\19\ It also provided account aggregation standards to
determine which positions to attribute to a particular market
participant.\20\ Because it interpreted the Dodd-Frank Act as mandating
position limits, the Commission did not make an independent threshold
determination that position limits are necessary to accomplish the
purposes set forth in the statute. The Commission explained:
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\16\ Position Limits for Futures and Swaps, 76 FR 71626 (Nov.
18, 2011). As finalized, part 151 replaced part 150.
\17\ Id. at 71665; see also id at 716629-30.
\18\ Id. at 71632-33 (transition), 71668-70 (spot-month limit),
71671 (non-spot month limit).
\19\ Id. at 71643-51.
\20\ Id. at 71651-55. A central feature of any position limits
regime is determining which positions to attribute to a particular
trader. The CEA requires the Commission to attribute to a person all
positions that the person holds or trades, as well as positions held
or traded by anyone else that such person directly or indirectly
controls. 7 U.S.C. 6a(a)(1). This is referred to as account
aggregation. In addition to account aggregation, Congress required
the Commission to set limits on all derivative positions in the same
underlying commodity that a trader may hold or control across all
derivative exchanges. 7 U.S.C. 6a(a)(6). The Commission refers to
this as position aggregation.
Congress directed the Commission to impose position limits and to do
so expeditiously. Section 4a(a)(2)(B) states that the limits for
physical commodity futures and options contracts ``shall'' be
established within the specified timeframes, and section 4a(a)(2)(5)
states that the limits for economically equivalent swaps ``shall''
be established concurrently with the limits required by section
4a(a)(2). The congressional directive that the Commission set
position limits is further reflected in the repeated references to
the limits ``required'' under section 4a(a)(2)(A).\21\
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\21\ Position Limits for Futures and Swaps, 76 FR at 71626-628.
ISDA and SIFMA sued the Commission to vacate part 151 on the basis
(among others) that, in their view, CEA section 4a(a) clearly required
the Commission to make an antecedent necessity finding.
b. The District Court Opinion
As set forth in the Commission's December 2013 Position Limits
Proposal,\22\ the district court in ISDA v. CFTC found that, on one
hand, CEA section 4a(a)(1) ``unambiguously requires that, prior to
imposing position limits, the Commission find that position limits are
necessary to `diminish, eliminate, or prevent' the burden described in
[CEA section 4a(a)(1)].'' \23\ On the other hand, the court found that
the Dodd-Frank Act amendments to CEA section 4a(a) rendered section
4a(a)(1) ambiguous with respect to whether such findings are required
for the position limits described in CEA section 4a(a)(2)--futures
contracts, options, and certain swaps on agricultural and exempt
commodities.\24\
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\22\ International Swaps and Derivatives Ass'n v. United States
Commodity Futures Trading Comm'n, 887 F. Supp. 2d 259 (D.D.C. 2012).
\23\ Id. at 270.
\24\ Id. at 281.
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The court's determination in ISDA v. CFTC that CEA sections
4a(a)(1) and (2), read together, are ambiguous focused on the opening
phrase of subsection (A)--``[i]n accordance with the standards set
forth in [CEA section 4a(a)(1)].'' The court held that the term
``standards'' in CEA section 4a(a)(2) was ambiguous as to whether it
referred to the requirement in CEA section 4a(a)(1) that the Commission
impose position limits only ``as [it] finds are necessary to diminish,
eliminate, or prevent'' an unnecessary burden on interstate
commerce.\25\ If not, ``standards'' would refer to the aggregation and
flexibility standards stated in CEA section 4a(a)(1) by which position
limits are to be implemented. Accordingly, the court rejected both (1)
the Commission's contention that CEA section 4a(a) as a whole
unambiguously mandated the imposition of position limits without the
Commission finding independently that they are necessary; and (2) the
plaintiffs' contention that CEA section 4a(a) unambiguously required
the Commission to make such findings before the imposition of position
limits.\26\ The court stated that because the Commission had
incorrectly found CEA section 4a(a) unambiguous, it could not defer to
any interpretation by the Commission to resolve the section's
ambiguity. As the court observed, the D.C. Circuit has held that ``
`deference to an agency's interpretation of a statute is not
appropriate when the agency wrongly believes that interpretation is
compelled by Congress.' '' \27\ The court further held that, pursuant
to the law of the D.C. Circuit, it was required to remand the matter to
the Commission so that it could ``fill in the gaps and resolve the
ambiguities.'' \28\ The court instructed that the Commission must apply
its experience and expertise and cautioned that, in resolving the
ambiguity in CEA section 4a(a), `` `it is incumbent upon the agency not
to rest simply on its parsing of the statutory language.' '' \29\ The
Commission does not rest simply on parsing the statutory language, but
any interpretation necessarily begins with the text, which is described
in the next section.
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\25\ 887 F. Supp. 2d at 274-76.
\26\ 887 F. Supp. 2d at 279-80.
\27\ Id. at 280-82, quoting Peter Pan Bus Lines, Inc. v. Fed.
Motor Carrier Safety Admin., 471 F.3d 1350, 1354 (D.C. Cir. 2006).
\28\ 887 F. Supp. 2d at 282.
\29\ Id. at n.7, quoting PDK Labs. Inc. v. DEA, 362 F.3d 786,
797 (D.C. Cir. 2004).
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2. The Statutory Framework for Position Limits
Before the Dodd-Frank Act, what was then CEA section 4a(a)
authorized the
[[Page 96707]]
Commission to set limits on futures for any exchange-traded contract
for future delivery of any commodity ``as the Commission finds are
necessary to diminish, eliminate, or prevent [the] burden'' of
``[e]xcessive speculation'' ``causing sudden or unreasonable
fluctuations or unwarranted changes in the price of such commodity.'' 7
U.S.C. 6a(a) (2009 Supp.).\30\ CEA section 4a(a) also required the
Commission to follow certain criteria for aggregating limits once it
made that determination. And the Commission was authorized to impose
limits flexibly, depending on the commodity, delivery month, and other
factors.\31\
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\30\ Under the heading of ``Burden on interstate commerce;
trading or position limits,'' 7 U.S.C. 6a(a) (2006) provided that
excessive speculation in any commodity under contracts of sale of
such commodity for future delivery made on or subject to the rules
of contract markets or derivatives transaction execution facilities,
or on electronic trading facilities with respect to a significant
price discovery contract causing sudden or unreasonable fluctuations
or unwarranted changes in the price of such commodity, is an undue
and unnecessary burden on interstate commerce in such commodity.
Title 7 U.S.C. 6a(a) (2006) further provided that for the purpose of
diminishing, eliminating, or preventing such burden, the Commission
shall, from time to time, after due notice and opportunity for
hearing, by rule, regulation, or order, proclaim and fix such limits
on the amounts of trading which may be done or positions which may
be held by any person under contracts of sale of such commodity for
future delivery on or subject to the rules of any contract market or
derivatives transaction execution facility, or on an electronic
trading facility with respect to a significant price discovery
contract, as the Commission finds are necessary to diminish,
eliminate, or prevent such burden. Additionally, 7 U.S.C. 6a(a)
(2006) stated that in determining whether any person has exceeded
such limits, the positions held and trading done by any persons
directly or indirectly controlled by such person shall be included
with the positions held and trading done by such person; and
further, such limits upon positions and trading shall apply to
positions held by, and trading done by, two or more persons acting
pursuant to an expressed or implied agreement or understanding, the
same as if the positions were held by, or the trading were done by,
a single person. Title 7 U.S.C. 6a(a) (2006) further stated that
nothing in that section shall be construed to prohibit the
Commission from fixing different trading or position limits for
different commodities, markets, futures, or delivery months, or for
different number of days remaining until the last day of trading in
a contract, or different trading limits for buying and selling
operations, or different limits for the purposes of paragraphs (1)
and (2) of subsection (b) of this section, or from exempting
transactions normally known to the trade as ``spreads'' or
``straddles'' or ``arbitrage'' or from fixing limits applying to
such transactions or positions different from limits fixed for other
transactions or positions. Moreover, 7 U.S.C. 6a(a) (2006) defined
the word ``arbitrage'' in domestic markets to mean the same as a
``spread'' or ``straddle.'' It also authorized the Commission to
define the term ``international arbitrage.'' 7 U.S.C. 6a(a) (2006).
\31\ There were four other subsections of CEA section 4a: CEA
section 4a(b), which made it unlawful for a person to hold positions
in excess of Commission-set limits; CEA section 4a(c), which
exempted positions held under an exemption for bona fide hedges, CEA
section 4a(d), which exempted positions held by or on behalf of the
United States, and CEA section 4a(e), which authorized exchanges to
set limits so long as they were not higher than Commission-set
limits and made it unlawful for any person to hold limits in excess
of exchange-set limits. (Exchange-set limits are also addressed
elsewhere in the CEA. E.g., 7 U.S.C. 7(d)(5)).
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The 2010 Dodd-Frank Act amendments to CEA section 4a(a)
significantly expanded and altered it. The entirety of pre-Dodd-Frank
CEA section 4a(a) became CEA section 4a(a)(1). Congress added six new
subsections to CEA section 4a(a)--sections 4a(a)(2) through (7). And,
outside of section 4a(a), Congress imposed a requirement that the
Commission study the new limits it imposed and provide Congress with a
report on their effects within one year of their imposition.\32\
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\32\ 15 U.S.C. 8307(a). Some parts of pre Dodd-Frank CEA
sections 4a(a) and 4a(b)-(e) were also amended by the Dodd-Frank
Act. CEA section 4a(a) is now CEA section 4a(a)(1) and was modified
primarily to add swaps, CEA section 4a(b) updates the names of
applicable exchanges, and CEA section 4a(c) requires the Commission
to promulgate a rule in accordance with a narrowed definition of
bona fide hedging position as an exemption from position limits. 7
U.S.C. 6a(a)(1), 6a(b)-(e).
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The primary change at issue here was the addition of new CEA
section 4a(a)(2), which addresses position limits on a specific class
of commodity contracts, ``physical commodities other than excluded
commodities'':
CEA section 4a(a)(2)(A) provides that in accordance with the
standards set forth in CEA section 4a(a)(1), with respect to physical
commodities other than excluded commodities, the Commission shall
establish limits on the amount of positions, as appropriate, other than
bona fide hedge positions, that may be held by any person with respect
to contracts of sale for future delivery or with respect to options on
the contracts.
CEA section 4a(a)(2)(B), in turn, provides that the limits
``required'' under CEA section 4a(a)(2)(A) ``shall be established
within 180 days after the date of enactment of this paragraph'' for
``agricultural commodities'' (such as wheat or corn) and ``within 270
days after the date of the enactment of this paragraph'' for ``exempt
commodities'' (which include energy-related commodities like oil, as
well as metals).\33\
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\33\ 7 U.S.C. 6a(a)(2)(B)(i) and (ii).
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The other new subsections of CEA section 4a(a) delineate the types
of physical commodity derivatives to which the new limits apply, set
forth criteria for the Commission to consider in determining the levels
of the required limits, require the Commission to aggregate the limits
across exchanges for equivalent derivatives, require the Commission to
impose limits on swaps that are economically equivalent to the physical
commodity futures and options subject to CEA section 4a(a)(2), and
permit the Commission to grant exemptions from the position limits it
must impose under the provision:
Section 4a(a)(3) guides the Commission in setting
appropriate limit levels by providing that the Commission shall
consider whether the limit levels: (i) Diminish, eliminate, or prevent
excessive speculation; (ii) deter and prevent market manipulation,
squeezes, and corners; (iii) ensure sufficient market liquidity for
bona fide hedgers; and (iv) ensure that the price discovery function of
the underlying market is not disrupted;
Section 4a(a)(4) sets forth criteria for determining which
swaps perform a significant price discovery function for purposes of
the position limits provisions;
Section 4a(a)(5) requires the Commission to concurrently
impose appropriate limit levels on physical commodity swaps that are
economically equivalent to the futures and options for which limits are
required;
Section 4a(a)(6) requires the Commission to apply the
required position limits on an aggregate basis to contracts based on
the same underlying commodity across all exchanges; and
Section a(a)(7) authorizes the Commission to grant
exemptions from the position limits it imposes.\34\
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\34\ 7 U.S.C. 6a(a)(3)-(7).
In a separate Dodd-Frank Act provision, Congress required that the
Commission, in consultation with exchanges, ``shall conduct a study of
the effects (if any) of the position limits imposed'' under CEA section
4a(a)(2), that ``[w]ithin twelve months after the imposition of
position limits'' the Commission ``shall'' submit a report of the
results of the study to Congress, and that Congress ``shall'' hold
hearings within 30 days of receipt of the report regarding its
findings.\35\
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\35\ 15 U.S.C. 8307(a).
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3. The Commission's Experience With Position Limits
As explained in the December 2013 Position Limits Proposal,
position limits have a long history as a tool to prevent unwarranted
price movement and volatility, including but not limited to price
swings caused by market manipulation.\36\ Physical commodities
underlying futures contracts are, by definition, in finite supply, and
so it is
[[Page 96708]]
possible to amass or dissipate an extremely large position in such a
way as to interfere with the normal forces of supply and demand.
Speculators (who have no commercial use for the underlying commodity)
are considered differently from hedgers (who use commodity derivatives
to hedge commercial risk). Speculators have been considered a greater
source of risk because their trading is unconnected with underlying
commercial activity, whereas a hedger's trading is calibrated to other
business needs. In various statutory enactments, Congress has
recognized both the utility of position limits and the need to treat
speculators differently from hedgers.
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\36\ December 2013 Position Limits Proposal, 78 FR at 75685.
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Congress began regulating commodity derivatives in 1917, when
Congress enacted emergency legislation to stabilize the U.S. grain
markets during the First World War by suspending wheat futures and
securing ``a voluntary limitation'' of 500,000 bushels on trading in
corn futures.\37\ In 1922 Congress enacted the Grain Futures Act, in
which it noted that ``sudden or unreasonable fluctuations in the prices
of commodity futures . . . frequently occur as a result of speculation,
manipulation, or control . . . .'' \38\ In 1936, Congress strengthened
the government's authority by providing for limits on speculative
trading in commodity derivatives when it enacted the CEA. The CEA
authorized the CFTC's predecessor, the Commodity Exchange Commission
(CEC), to establish limits on speculative trading. Since that time, the
Commission has been establishing or authorizing position limits for the
past 80 years. As discussed in the December 2013 Position Limits
Proposal and prior rulemakings, this history includes setting position
limits beginning in 1938; overseeing exchange-set limits beginning in
the 1960s; promulgating a rule in 1981, later directly ratified by
Congress, mandating that exchanges set limits for all commodity futures
for which there were no limits; allowing exchanges, in the 1990s, to
set position accountability levels for certain financial contracts,
such as futures and options on foreign currencies and other financial
instruments with high degrees of stability; \39\ and later expanding
exchange limits or accountability requirements to significant price
discovery contracts traded on exempt commercial markets.\40\
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\37\ Frank M. Surface, The Grain Trade During the World War, at
224 (Macmilliam 1928).
\38\ Grain Futures Act of 1922, ch. 369 at section 3, 342 Stat.
998, 999 (1922), codified at 7 U.S.C. 5 (1925-26).
\39\ See Speculative Position Limits--Exemptions From Commission
Rule 1.61; Chicago Mercantile Exchange Proposed Amendments to Rules
3902.D, 5001.E, 3010.F, 3012.F, 3013.F, 3015.F, 4604, and Deletion
of Rules 3902.F, 5001.G, 3010.H., 3012.M, 3013.H, and 3015.H, 56 FR
51687 (Oct. 15, 1991) (providing notice of proposed exchange rule
changes; request for comments). The Government, either through
Congress, CEC or the Commission, has maintained position limits on
various agricultural commodities since 1917.
\40\ December 2013 Position Limits Proposal, 78 FR at 75681-85;
Significant Price Discovery Contracts on Exempt Commercial Markets,
74 FR 12178 (March 23, 2009).
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As addressed in the December 2013 Position Limits Proposal, two
aspects of the Commission's experience are particularly important to
the Commission's interpretation of the Dodd-Frank Act amendments to CEA
section 4a. The first is the Commission's experience with the time
required to make necessity findings before setting limits, which
relates to the time limits contained in CEA section 4a(a)(2)(B). The
second is the Commission's experience in rulemaking requiring exchanges
to set limits in accordance with certain ``standards,'' the term the
district court found ambiguous.
a. Time to Establish Position Limits
Based on its experience administering position limits, the
Commission preliminarily concludes (as stated preliminarily in the
December 2013 Position Limits Proposal) that Congress could not have
contemplated that, as a prerequisite to imposing limits, the Commission
would first make antecedent commodity-by-commodity necessity
determinations in the 180-270 day time frame within which CEA section
4a(a)(2)(B) states that limits ``required under subparagraph
[4a(a)(2(A)] shall be established.'' \41\ As described in the December
2013 Position Limits Proposal, for 45 years after passage of the CEA,
the Commission's predecessor agency made findings of necessity in its
rulemakings establishing position limits.\42\ During that period, the
Commission had jurisdiction over only a limited number of agricultural
commodities. In orders issued by the Commodity Exchange Commission
between 1940 and 1956 establishing position limits, the CEC stated that
the limits it was imposing in each were necessary. Each of those orders
involved no more than a small number of commodities. But it took the
CEC many months to make those findings. For example, in 1938, the CEC
imposed position limits on six grain products.\43\ Proceedings leading
up to the establishment of the limits commenced more than 13 months
earlier, when the CEC issued a notice of hearing regarding the
limits.\44\ Similarly, in September 1939, the CEC issued a Notice of
Hearing with respect to position limits for cotton, but it was not
until August 1940 that the CEC finally promulgated such limits.\45\ And
the CEC began the process of imposing limits on soybeans and eggs in
January 1951, but did not complete the process until more than seven
months later.\46\
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\41\ December 2013 Position Limits Proposal, 78 FR at 75682-83
(citing 887 F. Supp. 2d at 273).
\42\ 887 F. Supp. 2d at 269.
\43\ See In the Matter of Limits on Position and Daily Trading
in Wheat, Corn, Oats, Barley, Rye, and Flaxseed, for Future Delivery
Findings of Fact, Conclusions, and Order, 3 FR 3145, Dec. 24, 1938.
\44\ See 2 FR 2460, Nov. 12, 1937.
\45\ See Limitation on Buying or Selling of Cotton Notice of
Hearing, 4 FR 3903, Sep. 14, 1939; Part 150--Orders of the Commodity
Exchange Commission Findings of Fact, Conclusions, and Order In the
Matter of Limits on Position and Daily Trading in Cotton for Future
Delivery, 5 FR 3198, Aug. 28, 1940.
\46\ See Handling of Anti-Hog-Cholera Serum and Hog-Cholera
Virus; Notice of Proposed Rule Making 16 FR 321, Jan. 12, 1951;
Limits on Position and Daily Trading in Eggs for Future Delivery, 16
FR 8106, Aug. 16, 1951; see also Limits on Positions and Daily
Trading in Cottonseed Oil, Soybean Oil, and Lard for Future
Delivery, 17 FR 6055, Jul. 4, 1952 (providing notice of a hearing
regarding proposed position limits for cottonseed oil, soybean oil,
and lard); Limits on Position and Daily Trading in Cottonseed Oil
for Future Delivery, 18 FR 443, Jan. 22, 1953 (giving orders setting
limits for cottonseed oil, soybean oil, and lard); Limits on
Position and Daily Trading in Onions for Future Delivery; Notice of
Hearing, 21 FR 1838, Mar. 24, 1956 (conveying notice of a hearing
regarding proposed position limits for onions), Limits on Position
and Daily Trading in Onions for Future Delivery, 21 FR 5575, Jul.
25, 1956 (providing order setting position limits for onions).
---------------------------------------------------------------------------
In the Commission's experience (including the experience of its
predecessor agency), it generally took many months to make a necessity
finding with respect to one commodity. The process of making the sort
of necessity findings that plaintiffs in ISDA v. SIFMA urged with
respect to all agricultural commodities and all exempt commodities (and
that some commenters urge) would be far more lengthy than the time
allowed by CEA section 4a(a)(3), i.e., 180 or 270 days from enactment
of the Dodd-Frank Act.\47\ Because of the stringent time limits in CEA
section 4a(a)(2)(B), the Commission concludes that Congress did not
intend for the Commission to delay the imposition of limits until it
first made antecedent, contract-by-contract necessity findings.
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\47\ Although the Commission did not meet these deadlines in its
first position limits rulemaking, it completed the task (in which
the Commission received and addressed more than 15,000 comments) as
expeditiously as possible under the circumstances.
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[[Page 96709]]
b. Prior Rulemaking Requiring Exchanges to Set Limits
The CFTC's preliminary interpretation of the statute is also based
in part on its promulgation of a rule in 1981 requiring exchanges to
impose limits on all contracts that did not already have limits. In
that rulemaking, the Commission, acting expressly pursuant to, inter
alia, what was then CEA section 4a(1) (predecessor to CEA section
4a(a)(1)), adopted what was then 17 CFR 1.61.\48\ This rule required
exchanges to set speculative position limits ``for each separate type
of contract for which delivery months are listed to trade'' on any DCM,
including ``contracts for future delivery of any commodity subject to
the rules of such contract market.'' \49\ The Commission explained that
this action would ``close the existing regulatory gap whereby some but
not all contract markets [we]re subject to a specified speculative
position limit.'' \50\
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\48\ Establishment of Speculative Position Limits, 46 FR 50938,
50944-45, Oct. 16, 1981. The rule adopted in 1981 tracked, in
significant part, the language of CEA section 4a(1). Compare 17 CFR
1.61(a)(1) (1982) with 7 U.S.C. 6a(1) (1976).
\49\ Establishment of Speculative Position Limits, 46 FR at
50945.
\50\ Id. at 50939; see also id. at 50938 (``to ensure that each
futures and options contract traded on a designated contract market
will be subject to speculative position limits'').
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Like the Dodd-Frank Act, the 1981 final rule established (and the
rule release described) that such limits ``shall'' be established
according to what the Commission termed ``standards.'' \51\ As used in
the 1981 final rule and release, ``standards'' meant the criteria for
determining how the required limits would be set.\52\ ``Standards'' did
not include the antecedent ``necessity'' determination of whether to
order limits at all. The Commission had already made the antecedent
judgment in the rule that ``speculative limits are appropriate for all
contract markets irrespective of the characteristics of the underlying
market.'' \53\ The Commission further concluded that, with respect to
any particular market, the ``existence of historical trading data''
showing excessive speculation or other burdens on that market is not
``an essential prerequisite to the establishment of a speculative
limit.'' \54\
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\51\ Compare id. at 50941-42, 50945 with 7 U.S.C. 6a(a)(2)(A).
\52\ Establishment of Speculative Position Limits, 46 FR 50941-
42, 50945.
\53\ Id. at 50941-42 (preamble), 50945 (text of Sec.
1.61(a)(2)).
\54\ The Commission believes it likely that, given the
prophylactic purposes articulated in current CEA section
4a(a)(1)(A), a similar view of position limits underpins CEA section
4a(a)(2)(A).
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The Commission thus directed the exchanges to set limits for all
futures contracts ``pursuant to the . . . standards of rule 1.61,''
without requiring that the exchanges first make a finding of
necessity.\55\ And rule 1.61 incorporated the ``standards'' from then-
CEA-section 4a(1)--an ``Aggregation Standard'' (46 FR at 50943) for
applying the limits to positions both held and controlled by a trader,
and a flexibility standard allowing the exchanges to set ``different
and separate position limits for different types of futures contracts,
or for different delivery months, or from exempting positions which are
normally known in the trade as `spreads, straddles or arbitrage' or
from fixing limits which apply to such positions which are different
from limits fixed for other positions.'' \56\ Because the Commission
had already made the antecedent necessity findings, it imposed tight
deadlines for the exchanges to establish the limits. It is,
accordingly, reasonable to believe that Congress would have structured
CEA section 4a(a) similarly, by first making the antecedent necessity
determination on its own,\57\ then directing the Commission to impose
the limits without making an independent determination of necessity,
and then using the term ``standards'' just as the Commission did in
1981 to refer to aggregation and flexibility rather than necessity for
the required limits.
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\55\ Establishment of Speculative Position Limits. 46 FR at
50942.
\56\ Id. at 50945 (Sec. 1.61(a)). Compare 7 U.S.C. 6a(1)
(1976).
\57\ As discussed in further detail regarding congressional
investigations, below, it is especially reasonable to infer that
Congress had in fact made such a determination based on the
congressional investigations that preceded these Dodd-Frank Act
amendments. The fact that the Commission already had the clear
authority to impose limits when it deemed them necessary bolsters
this inference, because there was no need for these Dodd-Frank Act
amendments to the position limits statute unless Congress, based on
its own determination of necessity, sought to direct the Commission
to impose limits.
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Indeed, legislative history shows reason to believe that Congress'
choice of the word ``standards'' to refer to aggregation and
flexibility alone was purposeful and intended it to mean the same thing
it did in the Commission's 1981 rule.\58\ The language that ultimately
became section 737 of the Dodd-Frank Act, amending CEA section 4a(a),
originated in substantially final form in H.R. 977, introduced by
Representative Peterson, who was then Chairman of the House Agriculture
Committee and who would ultimately be a member of the Dodd-Frank Act
conference committee.\59\ In important respects, the language of H.R.
977 resembles the language the Commission used in 1981, suggesting that
the regulation's text may have influenced the statutory text. Like the
Commission's 1981 rule, H.R. 977 states that there ``shall'' be
position limits in accordance with the ``standards'' identified in CEA
section 4a(a).\60\ This language was included in CEA section 4a(a)(2)
as adopted. Also like the 1981 rule, H.R. 977 established (and the
Dodd-Frank Act ultimately adopted) a ``good faith'' exception for
positions acquired prior to the effective date of the mandated
limits.\61\ The committee report accompanying H.R. 977 described it as
``Mandat[ing] the CFTC to set speculative position limits'' and the
section-by-section analysis stated that the legislation ``requires the
CFTC to set appropriate position limits for all physical commodities
other than excluded commodities.'' \62\ This closely resembles the
omnibus prophylactic approach the Commission took in 1981, when the
Commission required the establishment of position limits on all futures
contracts according to ``standards'' it borrowed from CEA section
4a(1). The Commission views the history and interplay of the 1981 rule
and Dodd-Frank Act section 737 as further evidence that Congress
intended to follow much the same approach as the Commission did in
1981, mandating position limits as to all physical commodities.\63\
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\58\ The relevant broader legislative history is discussed in
depth, below.
\59\ H.R. 977, 11th Cong. (2009).
\60\ 7 U.S.C. 6.
\61\ Compare H.R. 977, 11th Cong. (2009) with Establishment of
Speculative Position Limits, 46 FR at 50944.
\62\ H.Rept. 111-385, at 15, 19 (Dec. 19, 2009).
\63\ See Union Carbide Corp. & Subsidiaries v. Comm'r of
Internal Revenue, 697 F.3d 104, 109 (2d Cir. 2012) (explaining that
when an agency must resolve a statutory ambiguity, to do so ``with
the aid of reliable legislative history is rational and prudent''
(quoting Robert A. Katzman, Madison Lecture: Statutes, 87 N.Y.U. L.
Rev. 637, 659 (2012)).
---------------------------------------------------------------------------
There is further evidence based on the 1981 rulemaking that
Congress would have found the across-the-board prophylactic approach
attractive. In 1983, when enacting the Futures Trading Act of 19982,
Public Law 97-444, 96 Stat. 2294 (1983), Congress was aware that the
Commission had ``promulgated a final rule requiring exchanges to submit
speculative position limit proposals for Commission approval for all
futures contracts traded as of that date.'' \64\ Presented with
competing industry and Commission proposals to amend the position
limits statute, Congress elected to amend the
[[Page 96710]]
CEA ``to clarify and strengthen the Commission's authority in this
area,'' including authorizing the Commission to prosecute violations of
exchange-set limits as if they were violations of the CEA.\65\ Thus, by
granting the Commission explicit authority to enforce the Commission-
mandated exchange-set limits, Congress in effect ratified the 1981
rule, finding it reasonable to impose position limits on an across-the
board basis, rather than following a commodity-by-commodity
determination. This contributes to the Commission's judgment that
Congress reasonably could have followed a similar approach here and,
for the reasons given elsewhere, likely did.
---------------------------------------------------------------------------
\64\ S. Rep. No. 97-384, at 44 (1982).
\65\ Id.
---------------------------------------------------------------------------
c. Comments \66\
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\66\ A list is provided below in Section V, Appendix B, of the
full names, abbreviations, dates and comment letter numbers for all
comment letters cited in this rulemaking. The Commission notes that
many commenters submitted more than one comment letter.
Additionally, all comment letters that pertain to the December 2013
Position Limits Proposal and the 2016 Supplemental Position Limits
Proposal, including non-substantive comment letters, are contained
in the rulemaking comment file and are available through the
Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1708. A search can be done online for a
particular comment letters by inserting the specific comment letter
number in the address in place of the hash tags in the following web
address: http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=#####&SearchText.
---------------------------------------------------------------------------
i. Commission's Experience: No commenter disputed the depth or
breadth of the Commission's experience and expertise with position
limits.\67\ Most, if not all, commenters, many of them exchanges,
traders, and other market participants who have been subject to a long-
standing federal and exchange-set limit regime, implicitly or
explicitly agreed that at least spot-month position limits continue to
be essential to prevent manipulation and excessive volatility and thus
serve the public interest.\68\ One commenter acknowledged that only the
Commission can impose and monitor limits across exchanges.\69\ Another
opined that only the Commission could impose limits without any
conflicts of interest due to the exchanges' imperative to maximize
trading volume in order to maximize profit.\70\
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\67\ One commenter questioned whether the Commission's
experience was even relevant. This commenter asserted that the
statute clearly and unambiguously does not mandate imposition of
position limits, and therefore no consideration or deference to the
Commission's experience is appropriate. CL-ISDA/SIFMA-59611 at 7.
But the district court disagreed and directed the Commission to
employ its experience in resolving the ambiguities in the statute.
887 F. Supp. 2d at 270, 280-82. In any event, for the reasons
discussed, the Commission's reading is, at a minimum, reasonable.
\68\ E.g., CL-CME-59718 at 2; see also CL-ISDA/SIFMA-59611 at 3,
27-32, App. A at 11, App. B at 6 (arguing for alternatives to limits
outside the spot month).
\69\ CL-CME-59718 at 18.
\70\ CL-CMOC-60400 at 3; and CL-Public Citizen-60390 at 2-3.
---------------------------------------------------------------------------
ii. Time to Establish Limits: No commenters disputed the fact that
it took many months for the Commission to make a necessity
determination before establishing limits. Some commenters agreed with
the determinations the Commission preliminarily drew from its
experience.\71\
---------------------------------------------------------------------------
\71\ E.g., CL-A4A-59714 at 3.
---------------------------------------------------------------------------
Several commenters asserted that the Commission's reliance on the
timelines to support its view ignores other qualifying language in the
statute, such as the terms ``necessary'' and ``appropriate.'' \72\ The
Commission disagrees, because its interpretation of the statute
considers the relevant provisions as an integrated whole, which is
required in interpreting any statute. Under this approach, it is
appropriate to give consideration to the import of the tight statutory
deadlines in light of the Commission's experience that it could not
possibly comply with if it had to make necessity findings as it has in
the past. These comments fail to take these considerations into
account. The Commission addresses the language relied upon by these
commenters, infra, in its discussion of the text of the statute.
---------------------------------------------------------------------------
\72\ CL-CME-59718 at 7; and CL-ISDA/SIFMA-59611 at 9, n. 32
(asserting that deadlines are no excuse for the Commission to be
``arbitrary'' or ``sloppy.'').
---------------------------------------------------------------------------
CME also contended that the 180- and 270-day time limits were a
difficulty manufactured by the December 2013 Position Limits Proposal
itself. According to CME, the Commission could instead expedite the
process for setting limits by utilizing its exchanges and others to
determine whether position limits are necessary and appropriate for a
particular commodity and, if so, the appropriate types and levels of
limits and related exemptions.\73\ While this is a plausible approach
to generating necessity findings, the Commission views it unlikely that
Congress had this approach in mind. The provisions at issue make no
mention of exchange-set limits or necessity findings. CME also gave no
reason to believe that commodity-by-commodity necessity findings could
be made by the exchanges within the prescribed 180/270 day limits.
---------------------------------------------------------------------------
\73\ CL-CME-59718 at 7.
---------------------------------------------------------------------------
iii. 1981 Rulemaking: Some commenters disagreed with the
Commission's consideration of the 1981 Rule. CME commented that the
1981 Rule is inapposite because there the Commission was requiring DCMs
to impose position limits based on an ``antecedent judgment'' that
limits were necessary and appropriate; a necessity finding was not
required there.\74\ The Commission believes that CME's observation is
consistent with its interpretation. In the 1981 rule, the Commission
made an antecedent judgment on an across-the-board basis that position
limits were necessary, and the exchanges then set them according to
specific standards. Here, Congress has made the antecedent judgment on
an across-the-board basis that position limits are necessary for
physical commodities (i.e., commodities other than excluded
commodities), and ordered the Commission to set them according to the
same types of standards referenced in the 1981 rule. This supports,
rather than undermines, the Commission's interpretation that the
``standards'' in CEA section 4a(a)(1), referred to in CEA section
4a(a)(2) as added by the Dodd-Frank Act, are the flexibility and
aggregation standards, much as they were in the 1981 rulemaking
interpreting CEA section 4a(a)(1).
---------------------------------------------------------------------------
\74\ Id. at 9-10.
---------------------------------------------------------------------------
Several commenters contended that the Commission's reliance on the
1981 rulemaking ignores that the CFTC then imposed limits only after a
fact-intensive inquiry into the characteristics of individual contracts
markets to determine the limits most appropriate for individual
contract markets.\75\ However, the Commission has taken those inquiries
into account. The Commission believes these inquiries are significant
because while the Commission performed such investigation for some
markets, it did not do so for all markets ultimately within the scope
of the rule. The 1981 Rule directed exchanges to impose limits on all
futures contracts for which exchanges had not already imposed limits.
For example, citing a then-recent disruption in the silver market, the
Commission directed that position limits be imposed prophylactically
for all futures and options contracts.\76\ It further directed the
exchanges to consider the characteristics of particular contracts and
markets in determining how to set limits (the standards, limit
[[Page 96711]]
levels and so on) but not whether to do so.\77\ It specifically
rejected commenters' concerns that position limits would not be
beneficial for all contracts, finding, after ``considerable years of
Federal and contract market regulatory experience,'' that ``the
capacity of any contract market . . . is not unlimited,'' and there was
no need to evaluate the particulars of whether any contract would
benefit from position limits.\78\ The Dodd-Frank Act amendments
unfolded in an analogous fashion. Prior to the Dodd-Frank Act, Congress
conducted studies of some, but not all, markets in physical
commodities. This history suggests that Congress extrapolated from the
conclusions reached in those studies to determine that position limits
were necessary for all physical commodities other than excluded
commodities.
---------------------------------------------------------------------------
\75\ CL-AMG-59709 at 4, n. 8; and CL-CME-59718 at 15-16.
\76\ Establishment of Speculative Position Limits, 46 FR at
50940-41 (Oct. 16, 1981).
\77\ Id.
\78\ Id.
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ISDA and SIFMA asserted that the Commission's reliance on the 1981
rulemaking is unavailing because (1) it cannot alter the Commission's
statutory burdens with respect to imposing position limits; and (2) it
was never adopted by Congress.\79\ The first of these comments begs the
question, i.e., what is ``the statutory burden'' intended in the text
of CEA sections 4a(a)(1) and (2), read as a whole and considered in
context to resolve the ambiguity found by the district court. As to the
second comment, the Commission does not contend that Congress adopted
the 1981 rule. Rather, it is relevant because the language the district
court found ambiguous in the Dodd-Frank Act amendments to CEA section
4a(a) resembles the language of the 1981 rule, and some of the context
is parallel. The relevance of this rulemaking is supported by the fact
that Congress did ratify it the following year, when it amended the CEA
by granting the Commission the authority to enforce the position limits
set by the exchanges, reinforcing that as a historical matter Congress
had approved an omnibus prophylactic approach as reasonable. That
Congress had approved of such an approach before and then used language
in the Dodd-Frank Act that closely resembles the very language the
Commission used when it mandated that omnibus approach is another
factor that weighs on the side of interpreting the statutory ambiguity
to find a mandate to impose physical commodity positon limits.\80\
---------------------------------------------------------------------------
\79\ CL-ISDA/SIFMA-59611 at 9.
\80\ CFTC v. Schor, 478 U.S. 833, 846 (1986).
---------------------------------------------------------------------------
Finally, several commenters asserted that the Commission cannot
consider the 1981 rulemaking because the Commission later allowed
exchanges to set position accountability levels in lieu of limits for
some commodities and contracts.\81\ Those later exemptions do not,
however, alter the language or import of the 1981 rule, which directed
the exchanges to impose limits in accordance with ``standards'' that
did not include a necessity finding. The 1981 rulemaking is the last
time the Commission definitively addressed and identified the
``standards'' in CEA section 4a(a)(1) for imposing across-the-board,
prophylactic position limits in a manner akin to the Dodd-Frank Act
amendments. That other approaches intervened is not inconsistent with
the inference that Congress was influenced by the 1981 rulemaking in
the Dodd-Frank Act amendments.
---------------------------------------------------------------------------
\81\ E.g., CL-ISDA/SIFMA-59611 at 9; and CL-AMG-59709 at 4, n.8.
---------------------------------------------------------------------------
4. Legislative History of the Dodd-Frank Act Amendments to Position
Limits Statute
As discussed in the 2016 Supplemental Position Limits Proposal, the
Commission has also considered the legislative history of the Dodd-
Frank Act amendments.\82\ That history contains further indication that
Congress intended to mandate the imposition of limits for physical
commodity derivatives without requiring the Commission to make
antecedent necessity findings, and did not intend the term
``standards'' to include such a finding.\83\
---------------------------------------------------------------------------
\82\ Union Carbide Corp. & Subsidiaries v. Comm'r of Internal
Revenue, 697 F.3d 104, 109 (2d Cir. 2012) (explaining that when an
agency must resolve a statutory ambiguity, to do so ``with the aid
of reliable legislative history is rational and prudent'' (quoting
Robert A. Katzman, Madison Lecture: Statutes, 87 N.Y.U. L. Rev. 637,
659 (2012)).
\83\ December 2013 Position Limits Proposal, 78 FR at 75682,
75684-85.
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The Commission's preliminary interpretation of CEA section 4a(a)(2)
is based in part on congressional concerns that arose, and
congressional actions taken, before the passage of the Dodd-Frank Act
amendments.\84\ During the 1990s, the Commission began permitting
exchanges to experiment with an alternative to position limits--
position accountability, which allowed a trader to hold large positions
subject to reporting requirements and gave the exchange the right to
order the trader to hold or reduce its position.\85\ Then, in the
Commodity Futures Modernization Act of 2000 (``CFMA''),\86\ Congress
expressly authorized the use of position accountability as an
alternative means to limit speculative positions.\87\
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\84\ Id. at 75682.
\85\ Federal Speculative Position Limits for Referenced Energy
Contracts and Associated Regulations, 75 FR 4144, 4147 (Jan. 26,
2010); Revision of Federal Speculative Position Limits and
Associated Rules, 64 FR 24038, 24048-49 (May 5, 1999).
\86\ Commodity Futures Modernization Act of 2000, Public Law
106-554, 114 Stat. 2763 (Dec. 21, 2000).
\87\ 7 U.S.C. 7(d)(3) (2009).
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Following this experiment with position accountability, Congress
became concerned about fluctuations in commodity prices. In the late
1990s and 2000s, Congress conducted several investigations that
concluded that excessive speculation accounted for significant
volatility and price increases in physical commodity markets. For
example, a congressional investigation determined that prices of crude
oil had risen precipitously and that ``[t]he traditional forces of
supply and demand cannot fully account for these increases.'' \88\ The
investigation found evidence suggesting that speculation was
responsible for an increase of as much as $20-25 per barrel of crude
oil, which was then at $70.\89\ Subsequently, Congress found similar
price volatility stemming from excessive speculation in the natural gas
market.\90\
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\88\ The Role of Market Speculation in Rising Oil and Gas
Prices: A Need to Put the Cop Back on the Beat, Staff Report,
Permanent Subcommittee on Investigations of the Senate Committee on
Homeland Security and Governmental Affairs, U.S. Senate, S. Prt. No.
109-65 at 1 (June 27, 2006).
\89\ Id. at 12; see also Excessive Speculation in the Natural
Gas Market, Staff Report, Permanent Subcommittee on Investigations
of the Senate Committee on Homeland Security and Governmental
Affairs, U.S. Senate at 1 (June 25, 2007), available at http://www.levin.senate.gov/imo/media/doc/supporting/2007/PSI.Amaranth.062507.pdf (last visited Mar. 18, 2013) (``Gas
Report'').
\90\ Gas Report at 1-2.
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These investigations appear to have informed the drafting of the
Dodd-Frank Act. During hearings prior to the passage of the Dodd-Frank
Act, Senator Carl Levin, then-Chair of the Senate Permanent
Subcommittee on Investigations that had conducted them, urged passage
to ensure ``a cop on the beat in all commodity markets where U.S.
commodities are traded . . . that can enforce the law to prevent
excessive speculation and market manipulation.'' \91\ In addition,
Congress viewed the nearly $600 trillion little-regulated swaps market
as a ``major contributor to the financial crisis'' because excessive
risk taking, hidden leverage, and under collateralization in that
market created a systemic risk of harm to the entire financial
system.\92\ As Senator Cantwell and others explained, it was imperative
that the CFTC have the ability to regulate swaps through
[[Page 96712]]
``position limits,'' ``exchange trading,'' and ``public transparency''
to avoid a recurrence of the instability that rippled through the
entire financial system in 2008.\93\ And in the House of
Representatives, Representative Collin Peterson, then-Chairman of the
House Committee on Agriculture and author of an amendment strengthening
the position limits provision as discussed below, reminded his
colleagues that his committee's own ``in-depth review of derivative
markets began when we experienced significant price volatility in
energy futures markets due to excessive speculation--first with natural
gas and then with crude oil. We all remember when we had $147 oil. . .
. This conference report [now] includes the tools we authorized and the
direction to the CFTC to mitigate outrageous price spikes we saw 2
years ago.'' \94\ Congress's focus in its investigations on excessive
speculation involving physical commodities is reflected in the scope of
the Dodd-Frank Act's position limits amendment: It applies only to
physical commodities.
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\91\ 156 Cong. Record S. 4064 (daily ed. May 20, 2010).
\92\ S. Rep. 111-176, at 29 (2010).
\93\ See, e.g., 156 Cong. Rec. S 2676-78, S 2698-99, S 3606-07,
S 3966, S 5919 (daily ed. April 27, May 12, 19, July 15, 2010
(providing statements of Senators Cantwell, Feinstein, Lincoln)).
\94\ 156 Cong. Rec. H5245 (daily ed. June 30, 2010) (emphasis
added).
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The evolution of the position limits provision in the bills before
Congress from permissive to mandatory supports a preliminary
determination that Congress intended to do something more than continue
the long-standing statutory regime giving the Commission discretionary
authority to impose limits.\95\ As initially introduced, the House bill
that became the Dodd-Frank Act provided the Commission with
discretionary authority to issue position limits, stating that the
Commission ``may'' impose them.\96\ However, the House replaced the
word ``may'' with the word ``shall,'' suggesting a specific judgment
that the limits should be mandatory, not discretionary. The House also
added other language militating in favor of interpreting CEA section
4a(a)(2) as a mandate. In two new subsections, it set the tight
deadlines described above.\97\ After changing ``may'' to ``shall,'' the
House further amended the bill to refer in one instance to the limits
for agricultural and exempt commodities as ``required.'' \98\ And only
after the language had changed from permissive to mandatory, the House
added the requirement that the Commission conduct studies on the
``effects (if any) of position limits imposed'' \99\ to determine if
the required position limits were harming U.S. markets.\100\
Underscoring its intent to amend the bill to include a mandate, the
House Report accompanying the House Bill stated that it ``required''
the Commission to impose limits.\101\ The Conference Committee adopted
the House bill's amended provisions on position limits and then
strengthened them even further by referring to the position limits as
``required'' an additional three times, bringing the total to four
times in the final legislation the number of references in statutory
text to position limits as ``required.'' \102\
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\95\ December 2013 Position Limits Proposal, 78 FR at 75684-85.
\96\ Initially, the House used the word ``may'' to permit the
Commission to impose aggregate positions on contracts based upon the
same underlying commodity. See H.R. 4173, 11th Cong. 3113(a)(2)
(providing the version introduced in the House, Dec. 2, 2009)
(``Introduced Bill''); see also Brief of Senator Levin et al as
Amicus Curiae at 10-11, ISDA v. CFTC, no. 12-5362 (D.C. Cir. Apr.
22, 2013), Document No. 1432046 (hereafter ``Levine Br.'').
\97\ Levin Br. at 11 (citing H.R. 4173, 111th Cong.
3113(a)(5)(2), (7) (as passed by the House Dec. 11, 2009)
(``Engrossed Bill'')).
\98\ Id. at 12. (citing Engrossed Bill at 3113(a)(5)(3)).
\99\ 15 U.S.C. 8307; Engrossed Bill at 3005(a).
\100\ See Levin Br. at 13-17; see also DVD: October 21, 2009
Business Meeting (House Agriculture Committee 2009), ISDA v. CFTC,
Dkt. 37-2 Exh. B (Apr. 13, 2012) at 59:55-1:02:18.
\101\ Levin Br. at 23 (citing H.R. Rep. No. 111-373 at 11
(2009)).
\102\ Levin Br. at 17-18.
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a. Comments
A number of commenters generally supported or opposed the
Commission's consideration of Congressional investigations and the
textual strengthening of the Dodd-Frank bill. The Commission addresses
specific comments below.
i. Congressional Investigations: Several commenters agreed that the
Congressional investigations, hearings and reports support the view
that Congress decided to mandate position limits.\103\ They pointed out
that Congress's investigations followed amendments in 2000 to the CEA
as part of the CFMA that exempted swaps and energy derivatives from
position limits and expressly authorized exchanges to impose position
accountability levels in lieu of limits.\104\ According to the
Commodity Markets Oversight Coalition (``CMOC''), ``witnesses confirmed
[at those hearings] that the erosion of the position limits regime was
a leading cause in market instability and wild price swings.'' \105\
Senator Levin, who presided over the investigations, commented that
those investigations, conducted from 2002 onwards, ``into how our
commodity markets function, focusing in particular on the role of
excessive speculation on commodity prices'' ``have demonstrated that
the failure to impose and enforce effective position limits have led to
greater speculation and increased price volatility in U.S. commodity
markets.'' \106\ According to Senator Levin, the investigations
``provide[d] strong support for the Dodd-Frank decision to require the
Commission to impose position limits on all types of commodity futures,
swaps, and options.'' \107\ Senator Levin also stated that the harms of
excessive speculation continue to be felt in the absence of the
mandated limits. He cited recent actions by federal regulators to stop
manipulation in energy markets, and opined that the continuing problems
in the absence of the mandated limits only reinforce the reasonableness
of the Commission's view that Congress intended to mandate position
limits as a prophylactic measure.\108\ Senator Levin's point was echoed
by Public Citizen, a consumer advocacy organization, and Airlines for
America, a trade association for the U.S. scheduled airline
industry.\109\
---------------------------------------------------------------------------
\103\ CL-CMOC-59720 at 2; CL-Sen. Levin-59637 at 2-5; and CL-
A4A-59686 at 2-3.
\104\ CL-IECA-59964 at 2; CL-A4A-59686 at 2; and CL-Public
Citizen-59648 at 2-3.
\105\ CL-CMOC-59720 at 2.
\106\ CL-Sen. Levin-59637 at 3-4.
\107\ Id.
\108\ Id. at 2.
\109\ CL-Public Citizen-59648 at 2-3, and CL-A4A-59686 at 1-2.
---------------------------------------------------------------------------
Other commenters disagreed with the Commission's preliminary
determination that the Congressional investigations indicate that
Congress intended to mandate limits. CME asserted that the
investigations do not in themselves demonstrate that Congress required
the CFTC to impose position limits as recommended even if those
investigations suggest that excessive speculation poses a burden on
interstate commerce in certain physical commodity markets.\110\ Citadel
questioned whether the cited reports could be ``broadly indicative of
Congressional intent,'' or could ``redefine statutory language that has
existed for nearly eight decades.'' \111\
---------------------------------------------------------------------------
\110\ CL-CME-59718 at 8. CME also asserted that the
Congressional investigation into excessive speculation in natural
gas futures focused more on the fact that position accountability
rules for exchange-traded natural gas futures were not in place for
``look-alike'' natural gas swaps traded ``over the counter,''
permitting regulatory arbitrage.
\111\ CL-Citadel-59717 at 3.
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But the Commission is not relying solely on these reports. The
question, rather, is whether these Congressional
[[Page 96713]]
investigations and findings of excessive speculation and price
volatility in energy markets, conducted and issued when the Commission
was authorized but not required by law to impose limits, may be one
indication, among others, that Congress sought to do something more
with the Dodd-Frank Act amendments than to maintain the statutory
status quo for futures on physical commodities. In the Commission's
preliminary view, it is more plausible, based on these investigations,
that Congress sought to do something more--to require that the
Commission impose limits for the covered commodities without having to
first find that they are necessary to prevent excessive speculation.
Contrary to Citadel's comment, the Commission is not relying on the
investigations and reports to redefine statutory language that has
existed for nearly eight decades. Rather, the Commission believes that
the investigations favor the conclusion that Congress added CEA section
4a(a)(2) to the pre-existing language in order to strengthen the long-
standing position limits regime for a category of commodity
derivatives--physical commodities--that Congress's investigations
revealed to be vulnerable to substantial price fluctuations.
ii. Evolution of the Dodd-Frank Bill: Several commenters agreed
with the Commission's preliminary determination that the strengthening
of the position limits language in the Dodd-Frank bill evinces
Congress' intent to mandate limits.\112\
---------------------------------------------------------------------------
\112\ CL-Public Citizen-59648 at 2.
---------------------------------------------------------------------------
CME and MFA disagreed; while they do not directly address this
point, they believed that the strengthening of the language in the
Dodd-Frank bills does not indicate that Congress intended to de-couple
the enacted directive to impose position limits from the necessity
finding of CEA section 4a(a)(1).\113\ The Commission, however,
preliminarily considers this the most plausible interpretation. The
evolution of the bill from one stating the Commission ``may'' impose
position limits to include statements that the Commission ``shall''
impose them, that they are ``required,'' and that the Commission shall
study their effects indicates intentional progressive refinement from a
bill that would continue the status quo for futures to one that added
special nondiscretionary requirements for a category of commodities.
This legislative evolution also supports the conclusion ``standards''
does not include an antecedent necessity finding.
---------------------------------------------------------------------------
\113\ CL-CME-59718 at 2, 5-12 (maintaining statutory language
requires necessity finding); and CL-MFA-59606 at 9 (citing S. Rept.
111-176 (Apr. 30, 2010, which states ``[t]his section authorizes the
CFTC to establish aggregate position limits. . . .'').
---------------------------------------------------------------------------
5. The Commission Preliminarily Interprets the Text of CEA Section
4a(a) as an Integrated Whole, In Light of Its Experience and Expertise.
In the December 2013 Position Limits Proposal, the Commission
discussed how its interpretation of the text of CEA section 4a(a),
considered as an integrated whole, is consistent with and supports its
conclusions based on experience and expertise. As discussed, the
ambiguity is the meaning of CEA section 4a(a)(2)'s statement that the
Commission ``shall'' establish limits on physical commodities other
than excluded commodities ``[i]n accordance with the standards'' set
forth in CEA section 4a(a)(1). If ``standards'' includes a necessity
finding, then a necessity finding is required before limits can be
imposed on agricultural and exempt commodities. If not, the Commission
must impose limits for that subset of commodity derivatives. In the
December 2013 Position Limits Proposal, the Commission resolved the
ambiguity by preliminarily determining that the reference in CEA
section 4a(a)(2) to the ``standards'' in pre-Dodd-Frank section
4a(a)(1) refers to the criteria in CEA section 4a(a)(1) for how the
required limits are to be set and not the antecedent finding whether
limits are even necessary. The Commission explained that, in its
preliminary view, ``standards'' refers to, in CEA section 4a(a)(1),
only the following two provisions. First, the limits must account for
situations in which one person controls another or two persons act in
concert, by aggregating those positions as if the trading were done by
one person acting alone (aggregation). The second ``standard'' in CEA
section 4a(a)(1) states that the limits may be different for different
commodities, markets, delivery months, etc. (flexibility).
The Commission reasoned that this construction of ``standards''
seemed most consistent with the Commission's experience and history
administering position limits. It also seemed most consistent with the
text of CEA section 4a(a)(2), the rest of CEA section 4a(a), and the
Act as a whole. The Dodd-Frank Act amendments to CEA section 4a(a)
largely re-shape CEA section 4a(a) by adding a new, detailed, and
comprehensive section 4a(a)(2) that applies only to a subset of the
derivatives regulated by the Commission--physical commodities like
wheat, oil, and gold--and not intangible commodities like interest
rates. Amended CEA section 4a(a) repeatedly uses the word ``shall'' and
refers to the new limits as ``required,'' differentiating it from the
text that existed before the Dodd-Frank Act.\114\ Never before in the
Commission's experience had Congress set deadlines on action for
position limits by a date certain, much less the short time provided in
CEA section 4a(a)(2)(B).\115\ Nor, in the Commission's experience, had
Congress required a report by a given date or committed itself to hold
hearings on the report within 30 days thereafter.\116\ The Commission
preliminarily concluded that, considered as a whole in light of this
experience, these provisions evince a Congressional mandate that the
Commission impose limits on physical commodities, that it do so
quickly, that it impose limit levels in accordance with certain
requirements, and that it study the effectiveness of the limits after
imposing them and then report to Congress.
---------------------------------------------------------------------------
\114\ E.g., CEA sections 4a(a)(2)(A) (providing that the
Commission ``shall'' set the limits); 4a(a)(2)(B) (referring twice
to the ``limits required'' and directing that they ``shall'' be
established by a time certain); 4a(a)(3)(referring to the limits
``required'' under subparagraph (A)); 4a(a)(5)(stating that the
Commission ``shall'' concurrently establish limits on economically
equivalent contracts).
\115\ 7 U.S.C. 6a(a)(2(B).
\116\ 15 U.S.C. 8307.
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By the same token, the Commission preliminarily determined that
interpreting CEA section 4a(a)(2) as it proposed to do would not render
superfluous the necessity finding requirement in CEA section 4a(a)
because that section still applies to the non-physical (excluded)
commodity derivatives that are not subject to CEA section 4a(a)(2). Nor
would it nullify other parts of CEA section 4a(a), as those are
unaffected by this reading.
The Commission received a number of comments on its discussion of
the interplay between the statute's text and the Commission's
experience and expertise. The Commission has considered them carefully,
but is not thus far persuaded. The Commission preliminarily believes
that it is a reasonable interpretation of the text of the statute
considered as an integrated whole and viewed through the lens of the
Commission's experience and expertise, that Congress mandated that the
Commission establish position limits for physical commodities. It is
also reasonable to construe the reference to ``standards'' as an
instruction to the Commission to apply the flexibility and aggregation
standards set forth in CEA section 4a(a)(1), just as the Commission
instructed the exchanges to impose
[[Page 96714]]
omnibus limits in 1981. And it is at least reasonable to conclude that
Congress, in directing the Commission to impose the ``required'' limits
on extremely tight deadlines, did not intend the Commission to
independently make an antecedent finding that any given position limit
for physical commodities is ``necessary''--a finding that would take
many months for each individual physical commodity contract.
a. Comments
Several commenters disputed the Commission's interpretation, based
on its experience and expertise, that CEA section 4a(a)(2) is a mandate
for prophylactic limits based on their view that the statute
unambiguously requires the Commission to promulgate position limits
only after making a necessity finding, and only ``as appropriate.''
\117\ But in ISDA v. SIFMA, the district court held that the statute
was ambiguous in this respect, and the Commission here is following the
court's direction to apply its experience and expertise to resolve the
ambiguity. This is consistent with a commenter's statement that ``the
meshing of the Dodd-Frank Act into the CEA may have created some
ambiguity from a technical drafting/wording standpoint.'' \118\
Nevertheless, the Commission addresses these textual arguments to show
that its preliminary interpretation is, at a minimum, a permissible
one.
---------------------------------------------------------------------------
\117\ CL-CME-59718 at 11; CL-MFA-59606. at 9; etc. But see,
e.g., CL-A4A-59714 at 2-3 (noting that notwithstanding the
``meshing'' problems, ``it is clear that the Commission's
interpretation is reasonable and fully supported by the context in
which the Dodd-Frank Act was passed, its legislative history, and
the many other factors identified in the NPRM''); CL-AFR-59685 at 1;
CL-Public Citizen-60390 at 2; CL-Public Citizen-59648 at 2; CL-Sen.
Levin-59637 at 4; and CL-CMOC-59720 at 2-3.
\118\ CL-A4A-59714 at 2-3.
---------------------------------------------------------------------------
The commenters that disagreed with the Commission's preliminary
conclusion argued that the Commission: (i) Erred in determining that
the reference to ``standards'' in CEA section 4a(a)(2) does not include
the necessity finding in CEA section 4a(a)(1); (ii) failed to consider
other provisions that show Congress intended to require the Commission
to make antecedent findings; and (iii) incorrectly determined that its
interpretation is the only way to give effect to CEA section 4a(a)(2).
i. Meaning of Standards: Several commenters asserted that the
language: ``[in] accordance with the standards set forth in paragraph
(1)'' in section 4a(a)(2) must include the phrase ``as the Commission
finds are necessary to diminish, eliminate, or prevent [the burden on
interstate commerce]'' in CEA section 4a(a)(1).\119\ They believed that
the Commission's contrary interpretation constitutes an implied repeal
of the necessity finding language.\120\
---------------------------------------------------------------------------
\119\ See, e.g., CL-CME-59718 at 12-13; CL-Citadel-59717 at 3-4;
CL-AMG-59709 at 3; CL-MFA-59606 at 9-10; CL-ISDA/SIFMA-59611 at 5-7;
CL-IECAssn-59679 at 3-4; and CL-FIA-59595 at 6-7.
\120\ CL-CME-59718 at 2, 12 (citing Hunter v. FERC, 711 F.3d 155
(D.C. Cir. 2013)).
---------------------------------------------------------------------------
The Commission disagrees that this constitutes an implied repeal.
First, CEA section 4a(a)(2) applies only to physical commodities, not
other commodities. Accordingly, the requirement of a necessity finding
in section 4a(a)(1) still applies to a broad swath of commodity
derivatives. Second, there is no implied repeal even in part, because
the Commission is interpreting express language--the term
``standards.'' The Commission must bring its experience to bear when
interpreting the ambiguity in the new provision, and the Commission
preliminarily believes that the statute, read in light of the
Commission's experience administering position limits and making
necessity findings, is more reasonably read as an express limited
exception, for physical commodities futures and economically equivalent
swaps, to the preexisting authorization in CEA section 4a(a)(1) for the
Commission to impose limits when it finds them necessary.
ii. Other Limiting Language: Some commenters pointed to a number of
terms and provisions that they say support the notion that the
Commission must make antecedent findings before imposing any limits
under new CEA section 4a(a)(2).
First, some commenters asserted that the term ``as appropriate'' in
CEA sections 4a(a)(3) (factors that the ``Commission, ``as
appropriate'' must consider when it ``shall set limits'') and
4a(a)(5)(A) (providing that Commission ``shall'' ``as appropriate''
establish limits on swaps that are economically equivalent to physical
commodity futures and options) require the Commission to make
antecedent findings that the limits required under CEA section 4a(a)(2)
are appropriate before it may impose them.\121\ The district court
found these words to be ambiguous. In the court's view, they could
refer to the Commission's obligation to impose limits (i.e., the
Commission shall, ``as appropriate,'' impose limits), or to the level
of the limits the Commission is to impose.\122\
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\121\ See, e.g., CL-ISDA/SIFMA-59611 at 5, 7-8 (citing CEA
section 4a(a)(5) as authorizing aggregate position limits ``as
appropriate'' for swaps that are economically equivalent to DCM
futures and options and CEA section 4a(a)(3), which directs the
Commission to set position limits as appropriate and to the maximum
extent practicable, in its discretion: (i) To diminish, eliminate,
or prevent excessive speculation; (ii) to deter and prevent market
manipulation, squeezes, and corners; (iii) to ensure sufficient
market liquidity for bona fide hedgers; and (iv) to ensure that the
price discovery function of the underlying market is not
disrupted.).
\122\ 887 F.Supp. 2d at 278; December 2013 Position Limits
Proposal, 78 FR at 75685, n. 59.
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The Commission preliminarily believes that when these words are
considered in the context of CEA section 4a(a)(2)-(7) as a whole,
including the multiple uses of the new terms ``shall'' and ``required''
and the historically unique stringent time limits for imposing the
covered limits and post-imposition study requirement, it is more
reasonable to interpret these words as referring to the level of
limits, i.e., the Commission must set physical commodity limits at an
appropriate level, and not to require the Commission to first determine
whether the required limits are appropriate before it may even impose
them.\123\ In other words, while Congress made the threshold decision
to impose position limits on physical commodity futures and options and
economically equivalent swaps, Congress at the same time delegated to
the Commission the task of setting the limits at levels that would
maximize Congress' objectives.
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\123\ CEA section 4a(a)(2)(A) provides that the Commission
``shall'' establish limits; CEA section 4a(a)(2)(B) refers multiple
times to the ``required'' limits in (A) that ``shall'' be
established within 180 or 270 days of enactment of Dodd-Frank; and
CEA section 4a(a)(2)(C) provides that ``[i]n establishing the limits
required'' the Commission shall ``strive to ensure'' that trading on
foreign boards of trade for commodities that have limits will be
subject to ``comparable limits,'' thereby assuming that limits must
be established and requiring that they be set at levels in
accordance with particular considerations. CEA section 4a(a)(3)
contains ``specific limitations'' on the ``required'' limits which
are most reasonably understood to be considerations for the
Commission for the levels of limits.
---------------------------------------------------------------------------
Some commenters claimed that other parts of CEA section 4a(a)(2)
undermine the Commission's determination. First, CEA section 4a(2)(C)
states that the ``[g]oal . . . [i]n establishing the limits required''
is to ``strive to ensure'' that trading on foreign boards of trade
(``FBOTs'') for commodities that have limits will be subject to
``comparable limits.'' It goes on to state that for ``any limits to be
imposed'' the Commission will strive to ensure that they not shift
trading overseas. Commenters argue that ``any limits to be imposed''
under CEA section 4a(a)(2)(A) implies that limits might not be imposed
under that section. However, in the context discussed and in view of
the reference in that section to position limits
[[Page 96715]]
``required,'' the reference to ``any limits to be imposed'' refers
again to the levels or other standards applied. That is, whatever the
contours the Commission chooses for the required limits, they must meet
the goal set forth in that section.
Second, CEA section 4a(a)(3)(B) states certain factors that the
Commission must consider in setting limits under CEA section
4a(a)(2).\124\ The Commission sees no inconsistency with mandatory
position limits--the Commission must consider these factors in setting
the appropriate levels and other contours. Indeed, CEA section
4a(a)(3)(B) applies by its own terms to ``establishing the limits
required in paragraph (2).'' Moreover, consideration of these factors
under CEA section 4a(a)(3) is not mandatory, as some commenters
suggest,\125\ but rather to be made ``in [the Commission's]
discretion.'' \126\ In the Commission's preliminary view, there is thus
nothing in these provisions at odds with the Commission's
interpretation that it is required by CEA section 4a(a)(2)(A) to impose
limits on a subset of commodities without making antecedent findings
whether they should be imposed, particularly when the language at issue
is construed, as it should be, with other terms in CEA section
4a(a)(2)-(7), discussed above, that use mandatory language and impose
time limits.
---------------------------------------------------------------------------
\124\ See, e.g., CL-CME-59718 at 11, 13-17, and CL-FIA-59595 at
5-6.
\125\ See, e.g., CL-AMG-59709 at 3; and CL-CME-59718 at 13-17.
\126\ CEA section 4a(a)(3), 7 U.S.C. 6a(a)(3).
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Some commenters stated that two pre-Dodd Frank Act provisions in
CEA section 4a undermine the Commission's interpretation. The first is
CEA section 4a(e),which states, ``if the Commission shall have fixed
limits . . . for any contract . . . , then the limits'' imposed by
DCMs, SEFs or other trading facilities ``shall not be higher than the
limits fixed by Commission.'' \127\ According to a commenter, the ``if/
then'' formulation suggests position limits should not be presupposed
for any contract.\128\ The Commission sees the provision differently.
CEA section 4a(a)(2) applies only to a subset of futures contracts--
contracts in physical commodities. For other commodities, position
limits remain subject to the Commission's determination of necessity,
and the ``if/then'' formulation applies and remains logical. There is,
accordingly, no inconsistency.
---------------------------------------------------------------------------
\127\ CEA section 4a(e), 7 U.S.C. 6a(e).
\128\ CL-CME-59718 at 10 (citing CEA section 4a(e)).
---------------------------------------------------------------------------
The second pre-Dodd Frank Act provision the commenters mentioned is
CEA section 5(d)(5); \129\ it gives the exchanges discretionary
authority to impose position limits on all commodity derivatives ``as
is necessary and appropriate.'' \130\ There is, however, no
inconsistency. Exchanges retain the discretionary authority to set
position limits for the many commodities not covered by CEA section
4a(a)(2), and they retain the discretion to impose position limits for
physical commodities, so long as the limits are no higher than federal
position limits.
---------------------------------------------------------------------------
\129\ 7 U.S.C. 7(d)(5).
\130\ CL-CME-59718 at 11 (citing 7 U.S.C. 7(d)(5)).
---------------------------------------------------------------------------
Some commenters cited other language in CEA section 5(d)(5) to
support their assertion that, notwithstanding the Dodd-Frank Act
amendments discussed above requiring the Commission to impose limits,
the Commission retains and should exercise its discretion to impose
position accountability levels in lieu of limits or delegate that
authority exchanges to do so. CEA section 5(d)(5) authorizes exchanges
to adopt ``position limitations or position accountability'' levels in
order to reduce the threat of manipulation and congestion. These
commenters also pointed out that the Commission has previously endorsed
accountability levels for exchanges in lieu of limits.\131\ Other
commenters disagree. They asserted that, given what they interpret as a
mandate in CEA section 4a(a)(2) for the Commission to impose position
limits for physical commodities, it would be inappropriate for the
Commission to consider imposing position accountability levels instead
for those commodities, or to allow exchanges to do so.\132\
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\131\ CL-CME-59718 at 10; CL-AMG-59709 5-6; CL-FIA-59595 at 12-
13; CL-FIA-60392 at 4-6, 8 (asserting that under the Commission's
general rulemaking authority in CEA section 8a(5), 7 U.S.C. 12a(5),
``the Commission has the power to adopt, as part of an
accountability regime, a rule pursuant to which it or a DCM could
direct a market participant to reduce speculative positions above an
accountability limit because that authority is `reasonably necessary
to effectuate' a position accountability rule,'' and observing that
the Commission previously determined in rulemakings that exchange-
set accountability levels represent an alternative means to limit
excessive speculation); CL-FIA-60303 at 3-4; CL-DBCS-59569 at 4; CL-
MFA-60385 at 7-8, 10-14; and CL-Olam-59658 at 1-2 (declaring that
the Commission can and should permit exchanges to administer
position accountability levels in lieu of Commission-set limits
under CEA section 4a(a)(2)).
\132\ CL-Public Citizen-60390 at 3-4 (noting other concerns with
exchange set limits or accountability levels); CL-IECA 60389 at 3-4
(asserting that the Commission should not cede its authority to
exchanges); CL-AFR-60953 at 4; CL-A4A-59686 at 2-3; CL-IECA-59671 at
2; and CL-CMOC-59720 at 2.
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The Commission agrees with the latter group of commenters and finds
the former reading strained. CEA section 4a(a)(2) makes no mention of
position accountability levels. Regardless whether pre-Dodd Frank
section 5(d)(5) allows exchanges to set accountability levels in lieu
of limits where the Commission has not set limits, and regardless
whether the Commission has in the past endorsed exchange-set position
accountability levels in lieu of limits, CEA section 4a(a)(2) does not
mention that tool. If anything, reference to accountability levels
elsewhere in the CEA shows that Congress understands that exchanges
have used position accountability, but made no reference to it in
amended CEA section 4a(a).
iii. Avoiding Surplusage or Nullity: Several commenters took issue
with the Commission's preliminary determination that its interpretation
is necessary in order to avoid rendering CEA section 4a(a)(2)(A)
surplusage. These commenters suggested that reading the term
``standards'' in CEA section 4a(a)(2)(A) to include the antecedent
necessity finding in CEA section 4a(a)(1) will not render CEA section
4a(a)(2) surplusage because if the Commission finds a position limit is
``necessary'' and ``appropriate,'' it now must impose one (as opposed
to pre-Dodd-Frank, when the Commission had authority but not a mandate
under CEA section 4a(a) to impose limits).\133\ The Commission finds
this reading highly unlikely. There is no history of the Commission
determining that limits are necessary and appropriate, but then
declining to impose them. Nor is it reasonable to expect that the
Commission might do so. Indeed, historically necessity findings were
made only in connection with establishing limits.
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\133\ CL-ISDA/SIFMA-59611 at 5; and CL-MFA-59606 at 9-10. The
District Court expressed the same concern. 887 F. Supp. 2d at 274-
75.
---------------------------------------------------------------------------
Furthermore, if Congress had still wanted to leave it to the
Commission to ultimately decide whether a limit was necessary, there is
no reason for it to have also set tight deadlines, repeat multiple
times that the limits are ``required,'' and direct the agency to
conduct a study after the limits were imposed. In other words,
requiring the Commission to make an antecedent necessity finding would
render many of the Dodd-Frank Act amendments superfluous. For example,
if the Commission determined limits were not necessary then, contrary
to CEA section 4a(a)(2), no limits were in fact ``required,'' no limits
needed to be imposed by the deadlines, and no study
[[Page 96716]]
needed to be conducted. But none of these provisions were phrased in
conditional terms (e.g., if the Commission finds a limit necessary,
then it shall . . . ). Had Congress wanted the Commission to continue
to be the decisionmaker regarding the need for limits, it could have
expressed that view in countless ways that would not strain the
statutory language in this way.
CME contended that the Commission's position--that requiring a
necessity finding would essentially give the Commission the same
permissive authority it had before the Dodd-Frank Act amendments--is
``short-sighted'' because other provisions of CEA section 4a(a) ``would
still have practical significance.'' In support of this view, CME
stated that new CEA sections 4a(a)(2)(C) and 4(a)(3)(B) have
significance even if the Commission is required to make a necessity
finding because they ``set forth safeguards that the CFTC must balance
when it establishes limits'' after ``the CFTC finds that such limits
are necessary.'' The Commission preliminarily believes it unlikely that
Congress would have intended that. On CME's reading, the statute would
place additional requirements to constrain the Commission's preexisting
authority. Given the background for the amendments, particularly the
studies that preceded the Dodd-Frank Act, the Commission sees no reason
why Congress would have placed additional constraints, nor any reason
it would have placed them with respect to physical commodities but not
excluded commodities or others. This comment also does not address the
thrust of the Commission's interpretation, which is that finding a
mandate is the only way to read the entirety of the statute
harmoniously, including the timing requirements of CEA section
4a(a)(2)(B) and the reporting requirements of Section 719 of the Dodd-
Frank Act, account for the historical context, and, at the same time,
avoid reading CEA section 4a(a)(2)(A) as the functional equivalent of
CEA section 4a(a)(1).\134\ CME also cited CEA section 4a(a)(5), which
requires position limits for economically equivalent swaps, to make the
same point that there are still meaningful provisions in CEA section
4a(a), even with a necessity finding. But CEA section 4a(a)(1) already
authorizes the Commission to establish limits on swaps as necessary,
and so the authority, which would be discretionary under CME's reading,
to impose limits on economically equivalent swaps would add nothing to
the statute and the amendment would be wholly superfluous.
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\134\ In this vein, then-Commissioner Mark Wetjen, who was an
aide to Senate Majority Leader Harry Reid during the Dodd-Frank
legislative process, stated at the Commission's public meeting to
adopt the December 2013 proposal that to read Section 4a(a)(2)(A) to
require the same antecedent necessity finding as Section 4a(a)(1)
``does not comport with my understanding of the statute's intent as
informed by my experience working as a Senate aide during
consideration of these provisions.'' Statement of Commissioner Mark
Wetjen, Public Meeting of the Commodity Futures Trading Commission
(Nov. 5, 2013), http://www.cftc.gov/PressRoom/SpeechesTestimony/wetjenstatement110513.
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6. Conclusion
Having carefully considered the text, purpose and legislative
history of CEA section 4a(a) as a whole, along with its own experience
and expertise and the comments on its proposed interpretation, the
Commission preliminarily believes for the reasons above that Congress--
while not expressing itself with ideal clarity--decided that position
limits were necessary for a subset of commodities, physical
commodities, mandated the Commission to impose them on those
commodities in accordance with certain criteria, and required that the
Commission do so expeditiously, without first making antecedent
findings that they are necessary to prevent excessive speculation.
Consistent with this interpretation, Congress also directed the agency
to report back to Congress on their effectiveness within one year. In
the Commission's preliminary view, this interpretation, even if not the
only possible interpretation, best gives effect to the text and purpose
of the Dodd-Frank Act amendments in the context of the pre-existing
position limits provision, while ensuring that neither the amendments
nor the pre-existing language is rendered superfluous.
C. Necessity Finding
1. Necessity
The Commission reiterates its preliminary alternative necessity
finding as articulated in the December 2013 Position Limits Proposal:
\135\ Out of an abundance of caution in light of the district court
decision in ISDA v. CFTC,\136\ and without prejudice to any argument
the Commission may advance in any forum, the Commission reproposes, as
a separate and independent basis for the Rule, a preliminary finding
herein that the speculative position limits in this reproposed Rule are
necessary to achieve their statutory purposes.
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\135\ December 2013 Position Limits Proposal, 78 FR at 75685.
\136\ International Swaps and Derivatives Association v. United
States Commodity Futures Trading Commission, 887 F. Supp. 2d 259
(D.D.C. 2012).
---------------------------------------------------------------------------
As described in the Proposal, the policy basis and reasoning for
the Commission's necessity finding is illustrated by two major
incidents in which market participants amassed massive futures
positions in silver and natural gas, respectively, which enabled them
to cause sudden and unreasonable fluctuations and unwarranted changes
in the prices of those commodities. CEA section 4a(a)(1) calls for
position limits for the purpose of diminishing, eliminating, or
preventing the burden of excessive speculation.\137\ Although both
episodes involved manipulative intent, the Commission believes that
such intent is not necessary for an excessively large position to give
rise to sudden and unreasonable fluctuations or unwarranted changes in
the price of an underlying commodity. This is illustrated, for example,
by the fact that when the perpetrators of the silver manipulation lost
the ability to control their scheme, i.e., to manipulate the market at
will, they were forced to liquidate quickly, which, given the amount of
contracts sold in a very short time, caused silver prices to plummet.
Any trader who was forced by conditions in the market or their own
financial condition to liquidate a very large position could
predictably have similar effects on prices, regardless of their
motivation for amassing the position in the first place. Moreover,
although these two episodes unfolded in contract markets for silver and
natural gas, and unfolded at two different times in the past, there is
nothing unique about either market at either relevant time that causes
the Commission to restrict its preliminary finding of necessity to
those markets or to reach a different conclusion based on market
conditions today. Put another way, any contract market has a limited
ability, closely linked to the market's size, to absorb the
establishment and liquidation of large speculative positions in an
orderly manner.\138\ The silver and natural gas examples illustrate
these issues, but the reasoning applies beyond their specific facts.
Accordingly, the Commission preliminarily finds it necessary to
implement position limits as a prophylactic measure for the 25 core
referenced futures contracts.\139\
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\137\ 7 U.S.C. 6a(a)(1).
\138\ Establishment of Speculative Position Limits, 46 FR 50938,
50940 (Oct. 16, 1981).
\139\ The Commission's necessity finding is also supported by
the consideration of costs and benefits below.
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[[Page 96717]]
The Commission received many comments on its preliminary
alternative necessity finding; the Commission summarizes and responds
to significant comments below.
a. Studies' Lack of Consensus.\140\ The Commission stated in the
December 2013 Position Limits Proposal that the lack of consensus in
the studies reviewed at that time warrants acting on the side of
caution and implementing position limits as a prophylactic measure,
``to protect against undue price fluctuations and other burdens on
commerce that in some cases have been at least in part attributable to
excessive speculation.'' \141\ Some commenters suggested that a lack of
consensus means instead that the Commission should not implement
position limits,\142\ that the issue merits further study,\143\ that it
would be arbitrary and capricious to implement position limits,\144\
and that the desire to err on the side of caution should be irrelevant
to an assessment of whether position limits are necessary.\145\ In
short, these comments contend that the lack of consensus means position
limits cannot be necessary.\146\ The Commission disagrees. The lack of
consensus does not provide ``objective evidence that position limits
are not necessary;'' \147\ rather, it suggests that they remain
controversial.\148\ In response to these comments, the Commission
believes that Congress could not have intended by using the word
``necessary'' to restrict the Commission from determining to implement
position limits unless experts unanimously agree or form a consensus
they would be beneficial. Otherwise a necessity finding would be
virtually impossible and, in fact, the Commission could plausibly be
stymied by interested persons publishing self-interested studies. The
Commission's view in this respect is supported by the text of CEA
section 4a(a)(1), which states that there shall be such limits as ``the
Commission finds'' are necessary.\149\ Thus, while the Commission finds
the studies useful, it does not cede the necessity finding to the
authors.
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\140\ The Commission observed in the December 2013 Position
Limits Proposal that the studies discussed therein ``overall show a
lack of consensus regarding the impact of speculation on commodity
markets and the effectiveness of position limits.'' 78 FR at 75695.
\141\ December 2013 Position Limits Proposal, 78 FR at 75695.
\142\ E.g., CL-CCMR-59623 at 4-5; CL-EEI-EPSA-59602 at 3; CL-
FIA-59595 at 7; and CL-IECAssn-59679 at 3.
\143\ E.g., CL-BG Group-59656 at 3; CL-EEI-EPSA-59602 at 3; and
CL-WGC-59558 at 2.
\144\ CL-Chamber-59684 at 4.
\145\ CL-CCMR-59623 at 4-5.
\146\ Contra CL-AFR-59711 at 1; CL-AFR-59685 at 1; CL-Public
Citizen-59648 at 3; CL-WEED-59628.
\147\ CL-EEI-EPSA-59602 at 3.
\148\ A discussion of the cumulative studies reviewed by the
Commission follows below. See below, Section I.C.2. (discussing
studies and reports received or reviwed in connection with the
December 2013 Position Limits Proposal), and accompanying text.
\149\ This assumes that, contrary to the Commission's
interpretation of the statute, Congress did not make that
determination itself as to physical commodity markets.
---------------------------------------------------------------------------
b. Reliance on Silver and Natural Gas Studies.\150\ The Commission
stated in the December 2013 Position Limits Proposal that it ``found
two studies of actual market events to be helpful and persuasive in
making its preliminary alternative necessity finding,'' \151\ namely,
the Interagency Silver Study \152\ and the PSI Report on Excessive
Speculation in the Natural Gas Market.\153\ Some commenters criticized
the Commission's reliance on these two studies.\154\ These commenters
dismissed the two studies, variously, as limited, outdated,\155\
dubious,\156\ unpersuasive, anecdotal, and irrelevant.\157\ Other
commenters characterized the episodes as extreme or unique.\158\ Some
commenters observed that neither study recommended position
limits.\159\ One noted that, ``Each study focuses on activities in a
single market during a limited timeframe that occurred years ago.''
\160\ Others noted that the Commission has undertaken no independent
analysis of each market, commodity, or contract affected by this
rulemaking.\161\ They then claim that because particular markets or
commodities have unique characteristics, one cannot extrapolate from
these two specific episodes to other commodities or other markets.\162\
Several commenters describe the Hunt brothers silver crisis and the
collapse of the natural gas speculator Amaranth as instances of market
manipulation rather than excessive speculation.\163\
---------------------------------------------------------------------------
\150\ The Commission stated in the December 2013 Position Limits
Proposal that it found two studies of actual market events to be
helpful and persuasive in making its preliminary alternative
necessity finding, namely, the interagency report on the silver
crisis, U.S. Commodity Futures Trading Commission, ``Part Two, A
Study of the Silver Market, May 29, 1981, Report to The Congress in
Response to Section 21 of the Commodity Exchange Act, and the PSI
Report on, U.S. Senate, ``Excessive Speculation in the Natural Gas
Market,'' June 25, 2007.
\151\ December 2013 Position Limits Proposal, 78 FR at 75695.
\152\ Commodity Futures Trading Commission, Report to The
Congress in Response to Section 21 of the Commodity Exchange Act,
May 29, 1981, Part Two, A Study of the Silver Market.
\153\ Excessive Speculation in the Natural Gas Market, Staff
Report with Additional Minority Staff Views, Permanent Subcommittee
on Investigations, United States Senate, Released in Conjunction
with the Permanent Subcommittee on Investigations June 25 & July 9,
2007 Hearings.
\154\ One commenter called the Commission's choice `cherry-
picking.' CL-Citadel-59717 at 4.
\155\ The Commission disagrees; that an exemplary event occurred
in the past does not make it irrelevant.
\156\ Contra CL-Sen. Levin-59637 at 6 (pointing to ``concrete
examples'').
\157\ E.g., CL-Chamber-59684 at 3; CL-CME-59718 at 3, 18; CL-
IECAssn-59679 at 2; CL-ISDA/SIFMA-59611 at 12; and CL-USCF-59644 at
3.
\158\ E.g., CL-IECAssn-59679 at 2; and CL-BG Group-59656 at 3.
Certainly the Commission seeks to prevent extreme events such as
Amaranth and the Hunt brothers, however infrequently they may occur.
\159\ E.g., CL-CME-59718 at 18; and CL-CCMR-59623 at 3.
\160\ CL-CME-59718 at 18.
\161\ E.g., CL-EEI-EPSA-59602 at 2; CL-WGC-59558 at 2.
\162\ E.g., CL-Citadel-59717 at 4; CL-ISDA/SIFMA-59611 at 12-14;
CL-MFA-59606 at 10; and CL-WGC-59558 at 2.
\163\ E.g., CL-Better Markets-59716 at 12; CL-BG Group-59656 at
3; CL-COPE-59622 at 4-5; CL-CCMR-59623 at 4; CL-ISDA/SIFMA-59611 at
13; and CL-AMG-59709 at 5.
---------------------------------------------------------------------------
As discussed above, the presence of manipulative intent or activity
does not preclude the existence of excessive speculation, and traders
do not need manipulative intent for the accumulation of very large
positions to cause the negative consequences observed in the Hunt and
Amaranth incidents. These are some reasons position limits are valuable
as a prophylactic measure for, in the language of CEA section 4a(a)(1),
``preventing'' burdens on interstate commerce. The Hunt brothers, who
distorted the price of silver, and Amaranth, who distorted the price of
natural gas, are examples that illustrate the burdens on interstate
commerce of excessive speculation that occurred in the absence of
position limits, and position limits would have restricted those
traders' ability to cause unwarranted price movement and market
volatility, and this would be so even had their motivations been
innocent. Both episodes involved extraordinarily large speculative
positions, which the Commission has historically associated with
excessive speculation.\164\ We are also given no persuasive reason to
change our conclusion that extraordinarily large speculative positions
could result in sudden or unreasonable fluctuations or unwarranted
price changes in other physical commodity markets, just as they did in
silver and natural case in the Hunt Brothers and Amaranth episodes.
Although commenters describe changes in these markets over time, the
characteristics that we find salient have
[[Page 96718]]
not changed materially.\165\ Thus, these two examples remain relevant
and compelling.
---------------------------------------------------------------------------
\164\ December 2013 Position Limits Proposal, 78 FR at 75685, n.
60.
\165\ See infra Section I.C.1.f., and accompanying text.
---------------------------------------------------------------------------
CME makes a textual argument in support of the position that CEA
section 4a(a)(2) requires a commodity-by-commodity determination that
position limits are necessary. It cites several places in CEA section
4a(a)(1) that refer to limits as necessary to eliminate ``such burden''
on ``such commodity'' or ``any commodity.'' \166\ However, the
prophylactic measures described herein address vulnerabilities
characteristic of each market.\167\ Accordingly, the Commission
believes the statute's use of the singular is immaterial.\168\
---------------------------------------------------------------------------
\166\ CL-CME-59718 at 13-14.
\167\ See, e.g., Establishment of Speculative Position Limits,
46 FR at 50940 (Oct. 16, 1981) (``[I]t appears that the capacity of
any contract market to absorb the establishment and liquidation of
large speculative positions in an orderly manner is related to the
relative size of such positions, i.e., the capacity of the market is
not unlimited.'').
\168\ See also 1 U.S.C. 1 (``In determining the meaning of any
Act of Congress, unless the context indicates otherwise--words
importing the singular include and apply to several persons,
parties, or things[.]'')
---------------------------------------------------------------------------
The Commission's analysis applies to all physical commodities, and
it would account for differences among markets by setting the limits at
levels based on updated data regarding estimated deliverable supply in
each of the given underlying commodities in the case of spot-month
limits or based on exchange recommendation, if an exchange recommended
a spot-month limit level of less than 25 percent of estimated
deliverable supply, and open interest in the case of single-month and
all-months-combined limits, for each separate commodity. The
Commission's Reproposal regarding whether to adopt conditional spot-
month limits is also based on updated data.\169\ The Commission also
does not find it relevant that the Interagency Silver Study and the PSI
Report, each of which was published before the Dodd-Frank Act became
law, do not recommend the imposition of position limits. Based on the
facts described in those reports, along with the Commission's
understanding of the policies underlying CEA section 4a(a)(1) in light
of the Commission's own experience with legacy limits, the Commission
preliminarily finds that position limits are necessary within the
meaning of that section.
---------------------------------------------------------------------------
\169\ See the Commission's discussion of its verification of
estimates of deliverable supply and work with open interest data,
below.
---------------------------------------------------------------------------
c. Commission research. One commenter asserted that the Commission
failed ``to conduct proper economic analysis to determine, if in fact,
the position limits as proposed were likely to have any positive impact
in promoting fair and orderly commodity markets.'' \170\ While
acknowledging the Commission's resource constraints, this commenter
remarked on ``the paucity of the published record by the CFTC's s own
staff'' \171\ and suggests that outside authors be given ``controlled
access to all of the CFTC's data regarding investor and hedger trading
records.'' \172\ This commenter then proceeds to accuse the Commission
of failing to ``conduct such research because they felt the data would
not in fact support the proposed position limit regulations.'' \173\
---------------------------------------------------------------------------
\170\ CL-USCF-59644 at 2.
\171\ CL-USCF-59644 at 2. This commenter exaggerates. The last
arguably relevant report of Commission staff is ``Commodity Swap
Dealers & Index Traders with Commission Recommendations'' (Sept.
2008), available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/cftcstaffreportonswapdealers09.pdf. However, several
authors or co-authors of academic papers reviewed by the Commission
are or have been affiliated with the Commission in various
capacities and have added to the current literature relating to
position limits. Each of Harris, see note240, Kirilenko, see note
2400, and Overdahl, see notes 240 and 241, are former Chief
Economists of the Commission. Other authors, e.g., Aulerich, Boyd,
Brunetti, B[uuml]y[uuml]k[scedil]ahin, Einloth, Haigh, Hranaiova,
Kyle, Robe, and Rothenberg, are now or have been staff and/or
consultants to the Commission, have spent sabbaticals at the
Commission, or have been detailed to the Commission from other
federal agencies. Graduate students studying with some study
authors, including some working on dissertations, have also cycled
through the Commission as interns. Cf. note 180 (disclaimer on paper
by Harris and B[uuml]y[uuml]k[scedil]ahin).
\172\ CL-USCF-59644 at 3. Data regarding investor and hedger
trading records may be protected by section 8 of the CEA, 7 U.S.C.
12. In general, ``the Commission may not publish data and
information that would separately disclose the business transactions
or market positions of any person and trade secrets or names of
customers . . . .'' 7 U.S.C. 12(a)(1). The Commission must therefore
be very careful about granting outside economists access to such
data. Commission registrants have in the past ``questioned why the
CFTC was permitting outside economists to access CFTC data, why the
CFTC was permitting the publication of academic articles using that
data, and . . . the administrative process by which the CFTC was
employing these outside economists.'' Review of the Commodity
Futures Trading Commission's Response to Allegations Pertaining to
the Office of the Chief Economist, Prepared by the Office of the
Inspector General, Commodity Futures Trading Commission, Feb. 21.
2014, at ii, available at http://www.cftc.gov/idc/groups/public/@freedomofinformationact/documents/file/oigreportredacted.pdf. The
Commission is sensitive to these concerns, and strives to ensure
that reports and publications that rely on Commission data do not
reveal sensitive information. To do so requires an expenditure of
effort by Commission staff.
\173\ CL-USCF-59644 at 3. The Commission rejects the commenter's
aspersion. The Commission's Office of the Inspector General
addressed the perception of institutional censorship in its ``Follow
Up Report: Review of the Commodity Futures Trading Commission's
Response to Allegations Pertaining to the Office of the Chief
Economist, Jan. 13, 2016 (``Follow Up Report''), available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/oig_oce011316.pdf. The Follow Up Report emphasizes ``that there has
been no allegation that the Chairman or Commissioners have attempted
to prevent certain topics from being researched or to alter
conclusions,'' Follow Up Report at 11, but nevertheless recommended
``that OCE not prohibit research topics relevant to the CFTC
mission.'' Follow Up Report at 10. The Follow Up Report observed
that recently ``OCE has focused almost exclusively on short-term
research and economic analysis in support of other Divisions and the
Commission.'' Follow Up Report at 10.
---------------------------------------------------------------------------
The Commission disagrees that it has failed to conduct proper
economic analysis to determine the likely benefits of position limits.
CEA section 15(a) requires that before promulgating a regulation under
the Act, the Commission consider the costs and benefits of the action
according to five statutory factors. The Commission does so below in
robust fashion with respect to the Reproposal in its entirety,
including the alternative necessity finding. Neither section 15(a) of
the CEA nor the Administrative Procedure Act requires the Commission to
conduct a study in any particular form so long as it considers the
costs and benefits and the entire administrative record. Section 719(a)
of the Dodd-Frank Act, on the other hand, provides that the Commission
``shall conduct a study of the effects (if any) of the position limits
imposed pursuant to the . . . [CEA] on excessive speculation'' and
report to Congress on such matters after the imposition of position
limits.\174\ The Commission will do so as required by Section 719(a),
thereby fully discharging its duty. At all stages, the Commission has
relied on and will continue to rely on the input of staff economists in
the Division of Market Oversight (``DMO'') and the Office of the Chief
Economist (``OCE'').
---------------------------------------------------------------------------
\174\ 15 U.S.C. 8307(a). See December 2013 Position Limits
Proposal, 78 FR at 75684 (discussing section 719(a) of the Dodd-
Frank Act in the context of the Commission's construal of CEA
section 4a(a) to mandate that the Commission impose position
limits).
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d. Excessive Speculation
One commenter opined that, ``in discussing only the Hunt Brothers
and Amaranth case studies the Commission has not given adequate weight
to the benefits that speculators provide to the market.'' \175\ To the
contrary, the Commission recognizes that speculation is part of a well-
functioning market, particularly insofar as speculators contribute
valuable liquidity. The focus of this reproposed rulemaking is not
speculation per se; Congress identified excessive speculation as an
undue
[[Page 96719]]
burden on interstate commerce in CEA section 4a(a)(1).\176\
---------------------------------------------------------------------------
\175\ CL-MFA-59606 at 11-12.
\176\ 7 U.S.C. 6a(a)(1). One commenter suggests that the
Commission base speculative position limits on ``a determination of
an acceptable total level of speculation that approximates the
historic ratio of hedging to investor/speculative trading.'' CL-A4A-
59714 at 4. The Commission declines at this time to adopt such a
ratio as basis for speculative position limits. Among other things,
the Commission does not now collect reliable data distinguishing
hedgers from speculators. Also, there may be levels above a historic
hedging ratio that still provide liquidity rather than denoting
excessive speculation. While the Commission has authority under
section 4a(a)(1) of the Act to impose position limits on a group or
class of traders, the only way that the Commission knows how to
implement limit levels based on such a historic ratio would be to
impose rationing, which the Commission declines to do at this time.
---------------------------------------------------------------------------
One commenter asserted that the Commission must provide a
definition of excessive speculation before making any necessity
finding.\177\ The Commission disagrees that the rule must include such
a definition. The statute contains no such requirement, and did not
contain such a requirement prior to the Dodd-Frank Act. The Commission
has never based necessity findings on a rigid definition. The
Commission's position on this issue has been clear over time: ``The CEA
does not define excessive speculation. But the Commission historically
has associated it with extraordinarily large speculative positions . .
. .'' \178\ CEA section 4a(a)(1) states that position limits should
diminish, eliminate, or prevent burdens on interstate commerce
associated with sudden or unreasonable fluctuations or unwarranted
changes in the price of commodities.\179\ It stands to reason that
excessive speculation involves positions large enough to risk such
unreasonable fluctuations or unwarranted changes. This commenter also
urges the Commission to ``demonstrate and determine that . . . harmful
excessive speculation exists or is reasonably likely to occur with
respect to particular commodities'' \180\ before implementing any
position limits.\181\ As stated in the December 2013 Position Limits
Proposal, the Commission referenced its prior determination in 1981
``that, with respect to any particular market, the `existence of
historical trading data' showing excessive speculation or other burdens
on that market is not `an essential prerequisite to the establishment
of a speculative limit.' '' \182\ The Commission reiterates this
statement and underscores that these risks are characteristic of
contract markets generally. Differences among markets can be addressed,
as the Commission reproposes to do here, by setting the limit levels to
account for individual market characteristics. Attempting to
demonstrate and determine that excessive speculation is reasonably
likely to occur with respect to particular commodities before
implementing position limits is impractical because historical trading
data in a particular commodity is not necessarily indicative of future
events in that commodity. Further, it would require the Commission to
determine what may happen in a forecasted future state of the market in
a particular commodity. As the Commission has often repeated, position
limits are a prophylactic measure. Inherently, then, position limits
are designed to address the burdens of excessive speculation well
before they occur, not when the Commission somehow determines that such
speculation is imminent, which the Commission (or any market actor for
that matter) cannot reliably do.
---------------------------------------------------------------------------
\177\ CL-ISDA/SIFMA-59611 at 3, 14-15; see also CL-FIA-59595 at
6-7.
\178\ December 2013 Position Limits Proposal, 78 FR at 75685, n.
60 (citation omitted).
\179\ 7 U.S.C. 6a(a)(1).
\180\ CL-ISDA/SIFMA-59611 at 3; see also CL-CCMR-59623 at 4; CL-
Chamber-59684 at 4. Contra CL-Sen. Levin-59637 at 6 (stating
``[c]ontrary to the complaints of some critics, it would be a waste
of time and resources for the Commission to expand the proposed
rules beyond the existing justification to repeat the same analysis,
reach the same conclusions, and issue the same findings for each of
the 28 commodities.'').
\181\ See also CL-CCMR-59623 at 4-5. Another commenter
``contends that the best available evidence discounts the theory
that there is excessive speculation distorting the prices in the
commodity markets.'' CL-MFA-59606 at 13 (citing Pirrong). Such a
contention is inconsistent with ``Congress' determination, codified
in CEA section 4a(a)(1), that position limits are an effective tool
to address excessive speculation as a cause of sudden or
unreasonable fluctuations or unwarranted changes in the price of . .
. [agricultural and exempt] commodities. December 2013 Position
Limits Proposal, 78 FR at 75695 (footnote omitted). Another
commenter mischaracterizes the finding of the Congressional Budget
Report, ``Evaluating Limits on Participation and Transactions in
Markets for Emissions Allowances'' (2010), available at http://www.cbo.gov/publication/21967 (``CBO Report''); the CBO Report does
not conclude ``that position limits are harmful to markets.'' CL-
IECAssn-59679 at 3. Rather, in the context of creating markets for
emissions allowance trading, the CBO Report discusses both the uses
and benefits and the challenges and drawbacks of not only position
limits but also circuit breakers, in addition to banning certain
types of traders and banning allowance derivatives. Among other
things, the CBO Report states, ``Position Limits would probably
lessen the possibility of systemic risk and manipulation in
allowance markets . . . .'' CBO Report at viii. Another commenter
states that a ``CFTC study'' found that the 2008 crude oil crisis
was primarily due to fundamental factors in the supply and demand of
oil. CL-CCMR-59623 at 4. The referenced study is Harris and
B[uuml]y[uuml]k[scedil]ahin, The Role of Speculators in the Crude
Oil Futures Market (working paper 2009). See generally note 240
(listing studies that employ the Granger method of statistical
analysis). While Harris is a former Chief Economist, and
B[uuml]y[uuml]k[scedil]ahin is a former staff economist in OCE, as
noted above, the cover page of the referenced paper contains the
standard disclaimer, ``This paper reflects the opinions of its
authors only, and not those of the U.S. Commodity Futures Trading
Commission, the Commissioners, or other staff of the Commission.''
That is, it is not a ``CFTC study.'' In addition, other studies of
that market at that time reached different conclusions. Cf. note 252
(citing study that concludes price changes precede the position
change). The Commission reviewed several studies of the crude oil
market around 2008 and discusses them herein. See discussion of
persuasive academic studies, below. The Commission cautions that,
given the continuing controversy surrounding position limits, it is
unlikely that one study will ever be completely dispositive of these
complicated and difficult issues.
\182\ December 2013 Position Limits Proposal, 78 FR at 75683.
---------------------------------------------------------------------------
e. Volatility
Commenters assert, variously, that ``the volatility of commodity
markets has decreased steadily over the past decade,'' \183\ that
``research found that there was a negative correlation between
speculative positions and market volatility,'' \184\ research shows
that factors other than excessive speculation were primarily
responsible for specific instances of price volatility,\185\ that
futures markets are associated with lower price volatility,\186\ that
particular types of speculators provide liquidity rather than causing
price volatility,\187\ that position limits will increase
volatility,\188\ etc. It would follow, then, according to these
commenters, that because they believe there is little or no volatility
(no sudden or unreasonable fluctuations or unwarranted price changes),
or no volatility caused by excessive speculation, position limits
cannot be necessary.
---------------------------------------------------------------------------
\183\ CL-CCMR-59623 at 4 (claim supported only by a reference to
a comment letter that pre-dates the December 2013 Position Limits
Proposal).
\184\ CL-MFA-59606 at 12 (citing one academic paper, Irwin and
Sanders, The Impact of Index and Swap Funds on Commodity Futures
Markets: Preliminary Results (working paper 2010)). See generally
note 240 (studies that employ the Granger method of statistical
analysis).
\185\ E.g., CL-MFA-59606 at 11-12, n. 26. Contra CL-AFR-59685 at
1 (stating ``We understand that other factors contribute to highly
volatile commodity prices, but excessive speculation plays a
significant part, according to studies by Princeton, MIT, the
Petersen Institute, the University of London, and the U.S. Senate,
among other highly credible sources.'').
\186\ CL-MFA-59606 at 13, n. 30.
\187\ E.g., CL-MFA-59606 at 12-13 (hedge funds). Cf. CL-SIFMA
AMG-59709 at 15 (asserting ``neither Amaranth nor the Hunt brothers
were in any way involved in commodity index swaps''), 16 (registered
investment companies and ERISA accounts).
\188\ CL-MFA- 59606 at 13. Contra CL-CMOC-59702 at 2
(maintaining that witness testimony before policymakers ``confirmed
that the erosion of the position limits regime was a leading cause
in market instability and wild price swings seen in recent years and
that it had led to diminished confidence in the commodity derivative
markets as a hedging and price discovery tool'').
---------------------------------------------------------------------------
As stated above, the Commission recognizes that speculation is part
of a
[[Page 96720]]
well-functioning market particularly, as noted in comments, as a source
of liquidity. Position limits address excessive speculation, not
speculation per se. Position limits neither exclude particular types of
speculators nor prohibit speculative transactions; they constrain only
speculators with excessively large positions in order to diminish,
eliminate, or prevent an undue and unnecessary burden on interstate
commerce in a commodity.\189\ The Commission agrees that futures
markets are associated with, and may indeed contribute to, lower
volatility in underlying commodity prices. However, as Congress
observed, in CEA section 4a(a)(1), excessive speculation in a commodity
contract that causes sudden or unreasonable fluctuations or unwarranted
changes in the price of such commodity, is an undue and unnecessary
burden on interstate commerce in such commodity.\190\ In promulgating
CEA section 4a(a)(1), Congress adopted position limits as a useful tool
to diminish, eliminate, or prevent those problems. The Commission
believes that position limits are a necessary prophylactic measure to
guard against disruptions arising from excessive speculation, and the
Commission has endeavored to repropose limit levels that are not so low
as to hamper healthy speculation as a source of liquidity.\191\
---------------------------------------------------------------------------
\189\ That a particular type of speculator trades a different
type of instrument, employs a different trading strategy, or is
unlevered, diversified, subject to other regulatory regimes, etc.,
so as to distinguish it in some way from Amaranth or the Hunt
brothers does not overcome the size of the position held by the
speculator, and the risks inherent in amassing extraordinarily large
speculative positions.
\190\ CEA section 4a(a)(1); 7 U.S.C. 6a(a)(1).
\191\ See the discussion of the impact analysis, below under
Sec. 150.2.
---------------------------------------------------------------------------
f. Basis for Determination
One commenter states, ``The necessity finding . . . proffered by
the Commission--which consists of a discussion of two historical events
and a cursory review of existing studies and reports on position limits
related issues--falls short of a comprehensive analysis and
justification for the proposed position limits.\192\ We disagree with
the commenter's opinion that the Commission's analysis is not
comprehensive or falls short of justifying the reproposed rule.\193\
---------------------------------------------------------------------------
\192\ CL-Citadel-59717 at 3-4 (footnote omitted). Contra CL-Sen.
Levin-59637 at 6 (declaring that ``[t]he Commission's analysis and
findings, paired with concrete examples, provide a comprehensive
explanation of the principles and reasoning behind establishing
position limits.'').
\193\ Although the events described in the proposal are
sufficient to support the necessity finding for the reasons given,
the Commission also notes reports that more recent market events
have been perceived as involving excessively large positions that
have caused or threatened to cause market disruptions. See, e.g., Ed
Ballard, Speculators sit on Sugar Pile, Raising Fears of Selloff,
The Wall Street Journal (Nov. 21, 2016) (``Speculative investors
have built a record position in sugar this year, sparking fears of a
swift pullback in its price.''); Of mice and markets, A surge in
speculation is making commodity markets more volatile, The Economist
(Sept. 10, 2016) (discussing ``scramble by funds to unwind their
short positions in'' West Texas Intermediate that appears to have
``fanned a rally in spot oil prices''). As discussed elsewhere,
willingness to participate in the futures and swaps markets may be
reduced by perceptions that a participant with an unusually large
speculative position could exert unreasonable market power.
---------------------------------------------------------------------------
Another commenter states that the December 2013 Position Limits
Proposal ``does not provide any quantitative analysis of how the
outcome of these [two historical] events might have differed if the
proposed position limits had been in place.'' \194\ The Commission
disagrees. The Commission stated in the December 2013 Position Limits
Proposal that, ``The Commission believes that if Federal speculative
position limits had been in effect that correspond to the . . . .
[proposed] limits . . . , across markets now subject to Commission
jurisdiction, such limits would have prevented the Hunt brothers and
their cohorts from accumulating such large futures positions.'' \195\
This statement was based on calculations using a methodology similar to
\196\ that proposed in the December 2013 Position Limits Proposal
applied to quantitative data included and as described therein.\197\
The Commission's stated belief is unchanged at the higher single-month
and all-months-combined limit levels of 7,600 contracts that the
Commission adopts today for silver.\198\ Nevertheless, historical data
regarding absolute position size from the period of the late-1970's to
1980 may not be readily comparable to the numerical limits adopted in
the current market environment. Accordingly, the Commission is
reproposing establishing levels using the methodology based on the size
of the current market as described elsewhere in this release.
---------------------------------------------------------------------------
\194\ CL-WGC-59558 at 2; see also CL-BG Group-59656 at 3.
\195\ December 2013 Position Limits Proposal, 78 FR at 75690.
\196\ The Commission's methodology is a fair approximation of
how the limits would have been applied during the time of the silver
crisis. See December 2013 Position Limits Proposal, 78 FR at 75690.
\197\ December 2013 Position Limits Proposal, 78 FR at 75690-1.
\198\ For example, using historical month-end open interest
data, the Commission calculated a single- and all-months-combined
limit level of 6,700 contracts, which would have been exceeded by a
total Hunt position of over 12,000 contracts for March delivery.
December 2013 Position Limits Proposal, 78 FR at 75690. Baldly, a
position of 12,000 contracts would still exceed a 7,600 contract
limit.
---------------------------------------------------------------------------
With respect to Amaranth, the Commission stated, ``Based on certain
assumptions . . . , the Commission believes that if Federal speculative
position limits had been in effect that correspond to the limits that
the Commission . . . [proposed in the December 2013 Position Limits
Proposal], across markets now subject to Commission jurisdiction, such
limits would have prevented Amaranth from accumulating such large
futures positions and thereby restrict its ability to cause unwarranted
price effects.'' \199\ This statement of belief about Amaranth was also
based on calculations using the methodology applied to quantitative
data as described and included in the December 2013 Position Limits
Proposal preamble.\200\ The historical size of Amaranth positions would
no longer breach the higher single-month and all-months-combined limit
levels of 200,900 contracts that the Commission adopts today for
natural gas.\201\ However, the Commission is reproposing setting a
level using a methodology that adapts to changes in the market for
natural gas, i.e., the fact that it has grown larger and more liquid
since the collapse of Amaranth. Thus, it stands to reason that a
speculator might now have to accumulate a larger position than
Amaranth's historical position to present a similar risk of disruption
to the natural gas market. In fact, the Commission has long recognized
``that the capacity of any contract market to absorb the establishment
and liquidation of large speculative positions in an orderly manner is
related to the relative size of such positions, i.e., the capacity of
the market is not unlimited.'' \202\ A larger market should have larger
capacity, other things being equal; \203\ hence, the Commission is
adopting higher levels of limits. Moreover, costly disruptions like
those associated with Amaranth remain entirely possible. Because the
costs of these disruptions can be great, and borne by members of the
public
[[Page 96721]]
unconnected with trading markets, the Commission preliminarily finds it
necessary to impose speculative position limits as a preventative
measure. As markets differ in size, the limit levels differ
accordingly, each designed to prevent the accumulation of positions
that are extraordinary in size in the context of each market.
---------------------------------------------------------------------------
\199\ December 2013 Position Limits Proposal, 78 FR at 75692.
\200\ December 2013 Position Limits Proposal, 78 FR at 75692-3.
\201\ See level of initial limits under App. D to part 150.
\202\ Establishment of Speculative Position Limits, 46 FR 50938,
50940.
\203\ A gross comparison such as this may not meaningful. For
example, the Commission could have increased the size of Amaranth's
historical position proportionately to the increased size of the
market and compared it to the limit level for natural gas that the
Commission adopts today. But such an approach would be less rigorous
than the analysis on which the Commission bases its determination
today.
---------------------------------------------------------------------------
Several commenters opined that the Commission, in reaching its
preliminary alternative necessity finding, ignores current market
developments and does not employ the ``new tools'' other than position
limits available to it to prevent excessive speculation or manipulative
or potentially manipulative behavior.\204\ Specifically, some
commenters suggested that position limits are not necessary because
position accountability rules and exchange-set limits are
adequate.\205\ The Commission agrees that the Dodd-Frank Act gave the
Commission new tools with which to protect and oversee the commodity
markets, and agrees that these along with older tools may be useful in
addressing market volatility. However, the Commission disagrees that
the availability of other tools means that position limits are not
necessary.\206\ Rather the statute, at a minimum, reflects Congress'
judgment that position limits may be found by the Commission to be
necessary. The Commission notes that although CEA section 4a(a)
position limits provisions have existed for many years, the Dodd-Frank
Act not only retained CEA section 4a(a), but added, rather than
deleted, several sections. This leads to the conclusion that Congress
appears to share the Commission's view that the other tools provided by
Congress were not sufficient.
---------------------------------------------------------------------------
\204\ E.g., CL-CCMR-59623 at 3 (supporting additional
transparency and reporting); CL-Citadel-59717 at 4 (pointing to
available tools, including ``enhanced market surveillance, broadened
reporting requirements, broadened special call authorities, and
exchange limits''); CL-ISDA/SIFMA-59611 at 13 (noting that tools
that the Commission has incorporated include ``enhanced market
surveillance, broadened reporting requirements, broadened special
call authorities, and exchange limits''); CL-MFA-59606 at 10; and
CL-SIFMA AMG-59709 at 5-6 (providing examples of new tools).
\205\ E.g., CL-CME-59718 at 18; CL-ICE-59645 at 2-4; CL-FIA-
59595 at 6, n. 13, 12-13; and CL-AMG-59709 at 8.
\206\ The Commission observes that logically there is no reason
why the availability of some regulatory tools under the CEA should
preclude the use of another tool explicitly authorized by Congress.
---------------------------------------------------------------------------
Position accountability, for example, is an older tool, from the
era of the CFMA. As the Commission explained in the December 2013
Position Limits Proposal, the CFMA ``provided a statutory basis for
exchanges to use pre-existing position accountability levels as an
alternative means to limit the burdens of excessive speculative
positions. Nevertheless, the CFMA did not weaken the Commission's
authority in CEA section 4a to establish position limits as an
alternative means to prevent such undue burdens on interstate commerce.
More recently, in the CFTC Reauthorization Act of 2008, Congress gave
the Commission expanded authority to set position limits for
significant price discovery contracts on exempt commercial markets,''
\207\ and it expanded the Commission's authority again in the Dodd-
Frank Act.\208\ While position accountability is useful in providing
exchanges with information about specific trading activity so that
exchanges can act if prudent to require a trader to reduce a position
after the position has already been amassed, position limits operate
prophylactically without requiring case-by-case, ex post determinations
about large positions. As to exchange-set accountability levels or
position limits set at levels below those of federal position limits,
those remain useful as well and should be used, at the exchanges'
discretion, in conjunction with federal position limits. They may be
most useful, for example, with respect to contracts that are not core-
referenced futures contracts or if an exchange determines that federal
limits are too high to address adequately the conditions in the markets
it administers. In the regulations that the Commission reproposes
today, the Commission would update (rather than eliminate) the
acceptable practices for exchange-set speculative position limits and
position accountability rules to conform to the Dodd-Frank Act changes
[as described in the December 2013 Position Limits Proposal].\209\
Generally, for contracts subject to speculative limits, exchanges may
set limits no higher than the federal limits,\210\ and may impose
``restrictions . . . to reduce the threat of market manipulation or
congestion, to maintain orderly execution of transactions, or for such
other purposes consistent with its responsibilities.'' \211\ And Sec.
150.5(b)(3) sets forth the requirements for position accountability in
lieu of exchange-set limits in the case of contracts not subject to
federal limits. The exchanges are also still authorized to react to
instances of greater price volatility by exercising emergency authority
as they did during the silver crisis.\212\ In addition, the Commission
has striven to take current market developments into account by
considering the market data to which the Commission has access as
described herein and by considering the description of current market
developments to the extent included in the comments the Commission has
received in connection with the December 2013 Position Limits Proposal.
Some commenters suggest that the Commission, in reaching its
preliminary alternative necessity finding, has not undertaken any
empirical analysis of available data.\213\ As discussed above, the
Commission carefully reviewed the Interagency Silver Study and the PSI
Report on Excessive Speculation in the Natural Gas Market.\214\ The
Commission also carefully considered the studies submitted during the
various comment periods regarding the December 2013 Position Limits
Proposal and the 2016 Supplemental Position Limits Proposal. Other
commenters suggest that the Commission relies on incomplete,
unreliable, or out of date data, and that the Commission should collect
more and/or better data before determining that position limits are
necessary or implementing position limits.\215\ The Commission
disagrees. The Commission has considered the recent data presented by
the exchanges in support of their estimates of deliverable supply. The
Commission is expending significant, agency-wide efforts to improve
data collection and to analyze the data it receives. The quality of the
data on which the Commission relies has improved since the December
2013 Position Limits Proposal. The Commission is satisfied with the
quality of the data on which it bases its Reproposal.
---------------------------------------------------------------------------
\207\ 78 FR at 75681 (footnotes omitted).
\208\ See generally December 2013 Position Limits Proposal, 78
FR at 75681.
\209\ See generally December 2013 Position Limits Proposal, 78
FR at 75747-8.
\210\ See discussion of requirements for exchange-set position
limits under Sec. 150.5, below, and exchange core principles
regarding position limits, below.
\211\ See reproposed Sec. 150.5(a)(6)(iii).
\212\ See generally 7 U.S.C. 7(d)(6) (DCM Core Principles:
Emergency Authority); 7 U.S.C. 7b-3(f)(8) (Core Principles for Swap
Execution Facilities--Emergency Authority); 17 CFR 37.800 (Swap
Execution Facility Core Principle 8--Emergency authority), 17 CFR
38.350 (Designated Contract Markets -Emergency Authority--Core
Principle 6).
\213\ E.g., CL-FIA-59595 at 3; CL-EEI-EPSA-59602 at 2, 8-9.
\214\ See supra Section I.C.2 (discussing the Interagency Silver
Study and the PSI Report on Excessive Speculation in the Natural Gas
Market).
\215\ E.g., CL-Citadel-59717 at 4-5; CL-EEI-EPSA-59602 at 8-9.
---------------------------------------------------------------------------
One commenter opines that, ``The Proposal's `necessary' finding
offers no reasoned basis for adopting its framework and the shift in
regulatory policy it embodies.'' \216\ To the contrary,
[[Page 96722]]
the necessity finding, including the Commission's responses to
comments, is the Commission's explanation of why position limits are
necessary.\217\
---------------------------------------------------------------------------
\216\ CL-CME-59718 at 3.
\217\ See CL-Sen. Levin-59637 at 6 (stating that the
Commission's necessity finding ``appropriately reflects
Congressional action in enacting the Dodd-Frank Act which requires
the Commission to impose appropriate position limits on speculators
trading physical commodities.'').
---------------------------------------------------------------------------
g. Non-Spot-Month Limits
Some commenters opine that ``the Commission's proposed non-spot-
month position limits do not increase the likelihood of preventing the
excessive speculation or manipulative trading exemplified by Amaranth
or the Hunt brothers relative to the status quo.'' \218\ The Commission
disagrees; as repeated above, ``the capacity of the market is not
unlimited.'' \219\ This includes markets in non-spot month contracts.
Thus, as with spot-month contracts, extraordinarily large positions in
non-spot month contracts may still be capable of distorting
prices.\220\ If prices are distorted, the utility of hedging may
decline.\221\ One commenter argues for non-spot month position
accountability rules; \222\ the Commission discusses position
accountability above.\223\ Another argues that Amaranth was really just
``another case of spot-month misconduct.'' \224\ The Commission
disagrees that this limits the relevance of Amaranth; a speculator like
Amaranth may attempt to distort the perception of supply and demand in
order to benefit, for instance, calendar spread positions by, for
instance, creating the perception of a nearby shortage of the commodity
which a speculator could do by accumulating extraordinarily large long
positions in the nearby month.\225\ One commenter states that
``improperly calibrated non-spot month limits would also deter
speculative activity that triggers no risk of manipulation or `causing
sudden or unreasonable fluctuations or unwarranted changes in the price
of such commodity,' the hallmarks of `excessive speculation.' '' \226\
The Commission sees little merit in this objection because the
Reproposal would calibrate the levels of the non-spot month limits to
accommodate speculative activity that provides liquidity for hedgers.
---------------------------------------------------------------------------
\218\ CL-AMG-59709 at 9. See the Commission's response to the
comment regarding the purported lack of ``quantitative analysis of
how the outcome of these [two historical] events might of differed
if the proposed position limits had been in place'' at the text
accompanying notes 192-200 above. See also CL-CME-59718 at 41-3; CL-
ISDA/SIFMA-59611 at 28.
\219\ See note 202 supra and accompanying text.
\220\ See December 2013 Position Limits Proposal, 78 FR at 75691
(citing the PSI Report, ``Amaranth accumulated such large positions
and traded such large volumes of natural gas futures that it
distorted market prices, widened price spread, and increased price
volatility.'').
\221\ See December 2013 Position Limits Proposal, 78 FR at 75692
(citing the PSI Report, ``Commercial participants in the 2006
natural gas markets were reluctant or unable to hedge.'').
\222\ CL-CME-59718 at 41-42.
\223\ See notes 207-212 supra and accompanying text.
\224\ CL-ISDA/SIFMA-59611 at 28.
\225\ The Commission discussed the trading activity of Amaranth
at length in the December 2013 Position Limits Proposal, 78 FR at
75691-3; in particular, Amaranth's calendar spread trading is
discussed at 78 FR 75692. The Commission repeats that the findings
of the Permanent Subcommittee in the PSI Report support the
imposition of speculative position limits outside the spot month. A
trader, who does not liquidate an extraordinarily large long futures
position in the nearby physical-delivery futures contract, contrary
to typical declining open interest patterns in a physical-delivery
contract approaching expiration, may cause the nearby futures price
to increase as short position holders, who do not wish to make
physical delivery, bid up the futures price in an attempt to offset
their short positions. Potential liquidity providers who do not
currently hold a deliverable commodity may be hesitant to establish
short positions as a physical-delivery futures contract approaches
expiration, because exchange rules and contract terms require such
short position holder to prepare to make delivery by obtaining the
cash commodity.
\226\ CL-CME-59718 at 43; cf. CL-APGA-59722 at 3 (asserting that
``the non-spot month limits being proposed by the Commission are too
high to be effective'').
---------------------------------------------------------------------------
h. Meaning of Necessity
One commenter suggests that position limits could only be necessary
if they were the only means of preventing the Hunt brothers and
Amaranth crises.\227\ First, while the Commission relies on these
incidents to explain its reasoning, the risks they illustrate apply to
all markets in physical commodities, and so the efficacy of the limits
the Commission adopts today, and the extent to which other tools are
sufficient, cannot be judged solely by whether they might have
prevented those specific incidents. Second, in any event, the
Commission rejects such an overly restrictive reading, which lacks a
basis in both common usage and statutory construction. The Commission
preliminarily finds that limits are necessary as a prophylactic tool to
strengthen the regulatory framework to prevent excessive speculation ex
ante to diminish the risk of the economic harm it may cause further
than it would reliably be from the other tools alone. Other commenters
question why the Commission proposed limits at levels they contend are
too high to be effective, undercutting the Commission's alternative
necessity finding.\228\ One commenter points out that the limit levels
as proposed would not have prevented the misconduct alleged by the
Commission in a particular enforcement action filed in 2011.\229\ As
repeated elsewhere in this Notice \230\ and in the December 2013
Position Limits Proposal,\231\ in establishing limits, the Commission
must, ``to the maximum extent practicable, in its discretion . . .
ensure sufficient market liquidity for bona fide hedgers.\232\ The
Commission realizes that the reproposed initial limit levels may
prevent or deter some, but fail to eliminate all, excessive speculation
in the markets for the 25 commodities covered by this first phase of
implementation. But the Commission is concerned that initial limit
levels set lower than those reproposed today, and in particular low
enough to prevent market manipulation or excessive speculation in
specific, less egregious cases than the Hunt brothers or Amaranth,
could impair liquidity for hedges.\233\
---------------------------------------------------------------------------
\227\ CL-CCMR-59623 at 4.
\228\ CL-ISDA/SIFMA-59611 at 28; CL-Better Markets-59716 at 24;
CL-APGA-59722 at 6-7.
\229\ CL-Better Markets-59716 at 22, n. 38 (Parnon Energy).
\230\ See the discussion in levels of limits, under Sec. 150.2,
below.
\231\ E.g., December 2013 Position Limits Proposal, 78 FR at
75681.
\232\ CEA section 4a(a)(3)(B)(iii), 7 U.S.C. 6a(a)(3)(B)(iii).
Some commenters expressed concern that position limits could
disproportionately affect commercial entities. E.g., CL-CME-59718 at
43; CL-APGA-59722 at 3. Some commenters expressed concern about the
application of position limits to trade options. E.g., CL-APGA-59722
at 3; CL-EEI-EPSA-59602 at 3. The Commission reminds commenters that
speculative position limits do not apply to bona fide hedging
transactions or positions. CEA section 4a(c), 7 U.S.C. 6a(c).
\233\ The Commission will revisit the specific limitations set
forth in CEA section 4a(a)(3) when, under reproposed Sec. 150.2(e),
it considers resetting limit levels.
---------------------------------------------------------------------------
The Commission requests comment on all aspects of this section.
2. Studies and Reports
The Commission has reviewed and evaluated studies and reports
received as comments on the December 2013 Position Limits Proposal, in
addition to the studies and reports reviewed in connection with the
December 2013 Position Limits Proposal \234\ (such
[[Page 96723]]
studies and reports, collectively, ``studies''). Appendix A to this
preamble is a summary of the various studies reviewed and evaluated by
the Commission.
---------------------------------------------------------------------------
\234\ A list of studies and reports that the Commission reviewed
in connection with the December 2013 Position Limits Proposal was
included in its Appendix A to the preamble. December 2013 Position
Limits Proposal, 78 FR at 75784-7. One commenter observed that the
studies reviewed in connection with the December 2013 Position
Limits Proposal are not all ``necessarily germane to specific
position limits proposed.'' CL-Citadel-59717 at 4. See also CL-CCMR-
59623 at 5 (stating that it had reviewed the studies, and found that
``only 27 address position limits''). The Commission acknowledges
that some studies are more relevant than others. The Commission in
the December 2013 Position Limits Proposal was disclosing the
studies that it had reviewed and evaluated. The Commission requested
comment on its discussion of the studies, and invited commenters to
advise the Commission of other studies to consider, in the hope that
commenters would indicate which studies they believe are more
germane or persuasive and suggest other studies for Commission
review.
---------------------------------------------------------------------------
The Commission observed in the December 2013 Position Limits
Proposal, ``There is a demonstrable lack of consensus in the studies.''
\235\ Neither the passage of time nor the additional studies have
changed the Commission's view: As a group, these studies do not show a
consensus in favor of or against position limits.\236\ In addition to
arriving at disparate conclusions, the quality of the studies varies.
Nevertheless, the Commission believes that some well-executed studies
suggest that excessive speculation cannot be excluded as a possible
cause of undue price fluctuations and other burdens on commerce in
certain circumstances. All of these factors persuade the Commission to
act on the side of caution in preliminarily finding limits necessary,
consistent with their prophylactic purpose. For these reasons,
explained in more detail below, the Commission preliminarily concludes
that the studies, individually or taken as a whole, do not persuade the
Commission to reverse course \237\ or to change its necessity
finding.\238\
---------------------------------------------------------------------------
\235\ December 2013 Position Limits Proposal, 78 FR at 75694.
\236\ See 162 Cong. Rec. E1005-03, E1006 (June 28, 2016)
(Statement of Rep. Conaway, Chairman of the House Committee on
Agriculture) (``Comment letters on either side declaring that the
matter is settled in their favor among respectable economists are
simply incorrect.''). Contra CL-CCMR-59623 at 5, which says, ``The
Committee staff also reviewed these studies and found that of them,
only 27 address position limits, with the majority opposing such
limits.'' The commenter describes how it arrives at this conclusion
as follows: ``The Committee staff reviewed the abstract and body of
each study to determine if the author assessed: (1) Whether position
limits are effective at reducing speculation; or (2) whether
excessive speculation is distorting prices in commodities markets.
If the author presented a critical analysis of the issue, rather
than just mentioning position limits or excessive speculation in
passing, then the Committee staff included the study in its tally.''
Such a method is relatively unsophisticated, and the Commission
cannot evaluate it without knowing to which studies the commenter
refers. The commenter continues, ``Of the total, 105 studies address
whether excessive speculation is distorting prices in today's
commodity markets, with 66 of these studies finding that excessive
speculation is not a problem.'' This statement did not identify the
66 studies or 105 studies on which it based its belief. Accordingly,
the Commission is unable to evaluate the basis of its belief.
\237\ See discussion of mandate, above. We emphasize that this
discussion relates only to the Commission's alternative necessity
finding. To the extent there is a Congressional mandate that the
Commission establish position limits, these studies could be no
basis to disregard it. As noted in the December 2013 Position Limits
Proposal, ``Studies that militate against imposing any speculative
position limits appear to conflict with the Congressional mandate .
. . that the Commission impose limits on futures contracts, options,
and certain swaps for agricultural and exempt commodities.'' 78 FR
at 75695 (footnote omitted). Separately, ``such studies also appear
to conflict with Congress' determination, codified in CEA section
4a(a)(1), that position limits are an effective tool to address
excessive speculation as a cause of sudden or unreasonable
fluctuations or unwarranted changes in the price of such
commodities,'' irrespective of whether they are mandated. Id. The
Commission acknowledges that some of the studies, when considered as
comments on the December 2013 Position Limits Proposal, can be
understood to suggest that, contrary to the Congressional
determination, there is no empirical evidence that excessive
speculation exists, that excessive speculation causes sudden or
unreasonable fluctuations or unwarranted changes in the price of a
commodity, or is an undue and unnecessary burden on interstate
commerce in a commodity.
\238\ See discussion of necessity finding, above.
---------------------------------------------------------------------------
The Commission's deliberations are informed by its consideration of
the studies. The Commission recognizes that speculation and volatility
are not per se unusual or exceptional occurrences in commodity markets.
Some economic studies attempt to distinguish normal, helpful
speculative activity in commodity markets from excessive speculation,
and normal volatility from unreasonable price fluctuations. It has
proven difficult in some studies to discriminate between the proper
workings of a well-functioning market and unwanted phenomena. That some
studies have as yet failed to do so with precision or certainty does
not, in light of the full record, persuade the Commission to reverse
course or to change its necessity finding.
In general, many studies focused on subsidiary questions and did
not directly address the desirability or utility of position limits.
Their proffered interpretations may not be the only plausible
explanation for statistical results. There is no broad academic
consensus on the formal, testable economic definition of ``excessive
speculation'' in commodity futures markets or other relevant terms such
as ``price bubble.'' There is also no broad academic consensus on the
best statistical model to test for the existence of excessive
speculation. There are not many papers that quantify the impact and
effectiveness of position limits in commodity futures markets. The
Commission has identified some reasons why there are not many
compelling, peer-reviewed economic studies engaging in quantitative,
empirical analysis of the impact of position limits on prices or price
volatility: Limitations on publicly available data, including detailed
information on specific trades and traders; pre-existing position
limits in some commodity markets, making it difficult to determine how
those markets would operate in the absence of position limits; and the
difficulties inherent in modelling complex economic phenomena.
The studies that the Commission considered can be grouped into
seven categories.\239\
---------------------------------------------------------------------------
\239\ These categories are not exclusive; some studies employ or
examine more than one type of methodology. That researchers in the
different categories employed different methodologies complicates
the task of comparing the studies across the seven categories. In
addition, some studies were not susceptible to meaningful economic
analysis for various reasons, such as being written in a foreign
language, being founded on suspect methodologies, being press
releases, etc. These studies include: Basak and Pavlova, A Model
Financialization of Commodities (working paper 2013); Bass,
Finanazm[auml]rkte als Hungerverursacher? (working paper 2011);
Bass, Finanzspekulation und Nahrungsmittelpreise. Anmerkungenzum
Stand der Forschung (working paper 2013); Bukold,
[Ouml]lpreisspekulation und Benzinpreise in Deutschland, (2011);
Chevalier, (Minist[egrave]re de l'Economie, de l'Industrie e t de
l'emploi): Rappor t du groupe de travai l sur la volatilit[egrave]
des prix du p[egrave]trole, (2010); Dicker, Oil's Endless Bid,
(2011); Ederington and Lee, Who Trades Futures and How: Evidence
from the Heating Oil Market?, Journal of Business 2002; Evans, The
Official Demise of the Oil Bubble, Wall Street Journal 2008; Gheit
and Katzenberg, Surviving Lower Oil Prices, Oppenheimer & Co.
(2008); Ghosh, Commodity Speculation and the Food Crisis, (working
paper 2010); Halova, The Intraday Volatility-Volume Relationship in
Oil and Gas Futures, (working paper 2012); Jouyet, Rappor t d'
[eacute]tape-Pr[eacute]venir e t g[eacute]rer l'instabilit[eacute]
des march[eacute]s agricoles, (2010); Korzenik, Fundamental
Misconceptions in the Speculation Debate, (2009); Lake Hill Capital
Management, Investable Indices are Distorting Commodity Markets?,
(2013); Lee, Cheng, and Koh, Would Position Limits Have Made any
Difference to the `Flash Crash' on May 6, 2010?, Review of Futures
Markets (2010); Markham, Manipulation of Commodity Futures Prices:
The Unprosecutable Crime, Yale Journal of Regulation (1991); Mayer,
The Growing Financializsation of Commodity Markets: Divergences
between Index Investors and Money Managers, Journal of Development
Studies (2012); Morse, Oil dotcom, Research Notes, (2008); Naylor,
Food Security in an Era of Economic Volatility (working paper 2010);
Newell, Commodity Speculation's ``Smoking Gun'' (2008); Peri,
Vandone, and Baldi, Internet, Noise Trading and Commodity Prices
(working paper 2012); Soros, Interview with Stern Stern Magazine
(2008); Tanaka, IEA Says Speculation Amplifying Oil Price Moves,
(2006); Von Braun and Tadesse, Global Food Price Volatility and
Spikes: An Overview of Costs, Cause and Solutions (2012).
---------------------------------------------------------------------------
Granger Causality Analyses \240\
---------------------------------------------------------------------------
\240\ Studies that employ the Granger method of statistical
analysis include: Algieri, Price Volatility, Speculation and
Excessive Speculation in Commodity Markets: Sheep or Shepherd
Behaviour? (working paper 2012); Antoshin, Canetti, and Miyajima,
IMF Global Financial Stability Report: Financial Stress and
Deleveraging: Macrofinancial Implications and Policy, Annex 1.2,
Financial Investment in Commodities Markets (October 2008);
Aulerich, Irwin, and Garcia, Bubbles, Food Prices, and Speculation:
Evidence from the CFTC's Daily Large Trader Data Files (NBER
Conference 2012); Borin and Di Nino, The Role of Financial
Investments in Agricultural Commodity Derivatives Markets (working
paper 2012); Brunetti and B[uuml]y[uuml]k[scedil]ahin, Is
Speculation Destabilizing? (working paper 2009); Cooke and Robles,
Recent Food Prices Movements: A Time Series Analysis (working paper
2009); Frenk, Review of Irwin and Sanders 2010 OECD Report (Better
Markets June 10, 2010); Gilbert, Commodity Speculation and Commodity
Investment (2010); Gilbert, How to Understand High Food Prices,
Journal of Agricultural Economics (2008); Gilbert, Speculative
Influences on Commodity Futures Prices, 2006-2008, UN Conference on
Trade and Development (2010); Goyal and Tripathi, Regulation and
Price Discovery: Oil Spot and Futures Markets (working paper 2012);
Grosche, Limitations of Granger Causality Analysis to Assess the
Price Effects From the Financialization of Agricultural Commodity
Markets Under Bounded Rationality, Agricultural and Resource
Economics (2012); Harris and B[uuml]y[uuml]k[scedil]ahin, The Role
of Speculators in the Crude Oil Futures Market (working paper 2009);
Irwin and Sanders, Energy Futures Prices and Commodity Index
Investment: New Evidence from Firm-Level Position Data (working
paper 2014); Irwin and Sanders, The Impact of Index and Swap Funds
on Commodity Futures Markets: A Systems Approach, Journal of
Alternative Investments (working paper 2010); Irwin and Sanders, The
Impact of Index and Swap Funds on Commodity Futures Markets:
Preliminary Results (working paper 2010); Irwin and Sanders, The
``Necessity'' of New Position Limits in Agricultural Futures
Markets: The Verdict from Daily Firm-Level Position Data (working
paper 2014); Irwin and Sanders, The Performance of CBOT Corn,
Soybean, and Wheat Futures Contracts after Recent Changes in
Speculative Limits (working paper 2007); Irwin, Sanders, and Merrin,
Devil or Angel: The Role of Speculation in the Recent Commodity
Price Boom, Journal of Agricultural and Applied Economics (2009);
Kaufman, The role of market fundamentals and speculation in recent
price changes for crude oil, Energy Policy, Vol. 39, Issue 1
(January 2011); Kaufmann and Ullman, Oil Prices, Speculation, and
Fundamentals: Interpreting Causal Relations Among Spot and Futures
Prices, Energy Economics, Vol. 31, Issue 4 (July 2009); Mayer, The
Growing Interdependence Between Financial and Commodity Markets, UN
Conference on Trade and Development (discussion paper 2009); Mobert,
Do Speculators Drive Crude Oil Prices? (2009 working paper); Robles,
Torero, and von Braun, When Speculation Matters (working paper
2009); Sanders, Boris, and Manfredo, Hedgers, Funds, and Small
Speculators in the Energy Futures Markets: An Analysis of the CFTC's
Commitment of Traders Reports, Energy Economics (2004); Sanders,
Irwin, and Merrin, The Adequacy of Speculation in Agricultural
Futures Markets: Too Much of a Good Thing?, Applied Economic
Perspectives and Policy (2010); Sanders, Irwin, and Merrin, Smart
Money? The Forecasting Ability of CFTC Large Traders, Journal of
Agricultural and Resource Economics (2009); Sanders, Irwin, and
Merrin, A Speculative Bubble in Commodity Futures? Cross-Sectional
Evidence, Agricultural Economics (2010); Singleton, The 2008 Boom/
Bust in Oil Prices (working paper 2010); Singleton, Investor Flows
and the 2008 Boom/Bust in Oil Prices (working paper 2011); Stoll and
Whaley, Commodity Index Investing and Commodity Futures Prices
(working paper 2010); Timmer, Did Speculation Affect World Rice
Prices?, UN Food and Agricultural Organization (working paper 2009);
Tse and Williams, Does Index Speculation Impact Commodity Prices?,
Financial Review, Vol. 48, Issue 3 (2013); Tse, The Relationship
Among Agricultural Futures, ETFs, and the US Stock Market, Review of
Futures Markets (2012); Varadi, An Evidence of Speculation in Indian
Commodity Markets (working paper 2012); Williams, Dodging Dodd-
Frank: Excessive Speculation, Commodities Markets, and the Burden of
Proof, Law & Policy Journal of the University of Denver (2015).
---------------------------------------------------------------------------
[[Page 96724]]
Some economic studies considered by the Commission employ the
Granger method of statistical analysis. The Granger method seeks to
assess whether there is a strong linear correlation between two sets of
data that are arranged chronologically forming a ``time series.'' While
the Granger test is referred to as the ``Granger causality test,'' it
is important to understand that, notwithstanding this shorthand,
``Granger causality'' does not necessarily establish an actual cause
and effect relationship. The result of the Granger method is evidence,
or the lack of evidence, of the existence of a linear correlation
between the two time series. The absence of Granger causality does not
necessarily imply the absence of actual causation.
Comovement or Cointegration Analyses \241\
---------------------------------------------------------------------------
\241\ Studies that employ the comovement or cointegration
methods include: Ad[auml]mmer, Bohl and Stephan, Speculative Bubbles
in Agricultural Prices (working paper 2011); Algieri, A Roller
Coaster Ride: an Empirical Investigation of the Main Drivers of
Wheat Price (working paper 2013); Babula and Rothenberg, A Dynamic
Monthly Model of U.S. Pork Product Markets: Testing for and
Discerning the Role of Hedging on Pork-Related Food Costs, Journal
of Int'l Agricultural Trade and Development (2013); Baffes and
Haniotos, Placing the 2006/08 Commodity Boom into Perspective, World
Bank Policy Research Working Paper 5371 (2010); Basu and Miffre,
Capturing the Risk Premium of Commodity Futures: The Role of Hedging
Pressure, Journal of Banking and Risk (2013); Belke, Bordon, and
Volz, Effects of Global Liquidity on Commodity and Food Prices,
German Institute for Economic Research (2013); Bicchetti and
Maystre, The Synchronized and Long-lasting Structural Change on
Commodity Markets: Evidence from High Frequency Data (working paper
2012); Boyd, B[uuml]y[uuml]k[scedil]ahin, and Haigh, The Prevalence,
Sources, and Effects of Herding (working paper 2013); Bunn,
Chevalier, and Le Pen, Fundamental and Financial Influences on the
Co-movement of Oil and Gas Prices (working paper 2012);
B[uuml]y[uuml]k[scedil]ahin, Harris, and Haigh, Fundamentals, Trader
Activity, and Derivatives Pricing (working paper 2008);
B[uuml]y[uuml]k[scedil]ahin and Robe, Does it Matter Who Trades
Energy Derivatives?, Review of Env't, Energy, and Economics (2013);
B[uuml]y[uuml]k[scedil]ahin and Robe, Does ``Paper Oil'' Matter?
(working paper 2011); B[uuml]y[uuml]k[scedil]ahin and Robe,
Speculators, Commodities, and Cross-Market Linkages (working paper
2012); Cheng, Kirilenko, and Xiong, Convective Risk Flows in
Commodity Futures Markets (working paper 2012); Coleman and Dark,
Economic Significance of Non-Hedger Investment in Commodity Markets
(working paper 2012); Creti, Joets, and Mignon, On the Links Between
Stock and Commodity Markets' Volatility, Energy Economics (2010);
Dorfman and Karali, Have Commodity Index Funds Increased Price
Linkages between Commodities? (working paper 2012); Filimonov,
Bicchetti, Maystre, and Sornette, Quantification of the High Level
of Endogeneity and of Structural Regime Shifts in Commodity Markets,
(working paper 2013); Haigh, Harris, and Overdahl, Market Growth,
Trader Participation and Pricing in Energy Futures Markets (working
paper 2007); Hoff, Herding Behavior in Asset Markets, Journal of
Financial Stability (2009); Kawamoto, Kimura, et al., What Has
Caused the Surge in Global Commodity Prices and Strengthened Cross-
market Linkage?, Bank of Japan Working Papers Series No.11-E-3 (May
2011); Korniotis, Does Speculation Affect Spot Price Levels? The
Case of Metals With and Without Futures Markets (working paper, FRB
Finance and Economic Discussion Series 2009); Le Pen and
S[eacute]vi, Futures Trading and the Excess Comovement of Commodity
Prices (working paper 2012); Pollin and Heintz, How Wall Street
Speculation is Driving Up Gasoline Prices Today (AFR working paper
2011); Tang and Xiong, Index Investment and Financialization of
Commodities, Financial Analysts Journal (2012); and Windawi,
Speculation, Embedding, and Food Prices: A Cointegration Analysis
(working paper 2012).
---------------------------------------------------------------------------
The comovement method looks for whether there is correlation that
is contemporaneous and not lagged. A subset of these comovement studies
use a technique called cointegration for testing correlation between
two sets of data.
Models of Fundamental Supply and Demand \242\
---------------------------------------------------------------------------
\242\ Studies that employ models of fundamental supply and
demand include: Acharya, Ramadorai, and Lochstoer, Limits to
Arbitrage and Hedging: Evidence from Commodity Markets, Journal of
Financial Economics (2013); Allen, Litov, and Mei, Large Investors,
Price Manipulation, and Limits to Arbitrage: An Anatomy of Market
Corners, Review of Finance (2006); Bos and van der Molen, A Bitter
Brew? How Index Fund Speculation Can Drive Up Commodity Prices,
Journal of Agricultural and Applied Economics (2010);
Breitenfellner, Crespo, and Keppel, Determinants of Crude Oil
Prices: Supply, Demand, Cartel, or Speculation?, Monetary Policy and
the Economy (2009); Brennan and Schwartz, Arbitrage in Stock Index
Futures, Journal of Business (1990); Byun and Sungje, Speculation in
Commodity Futures Market, Inventories and the Price of Crude Oil
(working paper 2013); Chan, Trade Size, Order Imbalance, and
Volatility-Volume Relation, Journal of Financial Economics (2000);
Chordia, Subrahmanyam and Roll, Order imbalance, Liquidity, and
Market Returns, Journal of Financial Economics (2002); Cifarelli and
Paladino, Oil Price Dynamics and Speculation: a Multivariate
Financial Approach, Energy Economics (2010); Doroudian and
Vercammen, First and Second Order Impacts of Speculation and
Commodity Price Volatility (working paper 2012); Ederington,
Dewally, and Fernando, Determinants of Trader Profits in Futures
Markets (working paper 2013); Einloth, Speculation and Recent
Volatility in the Price of Oil (working paper 2009); Frankel and
Rose, Determinants of Agricultural and Mineral Commodity Prices
(working paper 2010); Girardi, Do Financial Investors Affect
Commodity Prices? (working paper 2011); Gorton, Hayashi,
Rouwenhorst, The Fundamentals of Commodity Futures Returns, Review
of Finance (2013); Guilleminot and Ohana, The Interaction of Hedge
Funds and Index Investors in Agricultural Derivatives Markets
(working paper 2013); Gupta and Kamzemi, Factor Exposures and Hedge
Fund Operational Risk: The Case of Amaranth (working paper 2009);
Haigh, Hranaiova, and Overdahl, Hedge Funds, Volatility, and
Liquidity Provisions in the Energy Futures Markets, Journal of
Alternative Investments (2007); Haigh, Hranaiova, and Overdahl,
Price Dynamics, Price Discovery, and Large Futures Trader
Interactions in the Energy Complex, (working paper 2005); Hamilton,
Causes and Consequences of the Oil Shock of 2007-2008, Brookings
Paper on Economic Activity (2009); Hamilton and Wu, Effects of
Index-Fund Investing on Commodity Futures Prices, International
Economic Review, Vol. 56, No. 1 (2015); Hamilton and Wu, Risk Premia
in Crude Oil Futures Prices, Journal of International Money and
Finance (2013); Harrison and Kreps, Speculative Investor Behavior in
a Stock Market with Heterogeneous Expectations, Quarterly Journal of
Economics (1978); Henderson, Pearson and Wang, New Evidence on the
Financialization of Commodity Markets (working paper 2012);
Hirshleifer, Residual Risk, Trading Costs, and Commodity Futures
Risk Premia, Review of Financial Studies, Vol. 1, No. 2, Oxford
University Press (1988); Hong and Yogo, Digging into Commodities
(working paper 2009); Interagency Task Force on Commodity Markets,
Interim Report on Crude Oil, multiple federal agencies including the
CFTC (2008); Juvenal and Petrella, Speculation in the Oil Market
(working paper 2012); Juvenal and Petrella, Speculation in
Commodities, and Cross-Market Linkages (working paper 2011); Kilian,
Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply
Shocks in the Crude Oil Market, American Economic Review (2007);
Kilian and Lee, Quantifying the Speculative Component in the Real
Price of Oil: The Role of Global Oil Inventories (working paper
2013); Kilian and Murphy, The Role of Inventories and Speculative
Trading in the Global Market for Crude Oil, Journal of Applied
Econometrics (2010); Knittel and Pindyck, The Simple Economics of
Commodity Price Speculation, (working paper 2013); Kyle and Wang,
Speculation Duopoly with Agreement to Disagree: Can Overconfidence
Survive the Market Test?, Journal of Finance (1997); Manera,
Nicolini and Vignati, Futures Price Volatility in Commodities
Markets: The Role of Short-Term vs Long-Term Speculation (working
paper 2013); Mei, Acheinkman, and Xiong, Speculative Trading and
Stock Prices: An Analysis of Chinese A-B Share Premia, Annals of
Economics and Finance (2009); Morana, Oil Price Dynamics, Macro-
finance Interactions and the Role of Financial Speculation, Journal
of Banking & Finance, Vol. 37, Issue 1 (Jan. 2012); Mou, Limits to
Arbitrage and Commodity Index Investment: Front-Running the Goldman
roll (working paper 2011); Plato and Hoffman, Measuring the
Influence of Commodity Fund Trading on Soybean Price Discovery
(working paper 2007); Sornette, Woodard and Zhou, The 2006-2008 Oil
Bubble and Beyond: Evidence of Speculation, and Prediction, Physica
A. (2009); Stevans and Sessions, Speculation, Futures Prices, and
the U.S. Real Price of Crude Oil, American Journal of Social and
Management Science (2010); Trostle, Global Agricultural Supply and
Demand: Factors Contributing to the Recent Increase in Food
Commodity Prices, USDA Economic Research Service (2008);Van der
Molen, Speculators Invading the Commodity Markets (working paper
2009); Weiner, Do Birds of A Feather Flock Together? Speculation in
the Oil Markets, (Working Paper 2006); Weiner, Speculation in
International Crises: Report from the Gulf, Journal of Int'l
Business Studies (2005); Westcott and Hoffman, Price Determination
for Corn and Wheat: The Role of Market Factors and Government
Programs (working paper 1999); Wright, International Grain Reserves
and Other Instruments to Address Volatility in Grain Markets, World
Bank Research Observer (2012).
---------------------------------------------------------------------------
[[Page 96725]]
Some economists have developed economic models for the supply and
demand of a commodity. These models often include theories of how
storage capacity and use affect supply and demand, which may influence
the price of a physical commodity over time. An economist looks at
where the model is in equilibrium with respect to quantities of a
commodity supplied and demanded to arrive at a ``fundamental'' price or
price return. The economist then looks for deviations between the
fundamental price (based on the model) and the actual price of a
commodity. When there is a statistically significant deviation between
the fundamental price and the actual price, the economist generally
infers that the price is not driven by market fundamentals of supply
and demand.
Switching Regressions or Similar Analyses \243\
---------------------------------------------------------------------------
\243\ Studies that include switching regressions or similar
analyses include: Brooks, Prokopczuk, and Wu, Boom and Bust in
Commodity Markets: Bubbles or Fundamentals? (working paper 2014);
Baldi and Peri, Price Discovery in Agricultural Commodities: the
Shifting Relationship Between Spot and Futures Prices (working paper
2011); Chevallier, Price Relationships in Crude oil Futures: New
Evidence from CFTC Disaggregated Data, Environmental Economics and
Policy Studies (2012); Cifarelli and Paladino, Commodity Futures
Returns: A non-linear Markov Regime Switching Model of Hedging and
Speculative Pressures (working paper 2010); Fan and Xu, What Has
Driven Oil Prices Since 2000? A Structural Change Perspective,
Energy Economics (2011); Hache and Lantz, Speculative Trading & Oil
Price Dynamic: A Study of the WTI Market, Energy Economics, Vol. 36,
p.340 (March 2013); Lammerding, Stephan, Trede, and Wifling,
Speculative Bubbles in Recent Oil Price Dynamics: Evidence from a
Bayesian Markov Switching State-Space Approach, Energy Economics
Vol. 36 (2013); Sigl-Gr[uuml]b and Schiereck, Speculation and
Nonlinear Price Dynamics in Commodity Futures Markets, Investment
Management and Financial Innovations, Vol. 77 (2010); Silvernnoinen
and Thorp, Financialization, Crisis and Commodity Correlation
Dynamics, Journal of Int'l Financial Markets, Institutions, and
Money (2013).
---------------------------------------------------------------------------
In the context of studies relating to position limits, economists
employing switching regression analysis generally posit a model with
two states: A normal state, where prices reflect market fundamentals,
and a second state, often interpreted as a ``bubble.'' \244\ Using
price data, authors of these studies calculate the probability of a
transition between the two states. The point of transition is called a
structural ``breakpoint.'' Examination of these breakpoints permits the
researcher to identify the duration of a particular ``bubble.''
---------------------------------------------------------------------------
\244\ While there is no broad academic consensus on the formal,
testable economic definition of the term ``price bubble,'' price
bubbles are colloquially thought to be unsustainable surges in asset
prices fueled by speculation and followed by ``crashes'' or
precipitous price drops.
---------------------------------------------------------------------------
Eigenvalue Stability Analysis \245\
---------------------------------------------------------------------------
\245\ Studies that employ eigenvalue stability analysis include:
Czudaj and Beckman, Spot and Futures Commodity Markets and the
Unbiasedness Hypothesis--Evidence from a Novel Panel Unit Root Test,
Economic Bulletin (2013); Du, Yu, and Hayes, Speculation and
Volatility Spillover in the Crude Oil and Agricultural Commodity
Markets: A Bayesian Analysis, (working paper 2012); Gilbert,
Speculative Influences on Commodity Futures Prices, 2006-2008, UN
Conference on Trade and Development (working paper 2010); Gutierrez,
Speculative Bubbles in Agricultural Commodity Markets, European
Review of Agricultural Economics (2012); Phillips and Yu, Dating the
Timeline of Financial Bubbles During the Subprime Crisis,
Quantitative Economics (2011).
---------------------------------------------------------------------------
Some economists have run regression analyses \246\ on price and
time-lagged values of price. They estimate an equation that relates
current to past time values over short time intervals and solve for the
roots of that equation, called the eigenvalues (latent values), in
order to detect unusual price changes. If they find an eigenvalue \247\
with an absolute value of greater than one, they infer that the price
of the commodity is in a ``bubble.''
---------------------------------------------------------------------------
\246\ In statistical modeling, regression analysis is a process
for estimating the relationships among certain types of variables
(values that change over time or in different circumstances).
\247\ In this context, an eigenvalue is a mathematical
calculation that summarizes the dynamic properties of the data
generated by the model. Generally, an eigenvalue is a concept from
linear algebra.
---------------------------------------------------------------------------
Theoretical Models \248\
---------------------------------------------------------------------------
\248\ Studies that present theoretical models include: Avriel
and Reisman, Optimal Option Portfolios in Markets with Position
Limits and Margin Requirements, Journal of Risk (2000); Dai, Jin and
Liu, Illiquidity, Position Limits, and Optimal Investment (working
paper 2009); Dicembrino and Scandizzo, The Fundamental and
Speculative Components of the Oil Spot Price: A Real Options Value
Approach (working paper 2012); Dutt and Harris, Position Limits for
Cash-Settled Derivative Contracts, Journal of Futures Markets
(2005); Ebrahim and ap Gwilym, Can Position Limits Restrain Rogue
Traders?, at p.832 Journal of Banking & Finance (2013); Edirsinghe,
Naik, and Uppal, Optimal Replication of Options with Transaction
Costs and Trading Restrictions, Journal of Financial and
Quantitative Analysis (1993); Froot, Scharfstein, and Stein, Herd on
the Street: Informational Inefficiencies in a Market with Short Term
Speculation, (Working Paper 1990); Kumar and Seppi, Futures
Manipulation with ``Cash Settlement'', Journal of Finance (1992);
Kyle and Viswanathan, How to Define Illegal Price Manipulation,
American Economic Review (2008); Kyle and Wang, Speculation Duopoly
with Agreement to Disagree: Can Overconfidence Survive the Market
Test?, Journal of Finance (1997); Lee, Cheng and Koh, An Analysis of
Extreme Price Shocks and Illiquidity Among Systematic Trend
Followers (working paper 2010); Leitner, Inducing Agents to Report
Hidden Trades: A Theory of an Intermediary, Review of Finance
(2012); Liu, Financial-Demand Based Commodity Pricing: A Theoretical
Model for Financialization of Commodities (working paper 2011);
Lombardi and van Robays, Do Financial Investors Destabilize the Oil
Price? (working paper, European Central Bank, 2011); Morris,
Speculative Investor Behavior and Learning, Quarterly Journal of
Economics (1996); Parsons, Black Gold & Fool's Gold: Speculation in
the Oil Futures Market, Economia (2009); Pierru and Babusiaux,
Speculation without Oil Stockpiling as a Signature: A Dynamic
Perspective (working paper 2010); Pirrong, Manipulation of the
Commodity Futures Market Delivery Process, Journal of Business
(1993); Pirrong, The Self-Regulation of Commodity Exchanges: The
Case of Market Manipulation, Journal of Law and Economics (1995);
Pliska and Shalen, The Effects of Regulation on Trading Activity and
Return Volatility in Futures Markets, Journal of Futures Markets
(2006); Routledge, Seppi, and Spatt, Equilibrium Forward Curves for
Commodities, Journal of Finance (2000); Schulmeister, Technical
Trading and Commodity Price Fluctuations (working paper 2012);
Schulmeister, Torero, and von Braun, Trading Practices and Price
Dynamics in Commodity Markets (working paper 2009); Shleifer and
Vishney, The Limits of Arbitrage, Journal of Finance (1997); Sockin
and Xiong, Feedback Effects of Commodity Futures Prices (working
paper 2012); Vansteenkiste, What is Driving Oil Price Futures?
Fundamentals Versus Speculation (working paper, European Central
Bank, 2011); Westerhoff, Speculative Markets and the Effectiveness
of Price Limits, Journal of Economic Dynamics and Control (2003).
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[[Page 96726]]
Some studies perform little or no empirical analysis and instead
present a general theoretical model that may bear, directly or
indirectly, on the effect of excessive speculation in the commodities
markets. Because these papers do not include empirical analysis, they
contain many untested assumptions and conclusory statements, limiting
their usefulness to the Commission.
Surveys of Economic Literature and Opinion Pieces \249\
---------------------------------------------------------------------------
\249\ Studies that are survey or opinion pieces include:
Anderson, Outlaw, and Bryant, The Effects of Ethanol on Texas Food
and Feed, Agricultural and Food Policy Center Research Report
(2008); Baffes, The Long-term Implications of the 2007-2008
Commodity-Price Boom, Development in Practice (2011); Basu and
Gavin, What Explains the Growth in Commodity Derivatives? (working
paper 2011); Berg, The Rise of Commodity Speculation: from
Villainous to Venerable, (2011); Bessenbinder, Lilan, and Mahadeva,
The Role of Speculation in Oil Markets: What Have We Learned So Far?
(working paper 2012); Cagan, Financial Futures Markets: Is More
Regulation Needed?, Journal of Futures Markets (1981); Chincarini,
The Amaranth Debacle: Failure of Risk Measures or Failure of Risk
Management (working paper 2007); Chincarini, Natural Gas Futures and
Spread Position Risk: Lessons from the Collapse of Amaranth Advisors
L.L.C., Journal of Applied Finance (2008); CME Group, Inc.,
Excessive Speculation and Position Limits in Energy Derivatives
Markets (working paper); Cooper, Excessive Speculation and Oil Price
Shock Recessions: A Case of Wall Street ``D[eacute]j[agrave] vu All
Over Again,'' Consumer Federation of America (2011); Dahl, Future
Markets: The Interaction of Economic Analyses and Regulation:
Discussion, American Journal of Agricultural Economics (1980); De
Schutter, Food Commodities Speculation and Food Price Crises, United
Nations Special Report on the Right to Food (2010); Easterbrook,
Monopoly, Manipulation, and the Regulation of Futures Markets,
Journal of Business (1986); Eckaus, The Oil Price Really is a
Speculative Bubble (working paper 2008); Ellis, Michaely, and
O'Hara, The Making of a Dealer Market: From Entry to Equilibrium in
the Trading of Nasdaq Stocks, Journal of Finance (2002); European
Commission, Review of the Markets in Financial Instruments Directive
(working paper 2010); European Commission, Tackling the Challenges
in Commodity Markets, Communication from the European Commission to
the European Parliament (2011); Frenk and Turbeville, Commodity
Index Traders and the Boom/Bust Cycle in Commodities Prices, Better
Markets Copyright (2011); Goldman Sachs, Global Energy Weekly March
2011 (2011); Government Accountability Office, Issues Involving the
Use of the Futures Markets to Invest in Commodity Indexes, (Report
2009); Greenberger, The Relationship of Unregulated Excessive
Speculation to Oil Market Price Volatility (working paper 2010);
Harris, Circuit Breaker and Program Trading Limits: What Have We
Learned, Brooking Institutions Press (1997); Henn, CL-WEED-59628;
Her Majesty's Treasury, Global Commodities: A Long Term Vision for
Stable, Secure, and Sustainable Global Markets, (2008); House of
Commons Select Committee on Science & Technology of the United
Kingdom, Strategically Important Metals, (2011); Hunt, Thought for
the Day: Unreported Copper Stocks, Simon Hunt Strategic Services
(2011); Inamura Kimata, and Takeshi, Recent Surge in Global
commodity Prices--Impact of Financialization of Commodities and
Globally Accommodative Monetary Conditions, Bank of Japan Review
March 2011; International Monetary Fund, Is Inflation Back?
Commodity Prices and Inflation, Chapter 3 of IMF's World Economic
Outlook ``Financial Stress, Downturns, and Recoveries'' (2008);
Irwin and Sanders, Index Funds, Financialization, and Commodity
Futures Markets, Applied Economic Perspective and Policy (2010);
Jack, Populists vs Theorists: Futures Markets and the Volatility of
Prices, Exploration in Economic History (2006); Jickling and Austin,
Hedge Fund Speculation and Oil Prices (working paper 2011); Kemp,
Crisis Remarks the Commodity Business, Reuters Columnist (2008);
Khan, The 2008 Oil Price ``Bubble (working paper 2009); Koski and
Pontiff, How Are Derivatives Used? Evidence from the Mutual Fund
Industry, Journal of Finance (1996); Lagi, Bar-Yam, and Bertrand,
The Food Crisis: A Quantitative Model Of Food Prices Including
Speculators and Ethanol Conversion (working paper 2012); Lagi, Bar-
Yam, and Bertrand, The Food Crisis: A Quantitative Model Of Food
Prices Including Speculators and Ethanol Conversion (working paper
2011); Lines, Speculation in Food Commodity Markets, World
Development Movement (2010); Luciani, From Price Taker to Price
Maker? Saudi Arabia and the World Oil Market (working paper 2009);
Masters and White, The Accidental Hunt Brother: How Institutional
Investors are Driving UP Food and Energy Prices (working paper
2008); Medlock and Myers, Who is in the Oil Futures Market and How
Has It Changed?, (working paper 2009); Newman, Financialiation and
Changes in the Social Relations along commodity Chains: The Case of
Coffee, Review of Radical Political Economics (2009); Nissanke,
Commodity Markets and Excess Volatility: An Evolution of Price
Dynamics Under Financialization (working paper 2011); Nissanke,
Commodity Market Linkage in the Global Financial Crisis: Excess
Volatility and Development Impact, Journal of Development Studies
(2012); Parsons, Black Gold & Fool's Gold: Speculation in the Oil
Futures Market, (Economia 2009); Jones, Price Limits: A Return to
Patience and Rationality in U.S. Markets, Speech to the CME Global
Financial Leadership (2010); Petzel, Testimony before the CFTC,
(July 28, 2009); Pfuderer and Gilbert, Index Funds Do Impact
Agricultural Prices? (working paper 2012); Pirrong, Squeezes,
Corners, and the Anti-Manipulation Provisions of the Commodity
Exchange Act, Regulation (1994); Pirrong, Annex B to CL-ISDA/SIFMA-
59611; Plante and Yucel, Did Speculation Drive Oil Prices? Market
Fundamentals Suggest Otherwise, Federal Reserve Bank of Dallas
(2011); Plante and Yucel, Did Speculation Drive Oil Prices? Futures
Market Points to Fundamentals, Federal Reserve Bank of Dallas
(2011); Ray and Schaffer, Index Funds and the 2006-2008 Run-up in
Agricultural Commodity Prices (working paper 2010); Rossi, Analysis
of CFTC Proposed Position Limits on Commodity Index Fund Trading
(working paper 2011); Smith, World Oil: Market or Mayhem?, Journal
of Economic Perspectives (2009); Technical Committee of the
International Organization of Securities Commissions, Task Force on
Commodity Futures Market Final Report, (2009); Tokic, Rational
Destabilizing Speculation, Positive Feedback Trading, and the Oil
Bubble of 2008, Energy Economics (2011); U.S. Commodity Futures
Trading Commission, Part Two, A Study of the Silver Market, May 29,
1981, Report to the Congress in Response to Section 21 Of The
Commodity Exchange Act., (1981); U.S. Commodity Futures Trading
Commission, Staff Report on Commodity Swap Dealers and Index Traders
with Commission Recommendations, (2008); U.S. Senate Permanent
Subcommittee, Excessive Speculation in the Natural Gas Market,
(2007); U.S. Senate Permanent Subcommittee, Excessive Speculation in
the Wheat Market, (2009); U.S. Senate Permanent Subcommittee, The
Role of Market Speculation in Rising Oil and Gas Prices: A Need to
Put the cop Back on the Beat, (2006); United Nations Commission of
Experts on Reforms of the International and Monetary System, Report
of the Commission of Experts, (2009); United Nations Conference on
Trade and Development, The Global Economic Crisis: Systemic Failures
and Multilateral Remedies, (2009); United Nations Conference on
Trade and Development, The Financialization of Commodity Markets,
(2009); United Nations Conference on Trade and Development, Trade
and Development Report: Price Formation in Financialized Commodity
Markets: The Role of Information, (2011); United Nations Food and
Agricultural Organization, Final Report of the Committee on
Commodity Problems: Extraordinary Joint Intersessional Meeting of
the Intergovernmental Group (IGG), (2010); United Nations Food and
Agricultural Organization, Price Volatility in Agricultural Markets,
Economic and Social Perspectives Policy Brief (2010); United Nations
Food and Agricultural Organization, Price Volatility in Food and
Agricultural Markets: Policy Response, (2011); Urbanchuk,
Speculation and the Commodity Markets (2011); Verleger, Annex A to
CL-ISDA/SIFMA-59611; Woolley, Why are Financial Markets so
Inefficient and Exploitative--and a Suggested Remedy, (2010); Wray,
The Commodities Market Bubble: Money Manager Capitalism and the
Financialization of Commodities (working paper 2008).
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The Commission considered more than seventy studies that are survey
or opinion pieces. Some of these studies provide useful background
material but, on the whole, they offer mere opinion unsupported by
rigorous empirical analysis. While they may be useful for developing
hypotheses or informing policymakers, these secondary sources often
exhibit policy bias and are not neutral, reliable bases for scientific
inquiry the way that primary economic studies are.\250\
---------------------------------------------------------------------------
\250\ For example, these surveys may posit ``facts'' that are
unsupported by testing, may not test their hypotheses, or may claim
results that are subject to multiple interpretations.
---------------------------------------------------------------------------
More Persuasive Academic Studies
While the economic literature is inconclusive, the Commission can
[[Page 96727]]
identify a few of the well-executed studies that do not militate
against and, to some degree, support the Commission's reproposal to
follow, out of due caution, a prophylactic approach.\251\ Hamilton and
Wu, in Risk Premia in Crude Oil Futures Prices, Journal of
International Money and Finance (2013), using models of fundamental
supply and demand, find evidence that changes in non-commercial
positions can affect the risk premium in crude oil futures prices; that
is, Hamilton and Wu found that, for a limited period around the time of
the 2008 financial crisis that gave rise to the Dodd-Frank Act,
increases in speculative positions reduced the risk premiums \252\ in
crude oil futures prices.\253\ This is important because, all else
being equal, one would expect the risk premium to be the component of
price that would be affected by traders accumulating large
positions.\254\ Hamilton, in Causes of the Oil Shock of 2007-2008,
Brookings Paper on Economic Activity (2009), also concludes that the
oil price run-up was caused by strong demand confronting stagnating
world production, but that something other than fundamental factors of
supply and demand (as modeled) may have aggravated the speed and
magnitude of the ensuing oil price collapse. Singleton, in Investor
Flows and the 2008 Boom/Bust in Oil Prices (working paper 2011),
employs a technique that is similar to Granger causality and finds a
negative correlation between speculative positions and risk
premiums.\255\ Chevallier, in Price Relationships in Crude Oil Futures:
New Evidence from CFTC Disaggregated Data, Environmental Economics and
Policy Studies (2012), applies switching regression analysis to
position data and concludes that one cannot eliminate the possibility
of speculation as one of the main factors contributing to oil price
volatility in 2008. This study also suggests that when supply and
demand are highly inelastic, i.e., relatively unresponsive to price
changes, financial investors may have contributed to oil price
volatility by taking large positions in energy sector commodity index
funds.\256\ As one may infer from this small sample, some of the more
compelling studies that support the proposition that large positions
may move prices involve empirical studies of the oil market. The
Commission acknowledges that not all commodity markets exhibit the same
price behavior at the same times. Even so, that the findings of a
particular study of the market experience of a particular commodity
over a particular time period may not be extensible to other commodity
markets or over other time periods does not mean that the Commission
should disregard that study. This is because, as explained elsewhere,
these markets are over time all susceptible to similar risks from
excessive speculation. Again, this supports a prophylactic approach to
limits and a determination that limits are necessary to effectuate
their statutory purposes.
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\251\ Generally, studies that the Commission considers to be
well-executed, for example, employ well-accepted, defensible,
scientific methodology, document and present facts and results that
can be replicated, are on point regarding issues relevant to
position limits, and may eventually appear in respected, peer-
reviewed academic journals.
\252\ A risk premium is the amount of return on a particular
asset or investment that is in excess of the expected rate of return
on a theoretically risk free asset or investment, i.e., one with a
virtually certain or guaranteed return.
\253\ The economic rationale behind this is that speculative
traders would be taking long positions to earn the risk premium,
among other things. If more speculative traders are going long,
i.e., bidding to earn the risk premium, the risk premium would be
reduced. In this way, speculators make it cheaper for short hedgers
to lock in their price risk. Contra Harris and
B[uuml]y[uuml]k[scedil]ahin, The Role of Speculators in the Crude
Oil Futures Market (working paper 2009) (concluding that price
changes precede the position change). In this way, speculators make
it cheaper for short hedgers to lock in their price risk.
\254\ Long speculators would tend to be compensated for assuming
the price risk that is inherent with going long in the crude oil
futures contract. If more speculators are bidding to earn the risk
premium by taking long position in crude oil futures contracts, it
should lower the risk premium, all else being equal.
\255\ That is, when long speculative positions are larger, the
risk premiums are smaller.
\256\ See also Hamilton and Wu, Risk Premia in Crude Oil Futures
Prices, Journal of International Money and Finance (2013); Hamilton,
Causes of the Oil Shock of 2007-2008, Brookings Paper on Economic
Activity (2009).
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The Commission in the December 2013 Position Limits Proposal
identified two studies of actual market events to be helpful and
persuasive in making its alternative necessity finding: \257\ The
inter-agency report on the silver crisis \258\ and the PSI Report on
Excessive Speculation in the Natural Gas Market.\259\ These two studies
and some of the other reports included in the survey category \260\ do
not use statistical or theoretical models to reach economically
rigorous conclusions. Some of the evidence cited in these studies is
anecdotal. Still, these two studies are in-depth examinations of actual
market events and the Commission continues to find them to be helpful
and persuasive in making its preliminary alternative necessity finding.
The Commission reiterates that the PSI Report (because it closely
preceded Congress' amendments to CEA section 4a(a) in the Dodd-Frank
Act) indicates how Congress views limits as necessary as a prophylactic
measure to prevent the adverse effects of excessively large speculative
positions. The studies, individually or taken as a whole, do not
dissuade the Commission from its consistent view that large speculative
positions and outsized market power pose risks to well-functioning
commodities markets, nor from its preliminary finding that speculative
position limits are necessary to achieve their statutory purposes.
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\257\ December 2013 Position Limits Proposal, 78 FR at 75695-6.
\258\ U.S. Commodity Futures Trading Commission, ``Part Two, A
Study of the Silver Market,'' May 29, 1981, Report to Congress in
Response to Section 21 of The Commodity Exchange Act.
\259\ U.S. Senate Permanent Subcommittee on Investigations,
``Excessive Speculation in the Natural Gas Market,'' June 25, 2007.
\260\ E.g., U.S. Commodity Futures Trading Commission, Staff
Report on Commodity Swap Dealers and Index Traders with Commission
Recommendations (2008); U.S. Senate Permanent Subcommittee,
Excessive Speculation in the Wheat Market (2009); U.S. Senate
Permanent Subcommittee, The Role of Market Speculation in Rising Oil
and Gas Prices: A Need to Put the Cop Back on the Beat (2006).
---------------------------------------------------------------------------
The Commission requests comment on its discussion of studies and
reports. It also invites commenters to advise the Commission of any
additional studies that the Commission should consider, and why.
II. Compliance Date for the Reproposed Rules
Commenters requested that the Commission delay the compliance date,
generally for at least nine months, to provide adequate time for market
participants to come into compliance with a final rule.\261\ In
addition, a commenter requested the Commission delay the compliance
date until no earlier than January 3, 2018, to coordinate with the
expected implementation date for position limits in Europe.\262\
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\261\ See, e.g., CL-FIA-60937 at 5.
\262\ CL-FIA-61036 at 2.
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In response to commenters, in this reproposal, the Commission
proposes to delay the compliance date of any final rule until, at
earliest, January 3, 2018, as provided under reproposed Sec. 150.2(e).
The Commission is of the opinion that a delay would provide market
participants with sufficient time to come into compliance with a final
rule, particularly in light of grandfathering provisions, discussed
below.
The Commission believes that a delay until January 3, 2018, would
provide time for market participants to gain
[[Page 96728]]
access to adequate systems to compute futures-equivalent positions. The
Commission bases this opinion on its experience, including with swap
dealers and clearing members of derivative clearing organizations, who,
as reporting entities under part 20 (swaps large trader reporting),
have been required to prepare reports of swaps on a futures-equivalent
basis for years. As discussed above, futures-equivalent reporting of
swaps under part 20 generally has improved. This means many reporting
entities already have implemented acceptable systems to compute
futures-equivalent positions. The systems developed for that purpose
also should be acceptable for monitoring compliance with position
limits. The Commission believes it is reasonable to expect some
reporting entities to offer futures-equivalent computation services to
market participants. In this regard, such reporting entities already
compute and report, under part 20, futures-equivalent positions for
swap counterparties with reportable positions, including spot-month
positions and non-spot-month positions.
The Commission notes that market participants who expect to be over
the limits would need to assess whether exemptions are available
(including requesting non-enumerated bona fide hedging positon
exemptions or spread exemptions from exchanges, as discussed below
under reproposed Sec. Sec. 150.9 and 150.10). In the absence of
exemptions, such market participants would need to develop plans for
coming into compliance.
The Commission notes the request for a further delay in a
compliance date may be mitigated by the grandfathering provisions in
the Reproposal. First, the reproposed rules would exclude from position
limits ``pre-enactment swaps'' and ``transition period swaps,'' as
discussed below. Second, the rules would exempt certain pre-existing
positions from position limits under reproposed Sec. 150.2(f).
Essentially, this means only futures contracts initially would be
subject to non-spot-month position limits, as well as swaps entered
after the compliance date. The Commission notes that a pre-existing
position in a futures contract also would not be a violation of a non-
spot-month limit, but, rather, would be grandfathered, as discussed
under reproposed Sec. 150.2(f)(2), below. Nevertheless, the Commission
intends to provide a substantial implementation period to ease the
compliance burden.
The Commission requests comment on its discussion of the proposed
compliance date.
III. Reproposed Rules
The Commission is not addressing comments that are beyond the scope
of this reproposed rulemaking.
A. Sec. 150.1--Definitions
1. Various Definitions Found in Sec. 150.1
Among other elements, the December 2013 Position Limits Proposal
included amendments to the definitions of ``futures-equivalent,''
``long position,'' ``short position,'' and ``spot-month'' found in
Sec. 150.1 of the Commission's regulations, to conform them to the
concepts and terminology of the CEA, as amended by the Dodd-Frank Act.
The Commission also proposed to add to Sec. 150.1, definitions for
``basis contract,'' ``calendar spread contract,'' ``commodity
derivative contract,'' ``commodity index contract,'' ``core referenced
futures contract,'' ``eligible affiliate,'' ``entity,'' ``excluded
commodity,'' ``intercommodity spread contract,'' ``intermarket spread
positions,'' ``intramarket spread positions,'' ``physical commodity,''
``pre-enactment swap,'' ``pre-existing position,'' ``referenced
contract,'' ``spread contract,'' ``speculative position limit,''
``swap,'' ``swap dealer'' and ``transition period swap.'' In addition,
the Commission proposed to move the definition of bona fide hedging
from Sec. 1.3(z) into part 150, and to amend and update it. Moreover,
the Commission proposed to delete the definition for ``the first
delivery month of the `crop year.' '' \263\ Separately, the Commission
proposed making a non-substantive change to list the definitions in
alphabetical order rather than by use of assigned letters.\264\
According to the December 2013 Position Limits Proposal, this last
change would be helpful when looking for a particular definition, both
in the near future, in light of the additional definitions proposed to
be adopted, and in the expectation that future rulemakings may adopt
additional definitions.
---------------------------------------------------------------------------
\263\ At that time, the Commission noted that several terms that
are not currently in part 150 were not included in the December 2013
Position Limits Proposal even though definitions for those terms
were adopted in vacated part 151. The Commission stated its view
that the definition of those terms was not necessary for clarity in
light of other revisions proposed in that rulemaking. The terms not
proposed at that time include ``swaption'' and ``trader.''
\264\ The December 2013 Position Limits Proposal also made
several non-substantive edits to the definitions to make them easier
to read.
---------------------------------------------------------------------------
Finally, in connection with the 2016 Supplemental Position Limits
Proposal, which provided 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, and to exempt from federal position limits certain spread
positions, the Commission proposed to further amend certain relevant
definitions, including changes to the definitions of ``futures-
equivalent,'' ``intermarket spread position,'' and ``intramarket spread
position.''
Separately, as noted in the December 2013 Position Limits Proposal,
amendments to two definitions were proposed in the November 2013
Aggregation Proposal,\265\ which was approved by the Commission on the
same date as the December 2013 Position Limits Proposal. The November
2013 Aggregation Proposal, a companion to the December 2013 Position
Limits Proposal, included amendments to the definitions of ``eligible
entity'' and ``independent account controller.'' \266\ The Commission
notes that since the amendments were part of the separate Aggregation
proposal, the proposed amendments to those definitions, and comments
thereon, are addressed in the final Aggregation rulemaking (the ``2016
Final Aggregation Rule''); \267\ therefore, the Commission is not
addressing the definitions of ``eligible entity'' and ``independent
account controller'' herein.
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\265\ See Aggregation of Positions, 78 FR 68946 (Nov. 15, 2013)
at 68965, 68974 (proposing changes to the definitions of ``eligible
entity'' and ``independent account controller'') (``November 2013
Aggregation Proposal''). The Commission issued a supplement to this
proposal in September 2015, but the supplement did not propose any
changes to the definitions. See 80 FR 58365 (Sept. 29, 2015).
\266\ The December 2013 Position Limits Proposal mirrored the
amendments to the definitions of ``eligible entity'' and
``independent account controller,'' proposed in the November 2013
Aggregation Proposal, and also included some non-substantive change
to the definition of ``independent account controller.''
\267\ See 2016 Final Aggregation Rule, adopted by the Commission
separately from this Reproposal.
---------------------------------------------------------------------------
The Commission is reproposing the amendments to the definitions in
Sec. 150.1, as set forth in the December 2013 Position Limits Proposal
and as amended in the 2016 Supplemental Position Limits Proposal, with
modifications made in response to public comments. The Reproposal also
includes non-substantive changes to certain definitions to enhance
readability and clarity for market participants and the public,
including the extraction of definitions that were contained in the
definition of ``referenced contract'' to stand on their own. The
amendments and the public
[[Page 96729]]
comments relevant to each amendment are discussed below.
a. Basis Contract
Proposed Rule: In the December 2013 Position Limits Proposal, the
Commission proposed to exclude ``basis contracts'' from the definition
of ``referenced contracts.'' \268\ While the term ``basis contract'' is
not defined in current Sec. 150.1, the Commission proposed a
definition for basis contract in the December 2013 Position Limits
Proposal. Proposed Sec. 150.1 defined basis contract to mean ``a
commodity derivative contract that is cash-settled based on the
difference in: (1) The price, directly or indirectly, of: (a) A
particular core referenced futures contract; or (b) a commodity
deliverable on a particular core referenced futures contract, whether
at par, a fixed discount to par, or a premium to par; and (2) the
price, at a different delivery location or pricing point than that of
the same particular core referenced futures contract, directly or
indirectly, of: (a) A commodity deliverable on the same particular core
referenced futures contract, whether at par, a fixed discount to par,
or a premium to par; or (b) a commodity that is listed in appendix B to
this part as substantially the same as a commodity underlying the same
core referenced futures contract.''
---------------------------------------------------------------------------
\268\ The Commission also notes that the proposed definition of
``commodity index contract'' excluded intercommodity spread
contracts, calendar spread contracts, and basis contracts.
---------------------------------------------------------------------------
The Commission also proposed Appendix B to part 150, Commodities
Listed as Substantially the Same for Purposes of the Definition of
Basis Contract. As proposed, the definition of basis contract would
include contracts cash-settled on the difference in prices of two
different, but economically closely related commodities, for example,
certain quality differentials (e.g., RBOB gasoline vs. 87
unleaded).\269\ As explained when it was proposed, the intent of the
proposed definition was to reduce the potential for excessive
speculation in referenced contracts where, for example, a speculator
establishes a large outright directional position in referenced
contracts and nets down that directional position with a contract based
on the difference in price of the commodity underlying the referenced
contracts and a close economic substitute that was not deliverable on
the core referenced futures contract.\270\ In the absence of this
provision, the speculator could then increase further the large
position in the referenced contracts. By way of comparison, the
Commission noted in the December 2013 Position Limits Proposal that
there is greater concern (i) that someone may manipulate the markets by
disguise of a directional exposure through netting down the directional
exposure using one of the legs of a quality differential (if that
quality differential contract were not exempted), than (ii) that
someone may use certain quality differential contracts that were
exempted from position limits to manipulate the outright price of a
referenced contract.\271\
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\269\ The proposed basis contract definition was not intended to
include significant time differentials in prices of the two
commodities (e.g., the proposed basis contract definition did not
include calendar spreads for nearby vs. deferred contracts).
\270\ December 2013 Position Limits Proposal at 75696.
\271\ Id.
---------------------------------------------------------------------------
Comments Received: The Commission received a number of comment
letters regarding the proposed definition of basis contract. One
commenter supported the proposed definition of basis contract and
stated that it appreciates the Commission's inclusion of Appendix B
listing the commodities it believes are substantially the same as a
core referenced futures contract for purposes of identifying contracts
that meet the basis contract definition.\272\ Other comment letters
requested that the Commission broaden the definition to include
contracts that settle to other types of differentials, such as
processing differentials (e.g., crack or crush spreads) or quality
differentials (e.g., sweet vs. sour crude oil). One commenter
recommended a definition of basis contract that includes crack spreads,
by-products priced at a differential to other by-products (e.g., jet
fuel vs. heating oil, both of which are crude oil by-products), and a
commodity that includes similar commodities such as a contract based on
the difference in prices between light sweet crude and a sour crude
that is not deliverable against the NYMEX Light Sweet Crude Oil core
referenced futures contract. This commenter suggested that if these
types of contracts are included as basis contracts, market participants
should be able to net certain contracts where a commodity is priced at
a differential to a product or by-product, subject to prior approval
according to a process created by the Commission.\273\
---------------------------------------------------------------------------
\272\ CL-Working Group-59693 at 68.
\273\ CLWorking Group-59959 at 16.
---------------------------------------------------------------------------
Two commenters specifically requested that the list in Appendix B
include Jet fuel (54 grade) as substantially the same as heating oil
(67 grade). They also requested that WTI Midland (Argus) vs. WTI
Financial Futures should be listed as basis contracts for Light
Louisiana Sweet (LLS) Crude Oil.\274\
---------------------------------------------------------------------------
\274\ CL-FIA-59595 at 19; CL-ISDA/SIFMA-59611 at 35.
---------------------------------------------------------------------------
Noting that basis contracts are excluded from the definition of
referenced contract and thus not subject to speculative position
limits, two commenters requested CFTC expand the list in Appendix B to
part 150 of commodities considered substantially the same as a core
referenced futures contract, and the corresponding list of basis
contracts, to reflect the commercial practices of market
participants.\275\ One of these commenters recommended that the
Commission adopt a flexible process for identifying any additional
commodities that are substantially the same as a commodity underlying a
core referenced futures contract for inclusion in Appendix B, and allow
market participants to request a timely interpretation regarding
whether a particular commodity is substantially the same as a core
referenced futures contract or that a particular contract qualifies as
a basis contract.\276\
---------------------------------------------------------------------------
\275\ CL-FIA-59595 at 4 and 18-19; CL-ISDA/SIFMA-59611 at 34-35.
\276\ CL-FIA-59595 at 19.
---------------------------------------------------------------------------
Commission Reproposal: The Commission has determined to repropose
the definition of basis contract as originally proposed, but to change
the defined term from ``basis contract'' to ``location basis
contract.'' The Commission intended the ``basis contract'' definition
to encompass contracts that settle to the difference between prices in
separate delivery locations of the same (or substantially the same)
commodity, while the industry seems to use the term ``basis'' more
broadly to include other price differentials, including, among other
things, processing differentials and quality differentials. Thus, under
the Reproposal, the term is changing from ``basis contract'' to
``location basis contract'' in order to reduce any confusion stemming
from the more encompassing use of the word ``basis'' in industry
parlance.\277\
---------------------------------------------------------------------------
\277\ Consequently, the Commission realizes that its
determination to retain its traditional definition while clarifying
its meaning by adopting the amended term of ``locational basis
contract'' does not provide for the expanded definition of basis
contract requested by some of the commenters. A broader definition
of basis contract would result in the exclusion of more derivative
contracts from the definition of referenced contract than previously
proposed. A contract excluded from the definition of referenced
contract is not subject to position limit under this Reproposal. The
Commission declines to exclude more than the locational basis
contracts that it previously proposed from the definition of
referenced contract.
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[[Page 96730]]
The Commission is reproposing Appendix B as originally proposed.
The Commission is not persuaded by commenters' suggestions for
expanding the current list of commodities considered ``substantially
the same'' in Appendix B. While a commenter requested the Commission
expand the list to address all ``commercial practices'' used by market
participants, the Commission believes this request is too vague and too
broad to be workable. In addition, although a commenter recommended
that the Commission adopt a flexible process for identifying any
additional commodities that are substantially the same as a commodity
underlying a core referenced futures contract for inclusion in Appendix
B,\278\ the Commission observes that market participants are already
provided the flexibility of two processes: (i) To request an exemptive,
no-action or interpretative letter under Sec. 140.99; and/or (ii) to
petition for changes to Appendix B under Sec. 13.2. Under either
process, the Commission would need to carefully consider whether it
would be beneficial and consistent with the policies underlying CEA
section 4a to list additional commodities as substantially the same as
a commodity underlying a core referenced futures contract, especially
since various market participants might have conflicting views on such
a determination in certain cases.
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\278\ As noted above, according to the commenter, a flexible
process would allow market participants to request a timely
interpretation regarding whether a particular commodity is
substantially the same as a core referenced futures contract or that
a particular contract qualifies as a ``basis contract. See CL-FIA-
59595 at 19
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Finally, the Commission notes that comments regarding other types
of differentials were addressed in the Commission's 2016 Supplemental
Position Limits Proposal, which would allow exchanges to grant spread
exemptions, including calendar spreads, quality differential spreads,
processing spreads, and product or by-product differential
spreads.\279\ Comments responding to that 2016 Supplemental Position
Limits Proposal and the Commission's Reproposal are discussed below.
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\279\ See 2016 Supplemental Position Limits Proposal, 81 FR at
38476-80.
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b. Commodity Derivative Contract
Proposed Rule: The December 2013 Position Limits Proposal would
define in Sec. 150.1 the term ``commodity derivative contract'' for
position limits purposes as shorthand for any futures, option, or swap
contract in a commodity (other than a security futures product as
defined in CEA section 1a(45)). The proposed use of such a generic term
would be a convenient way to streamline and simplify references in part
150 to the various kinds of contracts to which the position limits
regime applies. As such, this new definition can be found frequently
throughout the Commission's proposed amendments to part 150.\280\
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\280\ See, e.g., amendments to Sec. 150.1 (the definitions of:
``location basis contract,'' the definition of ``bona fide hedging
position,'' ``inter-market spread position,'' ``intra-market spread
position,'' ``pre-existing position,'' ``speculative position
limits,'' and ``spot month''), Sec. Sec. 150.2(f)(2), 150.3(d),
150.3(h), 150.5(a), 150.5(b), 150.5(e), 150.7(d), 150.7(f), Appendix
A to part 150, and Appendix C to part 150.
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Comments Received: The Commission received no comments on the
proposed definition.
Commission Reproposal: The Commission has determined to repropose
the definition as proposed for the reasons given above.
c. Commodity Index Contract, Spread Contract, Calendar Spread Contract,
and Intercommodity Spread Contract
Proposed Rule: The December 2013 Position Limits Proposal excluded
commodity index contracts from the definition of referenced contracts;
thus, commodity index contracts would not be subject to position
limits. The Commission also proposed to define the term commodity index
contract, which is not in current Sec. 150.1, to mean ``an agreement,
contract, or transaction that is not a basis contract or any type of
spread contract, based on an index comprised of prices of commodities
that are not the same or substantially the same.''
Further, the Commission proposed to add a definition of basis
contract, as discussed above, and spread contract to clarify which
types of contracts would not be considered a commodity index contract
and thus would be subject to position limits. Under the proposal, a
spread contract was defined as ``a calendar spread contract or an
intercommodity spread contract.'' \281\ Finally, the Commission
proposed the addition of definitions for a calendar spread contract,
and an intercommodity spread contract to clarify the meanings of those
terms. In particular, under the proposal, a calendar spread contract
would mean ``a cash-settled agreement, contract, or transaction that
represents the difference between the settlement price in one or a
series of contract months of an agreement, contract or transaction and
the settlement price of another contract month or another series of
contract months' settlement prices for the same agreement, contract or
transaction.'' An intercommodity spread contract would mean ``a cash-
settled agreement, contract or transaction that represents the
difference between the settlement price of a referenced contract and
the settlement price of another contract, agreement, or transaction
that is based on a different commodity.'' \282\
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\281\ In the December 2013 Position Limits Proposal, the
Commission noted that while the proposed definition of ``referenced
contract'' specifically excluded guarantees of a swap, basis
contracts and commodity index contracts, spread contracts were not
excluded from the proposed definition of ``referenced contract.''
The December 2013 Position Limits Proposal at 75702.
\282\ In the December 2013 Position Limits Proposal, the
Commission also clarified that if a swap was based on the difference
between two prices of two different commodities, with one linked to
a core referenced futures contract price (and the other either not
linked to the price of a core referenced futures contract or linked
to the price of a different core referenced futures contract), then
the swap was an ``intercommodity spread contract,'' was not a
commodity index contract, and was a referenced contract subject to
the position limits specified in Sec. 150.2. The Commission further
clarified that a contract based on the prices of a referenced
contract and the same or substantially the same commodity (and not
based on the difference between such prices) was not a commodity
index contract and was a referenced contract subject to position
limits specified in Sec. 150.2. See December 2013 Position Limits
Proposal, 78 FR at 75697, n. 163.
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The December 2013 Position Limits Proposal further noted that part
20 of the Commission's regulations requires reporting entities to
report commodity reference price data sufficient to distinguish between
commodity index contract and non-commodity index contract positions in
covered contracts.\283\ Therefore, for commodity index contracts, the
Commission stated its intention to rely on the data elements in Sec.
20.4(b) to distinguish data records subject to Sec. 150.2 position
limits from those contracts that are excluded from Sec. 150.2. The
Commission explained that this would enable the Commission to set
position limits using the narrower data set (i.e., referenced contracts
subject to Sec. 150.2 position limits) as well as conduct surveillance
using the broader data set.\284\
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\283\ Id. at 75697, n. 163.
\284\ Id. at 75697.
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Comments Received: The Commission received no comments on the
proposed definitions for commodity index contract, spread contract,
calendar spread contract, and intercommodity spread contract.\285\
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\285\ The Commission notes that although it did not receive
comments on the proposed definitions for commodity index contract,
spread contract, calendar spread contract, and intercommodity spread
contract, it did receive a number of comments regarding the
interplay of those defined terms and the definition of ``referenced
contract.'' Discussion of those comments are included in the
discussion of the proposed definition of ``referenced contract''
below.
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[[Page 96731]]
Commission Reproposal: The Commission has determined to repropose
the definitions as originally proposed for the reasons provided above,
with the exception that, under the Reproposal, the term ``basis
contract'' will be replaced with the term ``location basis contract,''
in the reproposed definition of commodity index contract, to conform to
the name change discussed above. In addition, the Commission notes that
while it had proposed to subsume the definitions of commodity index
contract, spread contract, calendar spread contract, and intercommodity
spread contract under the definition of referenced contract, in the
Reproposal it is enumerating each as a separate definition for ease of
reference.
d. Core referenced Futures Contract
Proposed Rule: The December 2013 Position Limits Proposal provided
a list of futures contracts in Sec. 150.2(d) to which proposed
position limit rules would apply. The Commission proposed the term
``core referenced futures contract'' as a short-hand phrase to denote
such contracts.\286\ Accordingly, the Commission proposed to include in
Sec. 150.1 a definition of core referenced futures contract to mean
``a futures contract that is listed in Sec. 150.2(d).'' In its
proposal, the Commission also clarified that core referenced futures
contracts include options that expire into outright positions in such
contracts.\287\
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\286\ The selection of the core referenced futures contracts is
explained in the discussion of Sec. 150.2. See discussion below.
\287\ See 78 FR at 75697 n. 166.
---------------------------------------------------------------------------
Comments Received: The Commission received no comments on the
proposed definition.
Commission Reproposal: The Commission has determined to repropose
the definition as originally proposed.
e. Eligible Affiliate
Proposed Rule: The term ``eligible affiliate,'' used in proposed
Sec. 150.2(c)(2), is not defined in current Sec. 150.1. The
Commission proposed to amend Sec. 150.1 to define an ``eligible
affiliate'' as an entity with respect to which another person: (1)
Directly or indirectly holds either: (i) A majority of the equity
securities of such entity, or (ii) the right to receive upon
dissolution of, or the contribution of, a majority of the capital of
such entity; (2) reports its financial statements on a consolidated
basis under Generally Accepted Accounting Principles or International
Financial Reporting Standards, and such consolidated financial
statements include the financial results of such entity; and (3) is
required to aggregate the positions of such entity under Sec. 150.4
and does not claim an exemption from aggregation for such entity.\288\
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\288\ See proposed Sec. 150.1.
---------------------------------------------------------------------------
The definition of ``eligible affiliate'' proposed in the December
2013 Position Limits Proposal qualified persons as eligible affiliates
based on requirements similar to those adopted by the Commission in a
separate rulemaking.\289\ On April 1, 2013, the Commission provided
relief from the mandatory clearing requirement of CEA section
2(h)(1)(A) of the Act for certain affiliated persons if the affiliated
persons (``eligible affiliate counterparties'') meet requirements
contained in Sec. 50.52.\290\ Under both Sec. 50.52 and the
definition proposed in the December 2013 Position Limits Proposal, a
person is an eligible affiliate if another person (e.g. a parent
company), directly or indirectly, holds a majority ownership interest
in such affiliates, reports its financial statements on a consolidated
basis under Generally Accepted Accounting Principles or International
Financial Reporting Standards, and such consolidated financial
statements include the financial results of such affiliates. In
addition, for purposes of the position limits regime, that other person
(e.g., a parent company) must be required to aggregate the positions of
such affiliates under Sec. 150.4 and not claim an exemption from
aggregation for such affiliates.\291\
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\289\ See December 2013 Position Limits Proposal, 78 FR at
75698.
\290\ See Clearing Exemption for Swaps Between Certain
Affiliated Entities, 78 FR 21749, 21783, Apr. 11, 2013. Section
50.52(a) addresses eligible affiliate counterparty status, allowing
a person not to clear a swap subject to the clearing requirement of
section 2(h)(1)(A) of the Act and part 50 if the person meets the
requirements of the conditions contained in paragraphs (a) and (b)
of Sec. 50.52. The conditions in paragraph (a) of Sec. 50.52
specify either one counterparty holds a majority ownership interest
in, and reports its financial statements on a consolidated basis
with, the other counterparty, or both counterparties are majority
owned by a third party who reports its financial statements on a
consolidated basis with the counterparties.
The conditions in paragraph (b) of Sec. 50.52 address factors
such as the decision of the parties not to clear, the associated
documentation, audit, and recordkeeping requirements, the policies
and procedures that must be established, maintained, and followed by
a dealer and major swap participant, and the requirement to have an
appropriate centralized risk management program, rather than the
nature of the affiliation. As such, those conditions are less
pertinent to the definition of eligible affiliate.
\291\ See December 2013 Position Limits Proposal, 78 FR at
75698; see also definition of ``eligible affiliate'' in Sec. 150.1,
as proposed therein.
---------------------------------------------------------------------------
Comments Received: The Commission received few comments on the
proposed definition of ``eligible affiliate.'' Commenters requested
that the Commission harmonize the definition of ``eligible affiliate''
with the definition of ``eligible affiliate counterparty'' under Sec.
50.52 in order to include ``sister affiliates'' within the
definition.\292\
---------------------------------------------------------------------------
\292\ See, e.g., CL-ISDA/SIFMA-59611 at 3 and 33, CL-Working
Group-59693 at 66-7.
---------------------------------------------------------------------------
Commission Reproposal: The Commission notes that under Sec. 150.4,
aggregation is required by a person that holds an ownership or equity
interest of 10 percent or greater in another person, unless an
exemption applies. Under reproposed Sec. 150.2(c)(2), sister
affiliates would not be required to comply separately with position
limits, provided such entities are eligible affiliates.\293\
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\293\ Of course, sister affiliates would be required to
aggregate, as would any other market participants, if they were
trading together pursuant to an express or implied agreement.
---------------------------------------------------------------------------
As such, the Commission does not believe a there is a need to
conform the ``eligible affiliate'' definition in reproposed Sec. 150.1
to the definition of ``eligible affiliate counterparty'' in Sec. 50.52
in order to accommodate sister affiliates. The Commission notes that a
third person that holds an ownership or equity interest in each of the
sister affiliates--e.g., the parent company--would be required to
aggregate positions of such eligible affiliates. Thus, the Commission
is reproposing the definition without changes.
f. Entity
Proposed Rule: The December 2013 Position Limits Proposal defined
``entity'' to mean ``a `person' as defined in section 1a of the Act.''
\294\ The term, not defined in current Sec. 150.1, is used in a number
of contexts, and in various definitions in the proposed amendments to
part 150. Thus, the definition originally proposed would provide a
clear and unambiguous meaning for the term, and prevent confusion.
---------------------------------------------------------------------------
\294\ CEA section 1a(38); 7 U.S.C. 1a(38). See also December
2013 Position Limits Proposal, 78 FR at 75698.
---------------------------------------------------------------------------
Comments Received: The Commission received no comments on the
proposed definition.
Commission Reproposal: The Commission has determined to repropose
the definition as originally proposed, for the reasons provided above.
g. Excluded Commodity
Proposed Rule: The phrase ``excluded commodity'' was added into the
CEA in the CFMA, and is defined in CEA
[[Page 96732]]
section 1a(19), but is not defined or used in current part 150.\295\
CEA section 4a(a)(2)(A), as amended by the Dodd-Frank Act, utilizes the
phrase ``excluded commodity'' when it provides a timeline under which
the Commission is charged with setting limits for futures and option
contracts other than on excluded commodities.\296\
---------------------------------------------------------------------------
\295\ CEA section 1a(19); 7 U.S.C. 1a(19).
\296\ CEA section 4a(2)(A); 7 U.S.C. 6a(2)(A).
---------------------------------------------------------------------------
The December 2013 Position Limits Proposal included in Sec. 150.1,
a definition of excluded commodity that simply incorporates the
statutory meaning, as a useful term for purposes of a number of the
proposed changes to part 150. For example, the phrase was used in the
proposed amendments to Sec. 150.5, in its provision of requirements
and acceptable practices for DCMs and SEFs in their adoption of rules
and procedures for monitoring and enforcing position limits and
accountability provisions; the phrase was also used in the definition
of bona fide hedging position.
Comments Received: The Commission received no comments on the
proposed definition.
Commission Reproposal: The Commission has determined to repropose
the definition as previously proposed, for the reasons provided above.
h. First Delivery Month of the Crop Year
Proposed Rule: The term ``first delivery month of the crop year''
is currently defined in Sec. 150.1(c), with a table of the first
delivery month of the crop year for the commodities for which position
limits are currently provided in Sec. 150.2. The crop year definition
had been pertinent for purposes of the spread exemption to the
individual month limit in current Sec. 150.3(a)(3), which limits
spreads to those between individual months in the same crop year and to
a level no more than that of the all-months limit.\297\ Under the
December 2013 Position Limits Proposal, the definition of ``crop year''
would be deleted from Sec. 150.1. The proposed elimination of the
definition conformed with level of individual month limits set at the
level of the all-months limits, thus negating the purpose of the
existing spread exemption in current Sec. 150.3(a)(3), which the
December 2013 Position Limits Proposal also eliminated.
---------------------------------------------------------------------------
\297\ Prior to the adoption of Part 151, a single-month limit
was set at a level that was lower than the all-months-combined
limit. Operating in conjunction with the lower single-month limit
level, as noted below, Sec. 150.3(a)(3) provides a limited
exemption for calendar spread positions to exceed that single-month
limit, as long as the single month position (including calendar
spread positions) is no greater than the level of the all-months-
combined limit. In part 151, the Commission determined to set the
single-month position limit levels in Sec. 150.2 at the same level
as the all-months-combined limits; in vacating part 151, the court
retained the amendments to Sec. 150.2, leaving the single-month
limit at the same level as those of the all-months-combined limit
levels. The December 2013 Position Limits Proposal retained parity
of the single-month limit and all-months-combined limits levels.
---------------------------------------------------------------------------
The Commission notes that in its 2016 Supplemental Position Limits
Proposal, the Commission proposed to retain a spread exemption in Sec.
150.3 and not, as proposed in the December 2013 Position Limits
Proposal, to eliminate it altogether.\298\
---------------------------------------------------------------------------
\298\ Moreover, the 2016 Supplemental Position Limits Proposal
did not limit the exemption to spread positions held between
individual months of a futures contract in the same crop year, nor
limit the size of an individual month position to the all-months
limit.
---------------------------------------------------------------------------
Comments Received: The Commission received no comments on the
proposed deletion of the crop year definition.
Commission Reproposal: The Commission has determined to repropose
the deletion of the definition of the term ``first delivery month of
the crop year'' as originally proposed. The Commission notes that,
although in its 2016 Supplemental Position Limits Proposal, the
Commission proposed to retain a spread exemption in Sec. 150.3 and, in
fact, provides for the approval by exchanges of exemptions to spread
positions beyond the limited exemption for spread positions in current
Sec. 150.3(a)(3), the crop year definition remains unnecessary since
the level of individual month limits has been set at the level of the
all-months limits.
i. Futures Equivalent
Proposed Rule: 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
regulations,\299\ and to expand upon clarifications included in the
current definition relating to adjustments and computation times.\300\
The Dodd-Frank Act amendments to CEA section 4a,\301\ 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. Under the December
2013 Position Limits Proposal, the definition of ``futures equivalent''
in current Sec. 150.1(f), which is applicable only to an option
contract, would be extended to both options and swaps.
---------------------------------------------------------------------------
\299\ 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.
\300\ The December 2013 Position Limits Proposal defined
``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.
\301\ 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).
---------------------------------------------------------------------------
In the 2016 Supplemental Position Limits Proposal, the Commission
proposed two further clarifications to the definition of the term
``futures-equivalent.'' First, the Commission proposed to address
circumstances in which a referenced contract for which futures
equivalents must be calculated is itself a futures contract. The
Commission noted that 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).\302\ The Commission proposed 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
[[Page 96733]]
referenced futures contract. This clarification would mirror the
expanded definition of ``futures-equivalent'' in the December 2013
Position Limits Proposal, as it would pertain to swaps.
---------------------------------------------------------------------------
\302\ 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.
---------------------------------------------------------------------------
Second, the Commission proposed in the 2016 Supplemental Position
Limits Proposal 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 would address 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.\303\
---------------------------------------------------------------------------
\303\ For an example of a futures-equivalent conversion of a
swaption, see example 6, WTI swaptions, Appendix A to part 20 of the
Commission's regulations.
---------------------------------------------------------------------------
The Commission expressed the view in the 2016 Supplemental Position
Limits Proposal that these clarifications would be 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.\304\
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\304\ 2016 Supplemental Position Limits Proposal, 81 FR at
38483. See also Table 11 in the December 2013 Position Limits
Proposal, 78 FR at 75731-3.
---------------------------------------------------------------------------
Comments Received: The Commission received two comments on the
proposed definition of ``futures-equivalent'' in the December 2013
Position Limits Proposal.\305\ Each comment was generally supportive of
the proposed definition. Although one commenter commended the
flexibility granted to market participants to use different option
valuation models, it recommended that the Commission provide guidance
on when it would consider an option valuation model unsatisfactory and
what the factors the Commission would consider in arriving at such an
opinion.\306\ According to the commenter, the Commission should utilize
a ``reasonableness approach'' by explicitly providing a ``safe harbor''
for models that produce results within 10 percent of an exchange or
Commission model, and should permit market participants to demonstrate
the reasonableness under prevailing market conditions of any model that
falls outside this safe harbor.\307\ It was also recommended that the
Commission consider the exchanges' approach to option valuation where
appropriate because these approaches are already in use and familiar to
market participants.\308\
---------------------------------------------------------------------------
\305\ CL-MFA-59606; CL-FIA-59595 at 15.
\306\ CL-MFA-59606 at 16-17.
\307\ MFA also stated that the Commission should not second
guess the results of reasonable models and impose findings of
violations after-the-fact as that would introduce tremendous
uncertainty into compliance with the position limits regime. Id at
17.
\308\ Id at 17.
---------------------------------------------------------------------------
Both MFA and FIA supported the optional use of the prior day's
delta to calculate a futures-equivalent position for purposes of
speculative position limit compliance.\309\ In addition, each requested
that the Commission confirm or adopt a provision similar to CME Rule
562. That exchange rule provides, among other things, that if a
participant's position exceeds position limits as a result of an option
assignment, that participant is allowed one business day to liquidate
the excess position without being considered in violation of the
limits. FIA urged the Commission to provide market participants with a
reasonable period of time to reduce its position below the speculative
position limit.\310\
---------------------------------------------------------------------------
\309\ CL-MFA-59606 at 17; CL-FIA-59595 at 15.
\310\ CL-FIA-59595 at 15.
---------------------------------------------------------------------------
Commission Reproposal: The Commission has determined to repropose
the definition of ``futures-equivalent'' as proposed in the 2016
Supplemental Position Limits proposal, with the exception that it now
proposes adopting the current exchange practice with regard to option
assignments, as discussed below.
Regarding risk (delta) models, the Reproposal does not provide a
``safe harbor'' as requested since risk models, generally, should
produce similar results. The Commission believes a difference of 10
percent above or below the delta resulting from an exchange's model
generally would be too great to be economically reasonable. However,
the Commission notes that, under the Reproposal, should a market
participant believe its model produces an economically reasonable and
analytically supported risk factor for a particular trading session
that differs significantly from a result published by an exchange for
that same time,\311\ it may describe the circumstances that result in a
significant difference and request that staff review that model for
reasonableness.\312\
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\311\ Under Sec. 16.01(a)(2), a reporting market is required to
record for each trading session the option delta, when a delta
system is used, while Sec. 16.01(e) requires a reporting market to
make that option delta readily available to the public. A reporting
market for this purpose is defined in Sec. 15.00(q) as a DCM or a
registered entity under CEA section 1a(40) (under CEA section
1a(40), registered entities include, among others, DCMs, DCOs, SEFs,
SDRs).
\312\ Deltas are computed using an option pricing model.
Different option pricing models incorporate different assumptions.
For a discussion of circumstances where assumptions in an option
pricing model may not hold, see, for example, Paul Wilmott,
Derivatives: The Theory and Practice of Financial Engineering
chapter 29 (1998) (describing circumstances where delta hedging an
option position (i.e., replication trading) can move the price of
the underlying asset, violating an assumption of certain option
pricing models that replication trading has no influence on the
price of the underlying asset).
---------------------------------------------------------------------------
Regarding the time period for a participant to come into compliance
because of option assignment, the Commission agrees that a participant
in compliance only because of a previous day's delta, and no longer,
after option assignment, in compliance on a subsequent day, should have
one business day to liquidate the excess position resulting from option
assignment without being considered in violation of the limits.\313\
Exchanges currently provide the same amount of time to come into
compliance.
---------------------------------------------------------------------------
\313\ The Commission believes that, in the circumstance of
option assignment, one business day is a reasonable amount of time
to come into compliance because the markets for commodities subject
to federal limits under Sec. 150.2 are generally liquid.
---------------------------------------------------------------------------
j. Intermarket Spread Position and Intramarket Spread Position
Proposed Rule: 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.'' \314\ These terms were defined in the December 2013
Position Limits Proposal within the definition of ``referenced
contract.'' In connection with its 2016 Supplemental Position Limits
Proposal to permit exchanges to process applications for exemptions
from federal position limits for certain spread positions, the
Commission proposed to expand the definitions of these terms as
proposed in the December 2013 Position Limits Proposal.
---------------------------------------------------------------------------
\314\ 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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In particular, in the 2016 Supplemental Position Limits Proposal,
[[Page 96734]]
the Commission proposed 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 proposed in the 2016 Supplemental Position Limits Proposal
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 Commission expressed the view that the expanded definitions
proposed in the 2016 Supplemental Position Limits Proposal 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 Commission
noted that 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).
Comments Received: The Commission did not receive any comments in
response to the definitions of ``intermarket spread position'' and
``intramarket spread position'' proposed in the December 2013 Position
Limits Proposal \315\ or in response to the 2016 Supplemental Position
Limits Proposal.
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\315\ As noted above, the definitions of ``intermarket spread
position'' and ``intramarket spread position'' were included.
---------------------------------------------------------------------------
Commission Reproposal: The Commission has determined to repropose
the definitions of the terms ``intermarket spread position'' and
``intramarket spread position'' as proposed in the 2016 Supplemental
Position Limits Proposal.
k. Long Position
Proposed Rule: The term ``long position'' is currently defined in
Sec. 150.1(g) to mean ``a long call option, a short put option or a
long underlying futures contract.'' The Commission proposed to update
the definition to make it also applicable to swaps such that a long
position would include a long futures-equivalent swap.
Commission Reproposal: Though no commenters suggested changes to
the definition of ``long position,'' the Commission is concerned that
the proposed definition does not clearly articulate that futures and
options contracts are subject to position limits on a futures-
equivalent basis in terms of the core referenced futures contract.
Longstanding market practice has applied position limits on futures and
options on a futures-equivalent basis, and the Commission believes that
practice ought to be made explicit in the definition in order to
prevent confusion. Thus, the Commission is reproposing an amended
definition to clarify that a long position is ``on a futures-equivalent
basis, a long call option, a short put option, a long underlying
futures contract, or a swap position that is equivalent to a long
futures contract.'' This clarification is consistent with the
clarification to the definition of futures-equivalent basis proposed in
the 2016 Supplemental Position Limits Proposal. Though the substance of
the definition is fundamentally unchanged, the revised language should
prevent unnecessary confusion over the application of futures-
equivalency to different kinds of commodity derivative contracts.
l. Physical Commodity
Proposed Rule: The December 2013 Position Limits Proposal would
amend Sec. 150.1 by adding in a definition of the term ``physical
commodity'' for position limit purposes. Congress used the term
``physical commodity'' in CEA sections 4a(a)(2)(A) and 4a(a)(2)(B) to
mean commodities ``other than excluded commodities as defined by the
Commission.'' Therefore, the Commission interprets ``physical
commodities'' to include both exempt and agricultural commodities, but
not excluded commodities, and proposes to define the term as such.\316\
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\316\ For position limits purposes, proposed Sec. 150.1 would
define ``physical commodity'' to mean any agricultural commodity as
that term is defined in Sec. 1.3 of this chapter or any exempt
commodity as that term is defined in section 1a(20) of the Act.
---------------------------------------------------------------------------
Comments Received: The Commission received no comments on the
proposed definition.
Commission Reproposal: The Commission has determined to repropose
the definition as originally proposed.
m. Pre-enactment Swap and Pre-Existing Position
Proposed Rule: The December 2013 Position Limits Proposal would
amend Sec. 150.1 by adding in new definitions of the terms ``pre-
enactment swap'' and ``pre-existing position'' for position limit
purposes. Under the definitions proposed in the December 2013 Position
Limits Proposal, ``pre-enactment swap'' means any swap entered into
prior to enactment of the Dodd-Frank Act of 2010 (July 21, 2010), the
terms of which have not expired as of the date of enactment of that
Act, while ``pre-existing position'' means any position in a commodity
derivative contract acquired in good faith prior to the effective date
of any bylaw, rule, regulation or resolution that specifies an initial
speculative position limit level or a subsequent change to that level.
Comments Received: The Commission received no comments on the
proposed definitions either of the terms ``pre-enactment swap'' or
``pre-existing position.''
Commission Reproposal: The Commission has determined to repropose
both definitions as previously proposed.
n. Referenced Contract
Proposed Rule: Part 150 currently does not include a definition of
the phrase ``referenced contract,'' which was introduced and adopted in
vacated part 151.\317\ As was noted when part 151 was adopted, the
Commission identified 28 core referenced futures contracts and proposed
to apply aggregate limits on a futures equivalent basis across all
derivatives that met the definition of referenced contracts.\318\ The
definition of referenced contract proposed in the December 2013
Position Limits Proposal was similar to that of vacated part 151,
[[Page 96735]]
but there were certain differences, including an exclusion of
guarantees of swaps and the incorporation of other terms into the
definition of referenced contract.
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\317\ Vacated Sec. 151.1 defined ``Referenced Contract'' to
mean ``on a futures-equivalent basis with respect to a particular
Core Referenced Futures Contract, a Core Referenced Futures Contract
listed in Sec. 151.2, or a futures contract, options contract, swap
or swaption, other than a basis contract or contract on a commodity
index that is: (1) Directly or indirectly linked, including being
partially or fully settled on, or priced at a fixed differential to,
the price of that particular Core Referenced Futures Contract; or
(2) directly or indirectly linked, including being partially or
fully settled on, or priced at a fixed differential to, the price of
the same commodity underlying that particular Core Referenced
Futures Contract for delivery at the same location or locations as
specified in that particular Core Referenced Futures Contract.''
\318\ Position Limits for Futures and Swaps, 76 FR at 71629.
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In the December 2013 Position Limits Proposal, the term
``referenced contract'' was proposed to be defined in Sec. 150.1 to
mean, on a futures-equivalent basis with respect to a particular core
referenced futures contract, a core referenced futures contract listed
in Sec. 150.2(d) of this part, or a futures contract, options
contract, or swap, other than a guarantee of a swap, a basis contract,
or a commodity index contract: (1) That is: (a) Directly or indirectly
linked, including being partially or fully settled on, or priced at a
fixed differential to, the price of that particular core referenced
futures contract; or (b) directly or indirectly linked, including being
partially or fully settled on, or priced at a fixed differential to,
the price of the same commodity underlying that particular core
referenced futures contract for delivery at the same location or
locations as specified in that particular core referenced futures
contract; and (2) where: (a) Calendar spread contract means a cash-
settled agreement, contract, or transaction that represents the
difference between the settlement price in one or a series of contract
months of an agreement, contract or transaction and the settlement
price of another contract month or another series of contract months'
settlement prices for the same agreement, contract or transaction; (b)
commodity index contract means an agreement, contract, or transaction
that is not a basis or any type of spread contract, based on an index
comprised of prices of commodities that are not the same or
substantially the same; (c) spread contract means either a calendar
spread contract or an intercommodity spread contract; and (d)
intercommodity spread contract means a cash-settled agreement, contract
or transaction that represents the difference between the settlement
price of a referenced contract and the settlement price of another
contract, agreement, or transaction that is based on a different
commodity.
Comments Received: The Commission received numerous comments \319\
regarding various aspects of the definition of ``referenced contract.''
Some were generally supportive of the proposed definition while others
suggested changes. One commenter expressly stated its support for
speculative limits on futures, options, and swaps because each
financial instrument ``can be used to develop market power and increase
volatility.'' \320\ Another commenter expressed its support for the
exclusion of guarantees of swaps from the definition of referenced
contract.\321\ These comments and the Commission's response are
detailed below.
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\319\ The commenters included AGA, APGA, Atmos, API, Better
Markets, BG Group, Calpine, Citadel, CME, CMOC, COPE, DEU, EEI,
EPSA, FIA, ICE, IECA, ISDA/SIFMA, GFMA, IATP, MFA, NEM, NFP, NGSA,
OLAM, PAAP, SCS, and Vectra.
\320\ CL-IECA-59713 at 4.
\321\ CL-IECAssn-59679 at 31.
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Commission Reproposal: The Commission is reproposing the definition
of referenced contract with two substantive modifications from the
original proposal, both of which are discussed further below. First,
the Commission is now proposing to amend the definition of ``referenced
contract'' to expressly exclude trade options. Second, the Reproposal
would clarify the meaning of ``indirectly linked.'' The Reproposal also
moves four definitions that were embedded in the proposed definition of
referenced contract, specifically ``calendar spread contract,''
``commodity index contract,'' ``spread contract,'' and ``intercommodity
spread contract,'' to their own definitions in Sec. 150.1, while
otherwise retaining those definitions as proposed. In addition, the
Reproposal makes non-substantive modifications to the definition of
referenced contract to make it easier to read.
Comments Received: In response to a specific request for comment in
the December 2013 Position Limits Proposal, many commenters recommended
excluding trade options from the definition of referenced
contract.\322\
---------------------------------------------------------------------------
\322\ See, e.g., CL-FIA-59595 at 4 and 19, CL-EEI-EPSA-59602 at
3, CL-ISDA/SIFMA-59611 at 3 and 34, CL-NEM-59620 at 2, CL-DEU-59627
at 7, CL-AGA-59632 at 4-5, CL-AGA-60382 at 10, CL-Olam-59658 at 3,
CL-BG Group-59656 at 4, CL-BG Group-60383 at 4, CL-COPE-59662 at 5
and 8, CL-Calpine-59663 at 5, CL-PAAP-59664 at 4, CL-NGSA-59673 at
27-33, CL-ICE-59669 at 13, CL-EPSA-60381 at 4-5, CL-A4A-59714 at 5,
CL-NFP-59690 at 7-8, CL-Working Group-59693 at 55-58, CL-API-59694
at 7, CL-IECAssn-59679 at 22, CL-IECAssn-59957 at 6-9, CL-Atmos-
59705 at 4, CL-APGA-59722 at 9, CL-EEI-59945 at 5-6, CL-EPSA-55953
at 6-7, and CL-SCS-60399 at 3.
---------------------------------------------------------------------------
Commission Reproposal: In response to numerous comments, the
reproposed definition of ``referenced contract'' expressly excludes
trade options that meet the requirements of Sec. 32.3. The Commission
notes that in its trade options final rule,\323\ the cross-reference to
vacated part 151 position limits was deleted from Sec. 32.3(c). At
that time, the Commission stated its belief that federal speculative
position limits should not apply to trade options, as well as its
intention to address trade options in the context of the any final
rulemaking on position limits.\324\ Therefore, the Commission is
reproposing the definition of ``referenced contract'' to expressly
exclude trade options that meet the requirements of Sec. 32.3 of this
chapter.
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\323\ Trade Options, 81 FR 14966 (Mar. 21, 2016).
\324\ Id. at 14971.
---------------------------------------------------------------------------
Comments Received: Commenters asserted that certain aspects of the
definition of referenced contract are unclear and/or unworkable. For
example, commenters suggested that the concept of ``indirectly linked''
is unclear and so market participants may not know whether a particular
contract is subject to limits.\325\ Some commenters believe that the
definition is overbroad and captures products that they state do not
affect price discovery or impair hedging and are not truly
economically-equivalent.\326\ Commenters request that the Commission
support its determination regarding which contracts are economically
equivalent by providing a description of the methodology used to
determine the contracts considered to be economically-equivalent,
including examples of over-the-counter (``OTC'') and FBOT
contracts.\327\ One commenter stated that support is necessary because
``mechanically assign[ing]'' the label of economically-equivalent to
any contract that references a core referenced futures contract does
not make it equivalent.\328\
---------------------------------------------------------------------------
\325\ See, e.g., CL-CMC-59634 at 14, and CL-COPE-59662 at 7, n.
20 (stating ``[i]t is one thing if the Commission means a reference
to a contract that itself directly references a core referenced
futures contract. It is more troubling and likely unworkable if the
Commission means a more subjective economic link to a delivery
location that is used in a core referenced futures contract. At a
minimum, the Commission should provide examples of indirect linkage
that triggers referenced contract status'').
\326\ See, e.g., CL-COPE-59662 at 7, and CL-BG Group-59656 at 4.
\327\ See, e.g., CL-MFA-59606 at 4 and 15-16.
\328\ CL-COPE-59950 at 7.
---------------------------------------------------------------------------
Commission Reproposal: The Commission agrees with commenters that
there is a need to clarify the meaning of ``indirectly linked.'' The
Commission notes that including contracts that are ``indirectly
linked'' to the core referenced futures contract under the definition
of referenced contract is intended to prevent the evasion of position
limits through the creation of an economically equivalent contract that
does not directly reference the core referenced futures contract price.
Under the reproposed definition, ``indirectly linked'' means a contract
that settles to a price based on another derivative contract that,
either directly or through linkage to another derivative contract, has
a settlement price based on
[[Page 96736]]
the price of a core referenced futures contract or based on the price
of the same commodity underlying that particular core referenced
futures contract for delivery at the same location specified in that
particular core referenced futures contract. Therefore, contracts that
settle to the price of a referenced contract, for example, would be
indirectly linked to the core referenced futures contract (e.g., a swap
that prices to the ICE Futures US Henry LD1 Fixed Price Futures (H)
contract, which is a referenced contract that settles directly to the
price of the NYMEX Henry Hub Natural Gas (NG) core referenced futures
contract).
On the other hand, an outright derivative contract whose settlement
price is based on an index published by a price reporting agency
(``PRA'') that surveys cash market transaction prices (even if the cash
market practice is to price at a differential to a futures contract)
would not be directly or indirectly linked to the core referenced
futures contract.\329\ Similarly, a derivative contract whose
settlement price was based on the same underlying commodity at a
different delivery location (e.g., ultra-low sulfur diesel delivered at
L.A. Harbor) would not be linked, directly or indirectly, to the core
referenced futures contract. The Commission is publishing an updated
CFTC Staff Workbook of Commodity Derivative Contracts Under the
Regulations Regarding Position Limits for Derivatives along with this
release, which provides a non-exhaustive list of referenced contracts
and may be helpful to market participants in determining categories of
contracts that fit within the definition. Under the Reproposal, as
always, market participants may request clarification from the
Commission when necessary.
---------------------------------------------------------------------------
\329\ The Commission notes that while the outright derivative
contract would not be indirectly linked to the core referenced
contract, a derivative contract that settles to the difference
between the core referenced futures contract and the PRA index would
be directly linked because it settles in part to the core referenced
futures contract price.
---------------------------------------------------------------------------
Regarding comments that the definition is overbroad and captures
products that commenters state do not affect price discovery or are not
truly economically-equivalent, the Commission notes that commenters
seem to be confusing the statutory definitions of ``significant price
discovery function'' (in CEA section 4a(a)(4)) and ``economically
equivalent'' (in CEA section 4a(a)(5)). As a matter of course,
contracts can be economically equivalent without serving a significant
price discovery function. The Commission notes that there is no
unpublished methodology used to determine which contracts are
referenced contracts. Instead, the Commission proposed, and, following
notice and comment, is now reproposing a definition for referenced
contracts, and contracts that fit under that definition will be subject
to federal speculative position limits.
Comments Received: Several commenters suggested that cash-settled
contracts should not be subject to position limits.\330\ One commenter
asserted that non-deliverable cash-settled contracts are
``fundamentally different'' from deliverable commodity contracts and
should not be subject to position limits.\331\ The commenter also
asserted that subjecting penultimate-day contracts such as options to a
limit structure would make managing an option portfolio ``virtually
impossible'' and would result in confusion and uncertainty.\332\
---------------------------------------------------------------------------
\330\ See, e.g., CL-Vectra-60369 at 3, and CL-Citadel-59717 at
9.
\331\ CL-Vectra-60369 at 3.
\332\ Id.
---------------------------------------------------------------------------
Commission Reproposal: The Commission has determined not to make
any changes in the Reproposal that would broadly exempt cash-settled
contracts from position limits. Cash-settled contracts are economically
equivalent to deliverable contracts, and Congress has required that the
Commission impose limits on economically equivalent swaps. The
Commission notes that Congress took action twice to address this issue.
In CEA section 4a(a)(5)(A), Congress required the Commission to adopt
position limits for swaps that are economically equivalent to futures
or options on futures or commodities traded on a futures exchange, for
which the Commission has adopted position limits. Previously, in the
CFTC Reauthorization Act of 2008,\333\ Congress imposed a core
principle for position limitations on swaps that are significant price
discovery contracts.\334\ In addition, because cash-settled referenced
contracts are economically equivalent to the physical delivery contract
in the same commodity, a trader has an incentive to manipulate one
contract in order to benefit the other.\335\ The Commission notes that
a trader with positions in both the physically delivered and cash-
settled referenced contracts would have, in the absence of position
limits, increased ability to manipulate one contract to benefit
positions in the other.
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\333\ Incorporated as Title XIII of the Food, Conservation and
Energy Act of 2008, Pub. L. 110-246, 122 Stat. 1624 (June 18, 2008),
\334\ CEA section 2(h)(7) (2009).
\335\ Under the reproposed definition, a cash-settled contract
must be linked, directly or indirectly, to the core referenced
futures contract or the same underlying commodity in the same
delivery location in order to be considered a ``referenced
contract.''
---------------------------------------------------------------------------
Moreover, if speculators were incentivized to abandon physical
delivery contracts for cash-settled contracts so as to avoid position
limits, it could result in degradation of the physical delivery
contract markets that position limits are intended and designed to
protect.
Comments Received: One commenter asked the Commission to confirm
that a non-transferable repurchase right granted in connection with a
hedged commodity transaction does not count towards position limits,
citing CME Group and ICE Futures rules to that effect. The commenter is
concerned that such a transaction could be deemed a commodity option
and therefore legally a swap, but that it believed the transaction
satisfies the criteria for exemption from definition as a swap.\336\
---------------------------------------------------------------------------
\336\ CL-Olam-59658 at 8-9.
---------------------------------------------------------------------------
Commission Reproposal: As the commenter notes, whether the contract
is subject to position limits depends on whether it is a swap. The
Commission points out that the release adopting the definition of swap
noted the Commission's belief that its forward contract interpretation
``provides sufficient clarity with respect to the forward contract
exclusion from the swap and future delivery definitions.'' \337\ Also
in that release, the Commission noted that commodity options are
swaps.\338\ Separately, the Commission adopted Commission Sec. 32.3,
providing an exemption from the commodity option definition for trade
options; the exemption was recently further amended.\339\ The commenter
should apply these rules to determine whether a given contract is a
swap. In addition, the Commission notes that under Commission Sec.
140.99, the commenter may request clarification or exemptive relief
regarding whether a non-transferable repurchase right falls under the
definition of a ``swap.'' To the extent the commenter seeks a
clarification or change to the definition of a swap, the current
rulemaking has not been expanded to revisit that definition.
---------------------------------------------------------------------------
\337\ See, Further Definition of ``Swap,'' ``Security-Based
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping; Final Rule (``Swap
Definition Rulemaking''), 77 FR 48208, 48231 (Aug. 13, 2012).
\338\ Id. at 48237.
\339\ See Commodity Options, 77 FR 25320, 75326 (Apr. 27, 2012);
see also Trade Options, 81 FR 14966 (Mar. 21, 2016).
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[[Page 96737]]
Comments Received: One commenter \340\ requested clarification that
a bid, offer, or indication of interest for an OTC swap that does not
constitute a binding transaction will not count towards position
limits, noting that current CME Rule 562 provides that such bids or
offers would be in violation of the limit.
---------------------------------------------------------------------------
\340\ See, e.g., CL-MFA-59606 at 5 and 23.
---------------------------------------------------------------------------
Commission Reproposal: The Reproposal does not change the
definition originally proposed in response to the comment requesting
clarification that a bid, offer, or indication of interest for an OTC
swap that does not constitute a binding transaction will not count
towards position limits. Nevertheless, the Commission clarifies that
under the Reproposal, such bids, offers, or indications of interest do
not count toward position limits.\341\
---------------------------------------------------------------------------
\341\ The Commission notes that it is discussing bids, offers,
and indications of interest in the context of whether these would
violate position limits, and is not addressing other issues such as
whether or not their use may indicate spoofing in violation of CEA
section 4(c)(a)(5).
---------------------------------------------------------------------------
Comments Received: One commenter requested that the Commission
exclude from the definition of referenced contract any agreement,
contract, and transaction exempted from swap regulations by virtue of
an exemption order, interpretation, no-action letter, or other
guidance; the commenter stated that it believes the Commission can use
its surveillance capacity and anti-manipulation authority, along with
its MOU with FERC, to monitor these nonfinancial commodity transactions
as well as the market participants relying on the exemptive
relief.\342\
---------------------------------------------------------------------------
\342\ CL-NFP-59690 at 14-15.
---------------------------------------------------------------------------
Commission Reproposal: The Reproposal does not change the proposed
definition in response to the comment requesting that the Commission
exclude from the definition of referenced contract any agreement,
contract, and transaction exempted from swap regulations by virtue of
an exemption order, interpretation, no-action letter, or other
guidance. The Commission notes that any contract that is not a
commodity derivative contract, including one that has been excluded
from the definition of swap, is not subject to position limits. The
commenter is requesting a broad exclusion from the definition of
referenced contract, based on other regulatory relief which may have
been adopted for a variety of policy reasons unrelated to position
limits. Consequently, in light of the many and varied policy reasons
for issuing an exemption order, interpretation, no-action letter or
other guidance from swap regulation, each such action would need to be
considered in the context of the goals of the Commission's position
limits regime. Rather than issuing a blanket exemption from the
definition of referenced contract for any agreement, contract, and
transaction exempted from swap regulations, therefore, the Commission
believes it would be better to consider each such action on its own
merits prior to issuing an exemption from position limits. Under the
Reproposal, if a market participant desires to extend a previously
taken exemptive action by exempting certain agreements, contracts, and
transactions from the definition of referenced contract, the market
participant can request that the particular exemption order,
interpretation, no-action letter, or other guidance be so extended.
This would allow the Commission to consider the particular action taken
and the merits of that particular exemption in the context of the
position limits regime.
The Commission notes that in the particular exemptive order cited
by the commenter,\343\ certain delineated non-financial energy
transactions between certain specifically defined entities were
exempted, pursuant to CEA sections 4(c)(1) and 4(c)(6), from all
requirements of the CEA and Commission regulations issued thereunder,
subject to certain anti-fraud, anti-manipulation, and record inspection
conditions. All entities that meet the requirements for the exemption
provided by the Federal Power Act 201(f) Order are, therefore, already
exempt from position limits compliance for all transactions that meet
the Order's conditions.
---------------------------------------------------------------------------
\343\ See the Between NFP Electrics Exemptive Order (Order
Exempting, Pursuant to Authority of the Commodity Exchange Act,
Certain Transactions Between Entities Described in the Federal Power
Act, and Other Electric Cooperatives, 78 FR 19670 (Apr. 2, 2013)
(``Federal Power Act 201(f) Order''). See also CL-NFP-59690 at 14-
15. The Federal Power Act 201(f) Order exempted all ``Exempt Non-
Financial Energy Transactions'' (as defined in the Federal Power Act
201(f) Order) that are entered into solely between ``Exempt
Entities'' (also as defined in the Federal Power Act 201(f) Order,
namely any electric facility or utility that is wholly owned by a
government entity as described in the Federal Power Act (`FPA')
section 201(f); (ii) any electric facility or utility that is wholly
owned by an Indian tribe recognized by the U.S. government pursuant
to section 104 of the Act of November 2, 1994; (iii) any electric
facility or utility that is wholly owned by a cooperative,
regardless of such cooperative's status pursuant to FPA section
201(f), so long as the cooperative is treated as such under Internal
Revenue Code section 501(c)(12) or 1381(a)(2)(C), and exists for the
primary purpose of providing electric energy service to its member/
owner customers at cost; or (iv) any other entity that is wholly
owned, directly or indirectly, by any one or more of the
foregoing.). See Federal Power Act 201(f) Order at 19688.
---------------------------------------------------------------------------
Comments Received: Commenters were divided with respect to the
exclusion of ``commodity index contracts'' from the definition of
referenced contract. As a result of the exclusion, the position of a
market participant who enters into a commodity index contract with a
dealer will not be subject to position limits. One commenter supported
the exclusion of commodity index contracts from the definition of
referenced contracts.\344\ The commenter was concerned, however, that a
dealer who offsets his or her exposure in such contracts by purchasing
futures contracts on the constituent components of the commodity index
will be subject to position limits in the referenced contracts. The
commenter urged the Commission to recognize as a bona fide hedge ``the
offsetting nature of the dealer's position by exempting the futures
contracts that a dealer acquires to hedge its commitments under
commodity index contracts.'' \345\ Alternatively, the Commission should
``modify the definition of `referenced contract' and the definition of
`commodity derivative contract' by excluding core referenced futures
contracts and related futures contracts, options contracts or swaps
that are offset on an economically equivalent basis by the constituent
portions of commodity index contracts.'' \346\ Another commenter
supported the Commission's proposal to exclude swaps that reference
indices such as the Goldman Sachs Commodity Index (GSCI) from the
definition of a referenced contract.\347\
---------------------------------------------------------------------------
\344\ CL-GFMA-60314 at 4.
\345\ Id.
\346\ Id.
\347\ CL-CMOC-59720 at 4.
---------------------------------------------------------------------------
One commenter asked that the Commission reconsider excluding
commodity index contracts from the definition of referenced
contract.\348\ Another commenter urged that commodity index contracts
should be included in the definition of referenced contract in
conjunction with (1) a class limit (as was proposed for vacated part
151, but not included in final part 151); and (2) a lower position
limit set at a level ``aimed to maintain no more than'' 30 percent
speculation in each commodity (based on COT report classifications)
that is reset every 6 months.\349\ The same commenter noted that
trading by passive, long only
[[Page 96738]]
commodity index fund speculators does not provide liquidity, but rather
takes net liquidity, dilutes the pool of market information to be less
reflective of fundamental forces, causes volatility, and causes an
increased frequency of contango attributed to frequent rolls from
selling a nearby contract and buying a deferred (second month)
contract. The commenter noted that, broadly, speculators in commodity
futures historically constituted between 15 and 30 percent of open
interest without meaningfully disrupting the market and providing
beneficial intermediation between hedging producers and hedging
consumers.\350\
---------------------------------------------------------------------------
\348\ CL-IATP-59701 at 2.
\349\ CL-Better Markets-59716 at 1-35, and particularly at 32.
\350\ CL-Better Markets-59716 at 5, and CL-Better Markets-60401
at 4, 16-17.
---------------------------------------------------------------------------
Commission Reproposal: The Commission is reproposing the provision
excluding commodity index contracts from the definition of referenced
contract as previously proposed.
Regarding commenters who requested that the Commission alter the
proposed definition to include commodity index derivative contracts,
the Commission notes that if it were to include such contracts, the
Commission's rules would allow netting of such positions in commodity
index contracts with other offsetting referenced contracts. The ability
to net such commodity index derivative contracts positions with other
offsetting referenced contracts would eliminate the need for a bona
fide hedging exemption for such contracts. Thus, the Commission
believes such netting would contravene Congressional intent, as
expressed in CEA section 4a(c)(B)(i) in its requirement to permit a
pass-thru swap offset only if the counterparty's position would qualify
as a bona fide hedge.
Another commenter suggested including commodity index contracts
under the definition of referenced contract in conjunction with a class
limit (e.g., a separate limit for commodity index contracts compared to
all other categories of derivative contracts). The commenter suggested
that the limit be set at a level aimed at maintaining a particular
ratio of speculative trading in the market. In response to this
commenter, the Commission declines in this Reproposal to propose class
limits because it believes any adoption of a class limit would require
a rationing scheme wherein unrelated legal entities would be limited by
the positions of other unrelated legal entities. Further, the
Commission is concerned that class limits (including the one proposed
by the commenter) could impair liquidity in the relevant markets.\351\
The Commission also notes that it currently does not collect
information to effectively enforce any ratio of speculative trading,
and has not done so since the Commission eliminated Series '03
reporting in 1981.\352\ The Reproposal does not make any changes to the
definition of referenced contract pursuant to this comment.
---------------------------------------------------------------------------
\351\ See also, December 2013 Position Limits Proposal, 78 FR at
75741.
\352\ The Commission's Series '03 reports required large traders
to classify how much of their position was speculative and how much
was hedging and formed the basis of the earliest versions of the
CFTC Commitments of Traders Reports. See ``Reporting Requirements
for Contract Markets, Futures Commission Merchants, Members of
Exchanges and Large Traders,'' 46 FR 59960 (Dec. 8, 1981)
(eliminating the routine of Series '03 reports by large traders).
---------------------------------------------------------------------------
Finally, in response to the commenter who suggested that, in
addition to excluding commodity index contracts as proposed, the
Commission should recognize as bona fide hedge positions those
positions that offset a position in a commodity index derivative
contract by using the component futures contracts, the Commission
observes that it still believes, as discussed in the December 2013
Position Limits Proposal, that financial products do not meet the
temporary substitute test. As such, the offset of financial risks
arising from financial products is inconsistent with the statutory
definition of a bona fide hedging position. The Commission also
declines in this Reproposal to accept the commenter's request to exempt
these offsetting positions using its authority under CEA section
4a(a)(7) because it does not believe that permitting the offset of
financial risks furthers the purposes of the Commission's position
limits regime as described in CEA section 4a(a)(3)(B). Finally, the
commenter suggested as an alternative that the Commission modify the
definition of referenced contract to broadly exclude any derivative
contracts that are used to offset commodity index exposure. However,
the Commission believes such a broad exclusion would, at best, be too
difficult to administer and, at worst, provide an easy vehicle for
entities to evade position limits regulations.
Comments Received: One commenter suggested that the Commission
unnecessarily limited the scope of permissible netting by not
recognizing cross-commodity netting, recommending either a threshold
correlation factor of 60 percent or an approach that would permit pro
rata netting to the extent of demonstrated correlation.\353\
---------------------------------------------------------------------------
\353\ CL-ISDA/SIFMA-59611 at 3 and 32-33.
---------------------------------------------------------------------------
Commission Reproposal: The Commission believes that recognizing
cross-commodity netting as requested by the commenter would
substantially expand the definition of referenced contract and, thus,
may weaken: (1) The protection of the price discovery function in the
core referenced futures contract; (2) the prevention of excessive
speculation; and (3) the prevention of market manipulation. Therefore,
this Reproposal does not change the definition of referenced contract
to accommodate cross-commodity netting.
Comments Received: One commenter requested that all ``nonfinancial
commodity derivatives'' used by commercial end-users for hedging
purposes be expressly excluded from the definition of referenced
contract (and so excluded from position limits). The commenter also
suggested that the Commission allow an end-user to identify a swap as
being used to ``hedge or mitigate commercial risks'' at the time the
swap is executed and noted that such trades are highly-customized
bilateral agreements that are difficult to convert into futures
equivalents.\354\ The commenter also requested that ``customary
commercial agreements'' be excluded from referenced contract
definition. The commenter stated that these contracts may reference a
core referenced futures contract or may be misinterpreted as directly
or indirectly linking to a core referenced futures contract, but that
the Commission has already determined that Congress did not intend to
regulate such agreements as swaps.\355\
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\354\ CL-NFP-59690 at 9-12.
\355\ CL-NFP-59690 at 13 (citing to Further Definition of
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap
Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, 77 FR 48208 (Aug. 13, 2012).
---------------------------------------------------------------------------
Commission Reproposal: This Reproposal does not amend the
definition of referenced contract in response to the request that
``nonfinancial commodity derivatives'' used by commercial end-users for
hedging purposes be expressly excluded from the definition of
referenced contract. The Commission understands the comment to mean
that when a particular transaction qualifies for the end-user
exemption, it should also be exempt from position limits by excluding
such transactions from the definition of ``referenced contract.'' The
commenter quotes language from the end-user exemption definition, which
was issued to provide relief from the clearing and trade execution
mandates. The Commission notes that under the CEA's statutory language,
the commercial end user exemption
[[Page 96739]]
definition is broader than the bona fide hedging definition. Under the
canons of statutory construction, when Congress writes one section
differently than another, the differences should be assumed to have
different meaning. Thus, the Commission believes that the more
restrictive language in the bona fide hedging definition should be
applied here. The definition of bona fide hedging position, as proposed
in the December 2013 Position Limits Proposal, as amended by the 2016
Supplemental Position Limits Proposal, and as reproposed here, would be
consistent with the differences in the two definitions, as adopted by
Congress. The Commission notes that under this Reproposal, commercial
end-users may rely on any applicable bona fide hedge exemption.
In response to the commenter's concern regarding ``customary
commercial agreements,'' the Commission reiterates its belief that
contracts that are exempted or excluded from the definition of ``swap''
are not considered referenced contracts and so are not subject to
position limits.
o. Short Position
Proposed Rule: The term ``short position'' is currently defined in
Sec. 150.1(c) to mean a short call option, a long put option, or a
short underlying futures contract. In the December 2013 Position Limits
Proposal, the Commission proposed to amend the definition to state that
a short position means a short call option, a long put option or a
short underlying futures contract, or a short futures-equivalent swap.
This proposed revision reflects the fact that under the Dodd-Frank Act,
the Commission is charged with applying the position limits regime to
swaps.
Comments Received: The Commission received no comments regarding
the proposed amendment to the definition of ``short position.''
Commission Reproposal: Though no commenters suggested changes to
the definition of ``short position,'' the Commission is concerned that
the proposed definition, like the proposed definition of ``long
position'' described supra, does not clearly articulate that futures
and options contracts are subject to position limits on a futures-
equivalent basis in terms of the core referenced futures contract.
Longstanding market practice has applied position limits to futures and
options on a futures-equivalent basis, and the Commission believes that
practice ought to be made explicit in the definition in order to
prevent confusion. Thus, in this Reproposal, the Commission is
proposing to amend the definition to clarify that a short position is
on a futures-equivalent basis, a short call option, a long put option,
a short underlying futures contract, or a swap position that is
equivalent to a short futures contract. Though the substance of the
definition is fundamentally unchanged, the revised language should
prevent unnecessary confusion over the application of futures-
equivalency to different kinds of commodity derivative contracts.
p. Speculative Position Limit
The term ``speculative position limit'' is currently not defined in
Sec. 150.1. In the December 2013 Position Limits Proposal, the
Commission proposed to define the term ``speculative position limit''
to mean ``the maximum position, either net long or net short, in a
commodity derivatives contract that may be held or controlled by one
person, absent an exemption, such as an exemption for a bona fide
hedging position. This limit may apply to a person's combined position
in all commodity derivative contracts in a particular commodity (all-
months-combined), a person's position in a single month of commodity
derivative contracts in a particular commodity, or a person's position
in the spot-month of commodity derivative contacts in a particular
commodity. Such a limit may be established under federal regulations or
rules of a designated contract market or swap execution facility. An
exchange may also apply other limits, such as a limit on gross long or
gross short positions, or a limit on holding or controlling delivery
instruments.'' \356\
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\356\ December 2013 Position Limits Proposal, 78 FR at 75825.
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As explained in the December 2013 Position Limits Proposal, the
proposed definition is similar to definitions for position limits used
by the Commission for many years,\357\ as well as glossaries published
by the Commission for many years.\358\ For example, the December 2013
Position Limits Proposal noted that the version of the staff glossary
currently posted on the CFTC Web site defines speculative position
limit as ``[t]he maximum position, either net long or net short, in one
commodity future (or option) or in all futures (or options) of one
commodity combined that may be held or controlled by one person (other
than a person eligible for a hedge exemption) as prescribed by an
exchange and/or by the CFTC.''
---------------------------------------------------------------------------
\357\ Id. at 75701. As noted in the December 2013 Position
Limits Proposal, ``the various regulations and defined terms
included use of maximum amounts `net long or net short,' which
limited what any one person could `hold or control,' `one grain on
any one contract market' (or in `in one commodity' or `a particular
commodity'), and `in any one future or in all futures combined.' For
example, in 1936, Congress enacted the CEA, which authorized the
CFTC's predecessor, the CEC, to establish limits on speculative
trading. Congress empowered the CEC to `fix such limits on the
amount of trading . . . as the [CEC] finds is necessary to diminish,
eliminate, or prevent such burden.' [CEA section 6a(1) (Supp. II
1936)] It also noted that the first speculative position limits were
issued by the CEC in December 1938, 3 FR 3145, Dec. 24, 1938, and
that those first speculative position limits rules provided, also in
Sec. 150.1, for limits on position and daily trading in grain for
future delivery, and adopted a maximum amount ``net long or net
short position which any one person may hold or control in any one
grain on any one contract market'' as 2,000,000 bushels ``in any one
future or in all futures combined.'' Id.
\358\ For example, the December 2013 Position Limits Proposal
noted that the Commission's annual report for 1983 includes in its
glossary ``Position Limit: the maximum position, either net long or
net short, in one commodity future combined which may be held or
controlled by one person as prescribed by any exchange or by the
CFTC.'' Id.
---------------------------------------------------------------------------
The Commission received no comments on the proposed definition, and
is reproposing the definition without amendment.
q. Spot-Month
Proposed Rule: In the December 2013 Position Limits Proposal, the
Commission proposed to adopt a definition of ``spot-month'' that
expands upon the current Sec. 150.1 definition.\359\ The definition,
as proposed, specifically addressed both physical-delivery contracts
and cash-settled contracts, and clarified the duration of ``spot-
month.'' Under the proposed definition, the ``spot-month'' for
physical-delivery commodity derivatives contracts would be the period
of time beginning at of the close of trading on the trading day
preceding the first day on which delivery notices could be issued or
the close of trading on the trading day preceding the third-to-last
trading day, until the contract was no longer listed for trading (or
available for transfer, such as through exchange for physical
transactions). The proposed definition included similar, but slightly
different language for cash-settled contracts, providing that the spot
month would begin at the earlier of the start of the period in which
the underlying cash-settlement price was calculated or the close of
trading on the trading day preceding the third-to-last trading day and
would continue until the contract
[[Page 96740]]
cash-settlement price was determined. In addition, the proposed
definition included a proviso that, if the cash-settlement price was
determined based on prices of a core referenced futures contract during
the spot month period for that core referenced futures contract, then
the spot month for that cash-settled contract would be the same as the
spot month for that core referenced futures contract.\360\
---------------------------------------------------------------------------
\359\ December 2013 Position Limits Proposal, 78 FR at 75701-02;
As noted in in the December 2013 Position Limits Proposal, the
definition proposed would be an expansion upon the definition
currently found in Sec. 150.1, but greatly simplified from the
definition adopted in vacated Sec. 151.3 (in the Part 151
regulations, the ``spot month'' definition in Sec. 151.1 simply
cited to the ``spot month'' definition provided in Sec. 151.3).
\360\ See id. at 75825-6.
---------------------------------------------------------------------------
Comments Received: The Commission received several comments
regarding the definition of spot month.\361\ One commenter noted that
the definition of the spot month for federal limits does not always
coincide with the definition of spot month for purposes of any exchange
limits and assumes that the Commission did not intend for this to
happen. For example, the commenter noted the proposed definition of
spot month would commence at the close of trading on the trading day
preceding the first notice day, while the ICE Futures US definition
commences as of the opening of trading on the second business day
following the expiration of regular option trading on the expiring
futures contract. Regarding the COMEX contracts, the commenter stated
that the exchange spot month commences at the close of business, rather
than at the close of trading, which would allow market participants to
incorporate exchange of futures for related position transactions
(EFRPs) that occur after the close of trading, but before the close of
business.\362\ Finally, the commenter requested the Commission ensure
the definition of spot month for federal limits is the same as the
definition of spot month for exchange limits for all referenced
contracts.\363\
---------------------------------------------------------------------------
\361\ See, e.g., CL-FIA-59595 at 10, CL-NFP-59690 at 19, CL-
NGSA-59673 at 44, and CL-ICE-59669 at 5-6.
\362\ CL-FIA-59595 at 10.
\363\ Id.
---------------------------------------------------------------------------
Two commenters urged the Commission to reconsider its proposed
definition of spot month for cash-settled contracts that encompasses
the entire period for calculation of the settlement price, preferring
the current exchange practice which is to apply the spot month limit
during the last three days before final settlement.\364\ One commenter
noted its concern that the proposed definition would discourage use of
calendar month average price contracts.\365\
---------------------------------------------------------------------------
\364\ See, e.g., CL-NGSA-59673 at 44, CL-ICE-59669 at 5-6.
\365\ See, CL-ICE-59669 at 5-6.
---------------------------------------------------------------------------
Another commenter recommended that the Commission define ``spot
month'' in relation to each core referenced futures contract and all
related physically-settled and cash-settled referenced contracts, to
assure that the definition works appropriately in terms of how each
underlying nonfinancial commodity market operates, and to ensure that
commercial end-users of such nonfinancial commodities can effectively
use such referenced contracts to hedge or mitigate commercial
risks.\366\
---------------------------------------------------------------------------
\366\ CL-NFP-59690 at 19.
---------------------------------------------------------------------------
The Commission also received the recommendation from one commenter
that the Commission should publish a calendar listing the spot month
for each Core Referenced Futures Contract to provide clarity to market
participants and reduce the cost of identifying and tracking the spot
month.\367\
---------------------------------------------------------------------------
\367\ CL-FIA-59595 at 10-11.
---------------------------------------------------------------------------
Commission Reproposal: For core referenced futures contracts, the
Commission agrees with the commenter that the definition of spot month
for federal limits should be the same as the definition of spot month
for exchange limits. The Commission is therefore the definition of spot
month in this Reproposal generally follows exchange practices. In the
reproposed version, spot month means the period of time beginning at
the earlier of the close of business on the trading day preceding the
first day on which delivery notices can be issued by the clearing
organization of a contract market, or the close of business on the
trading day preceding the third-to-last trading day, until the contract
expires for physical delivery core referenced futures contracts,\368\
except for the following: (a) ICE Futures U.S. Sugar No. 11 (SB)
referenced contract for which the spot month means the period of time
beginning at the opening of trading on the second business day
following the expiration of the regular option contract traded on the
expiring futures contract; (b) ICE Futures U.S. Sugar No. 16 (SF)
referenced contract,\369\ for which the spot month means the period of
time beginning on the third-to-last trading day of the contract month
until the contract expires \370\ and (c) Chicago Mercantile Exchange
Live Cattle (LC) referenced contract, for which the spot month means
the period of time beginning at the close trading on the fifth business
day of the contract month.\371\
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\368\ As noted above, this Reproposal does not address the three
cash-settled contracts (Class III Milk, Feeder Cattle, and Lean
Hogs) which, under the December 2013 Position Limits Proposal, were
included in the list of core referenced futures contracts.
Therefore, the reproposed spot month definition does not address
those three contracts.
\369\ While the Commission realized that Sugar 16 does not
currently have a spot month, its delivery period takes place after
the last trading day (similar to crude oil). Therefore, the
Reproposal amends the spot month definition for Sugar No. 16 to
mirror the three day period for other contracts that deliver after
the end of trading.
\370\ In regard to the modifier ``until the contract expires,''
the Commission views ``expires'' as meaning the end of delivery
period or until cash-settled.
\371\ In response to FIA's comment, CL-FIA-59595 at 10, the
Commission notes that the spot periods for exchange-set limits on
COMEX products begin at the close of trading and not the close of
business. See http://www.cmegroup.com/market-regulation/position-limits.html. However, the Commission understands that CME Group
staff determines compliance with spot month limits in conjunction
with the receipt of futures large trader reports. In consideration
of the practicality of this approach, and in light of the definition
of reportable position, the Commission believes that it would be
more practical, clear, and consistent with existing exchange
practices, for the spot month to begin ``at the close of the
market.'' See CFTC Regulation 15.00(p).
---------------------------------------------------------------------------
As noted above, in the December 2013 Position Limits Proposal, spot
month was proposed to be defined to begin at the earlier of: (1) ``the
close of trading on the trading day preceding the first day on which
delivery notices can be issued to the clearing organization''; or (2)
``the close of trading on the trading day preceding the third-to-last
trading day''--based on the comment letters received, the proposed
definition resulted in some confusion.\372\ The Commission observes
that the current definition also seems to be a source of some confusion
when it defines ``spot month,'' in current CFTC Regulation 150.1(a), to
begin ``at the close of trading on the trading day preceding the first
day on which delivery notices can be issued to the clearing
organization.''
---------------------------------------------------------------------------
\372\ As a note of clarification, in light of the confusion of
some commenters, position limits apply to open positions; once the
position isn't open the limits don't apply.
---------------------------------------------------------------------------
The Commission understands current DCM practice for physical-
delivery contracts permitting delivery before the close of trading
generally is that the spot month begins at the start of the first
business day on which the clearing house can issue ``stop'' notices to
a clearing member carrying a long position, or, at the close of
business on the day preceding the first business day on which the
clearing house can issue ``stop'' notices to a clearing member carrying
a long position, but current DCM rules vary somewhat. For some ICE
contracts,\373\ the spot month includes ``any month for which delivery
notices have been or may be issued,'' \374\ and begins at the open of
trading; \375\ the
[[Page 96741]]
CME spot month, as noted above, begins at the close of trading.
However, the Commission understands that the amended ``spot month''
definition, as reproposed herein, would be consistent with the existing
spot month practices of exchanges when enforcing the start of the spot
month limits in any of the 25 core referenced futures contracts, based
on the timing of futures large trader reports, discussed below.
---------------------------------------------------------------------------
\373\ See, e.g., Cotton No. 2.
\374\ See ICE Rule 6.19.
\375\ See, e.g., Cotton No. 2 Position Limits and Position
Accountability information: ``ICE (1) Delivery Month: Cocoa, Coffee
``C'', Cotton, World Cotton, FCOJ, Precious Metals--on and after
First Notice Day Sugar#11 on and after the Second Business Day
following the expiration of the regular option contract traded on
the expiring futures contract.'' https://www.theice.com/products/254/Cotton-No-2-Futures.
---------------------------------------------------------------------------
Furthermore, based on Commission staff discussions with staff from
several DCMs regarding exchange current practices, the Commission
believes that the spot month should begin at the same time as futures
large trader reports are submitted--that is, under the definition of
reportable position, the spot month should begin ``at the close of the
market.'' \376\ The Commission views the ``close of the market'' as
consistent with ``the close of business.''
---------------------------------------------------------------------------
\376\ See current Sec. 15.00(p).
---------------------------------------------------------------------------
In consideration of the practicality of this approach, and in light
of the definition of ``reportable position,'' the Commission believes
that it would be more practical, clear, and consistent with existing
exchange practices, for the spot month to begin ``at the close of
business.'' In addition, as noted by one commenter,\377\ when the
exchange spot month commences at the close of business, rather than at
the close of trading, it would allow market participants to incorporate
exchange of futures for related position transactions (``EFRPs'') \378\
that occur after the close of trading, but before the close of
business.
---------------------------------------------------------------------------
\377\ CL-FIA-59595 at 10.
\378\ The Commission notes that DCM determinations of allowable
blocks, EFRPs, and transfer trades, in regards to position limits,
must also consider compliance with DCM Core Principle 9; discussion
of the interplay is beyond the scope of this Reproposal.
---------------------------------------------------------------------------
The Commission points out an additional correction made to the
reproposed definition, changing it from ``preceding the first day on
which delivery notices can be issued to the clearing organization of a
contract market'' to ``preceding the first day on which delivery
notices can be issued by the clearing organization of a contract
market'' [emphasis added]. The Commission understands that the spot
periods on the exchanges commence the day preceding the first day on
which delivery notices can be issued by the clearing organization of a
contract market, not the first day on which notices can be issued to
the clearing organization. The ``spot month'' definition in this
Reproposal, therefore, has been changed to correct this error.
The revisions included in the reproposed definition addresses the
concerns of the commenter who suggested the Commission define the spot
month according to each core referenced futures contract and for cash-
settled and physical delivery referenced contracts that are not core
referenced futures contracts, although for clarity and brevity the
Commission has chosen to highlight contracts that are the exception to
the general definition rather than list each of the 25 core referenced
futures contracts and multitude of referenced contracts separately.
In response to the commenters' concern regarding cash-settled
referenced contracts, the Reproposal changes the definition of spot
month to agree with the limits proposed in Sec. 150.2. In the December
2013 Position Limits Proposal, the Commission defined the spot month
for certain cash-settled referenced contracts, including calendar month
averaging contracts, to be a longer period than the spot month period
for the related core referenced futures contract. However, the
Commission did not propose a limit for such contracts in proposed Sec.
150.2, rendering superfluous that aspect of the proposed definition of
spot month, at this time. The Commission is reproposing the definition
of spot month without this provision, thereby addressing the concerns
of the commenters regarding the impact of the definition on calendar
month averaging contracts outside of the spot month for the relevant
core referenced futures contract. In order to make clearer the relevant
spot month periods for referenced contracts other than core referenced
futures contracts, the Commission has included subsection (3) of the
definition that states that the spot month for such referenced
contracts is the same period as that of the relevant core referenced
futures contract.
The Commission believes that the revised definition reproposed here
sufficiently clarifies the applicable spot month periods, which can
also be determined via exchange rulebooks and defined contract
specifications, such that a defined calendar of spot months is not
necessary. Further, a published calendar would need to be revised every
year to update spot month periods for each contract and each
expiration. The Commission believes this constant revision may lead to
more confusion than it is meant to correct.
r. Spot-Month, Single-Month, and All-Months-Combined Position Limits
Proposed Rule: In addition to a definition for ``spot month,''
current part 150 includes definitions for ``single month,'' and for
``all-months'' where ``single month'' is defined as ``each separate
futures trading month, other than the spot month future,'' and ``all-
months'' is defined as ``the sum of all futures trading months
including the spot month future.''
As noted in the December 2013 Position Limits proposal, vacated
part 151 retained only the definition for spot month, and, instead,
adopted a definition for ``spot-month, single-month, and all-months-
combined position limits.'' The definition specified that, for
Referenced Contracts based on a commodity identified in Sec. 151.2,
the maximum number of contracts a trader could hold was as provided in
Sec. 151.4.
In the December 2013 Position Limits Proposal, as noted above, the
Commission proposed to amend Sec. 150.1 by deleting the definitions
for ``single month,'' and for ``all-months,'' but, unlike the vacated
part 151, the proposal did not include a definition for ``spot-month,
single-month, and all-months-combined position limits.'' Instead, it
proposed to adopt a definition for ``speculative position limits'' that
should obviate the need for these definitions.\379\
---------------------------------------------------------------------------
\379\ See Section III.A.1.r (Spot-month, single-month, and all-
months-combined position limits) above for a discussion of the
proposed definition of ``speculative position limit.''
---------------------------------------------------------------------------
Comments Received: The Commission received no comments regarding
the deletion of these definitions.
Commission Reproposal: This Reproposal, consistent with the
December 2013 Position Limits Proposal, eliminates the definitions for
``single month,'' and for ``all-months,'' for the reasons provided
above.
s. Swap and Swap Dealer
Proposed Rule: While the terms ``swap'' and ``swap dealer'' are not
currently defined in Sec. 150.1, the December 2013 Position Limits
Proposal amended Sec. 150.1 to define these terms as they are defined
in section 1a of the Act and as further defined in section 1.3 of this
chapter.'' \380\
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\380\ 7 U.S.C. 1a(47) and 1a(49); Sec. 1.3(xxx) (``swap'') and
Sec. 1.3(ggg) (``swap dealer''). See Further Definition of ``Swap
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and
``Eligible Contract Participant,'' 77 FR 30596 (May 23, 2012); see
also, Swap Definition Rulemaking.
---------------------------------------------------------------------------
Comments Received: The Commission received no comments on these
definitions.
[[Page 96742]]
Commission Reproposal: The Commission has determined to repropose
these definitions as originally proposed, for the reasons provided
above.
2. Bona Fide Hedging Definition
a. Bona Fide Hedging Position (BFH) Definition--Background
Prior to the 1974 amendments to the CEA, the definition of a bona
fide hedging position was found in the statute. The 1974 amendments
authorized the newly formed Commission to define a bona fide hedging
position.\381\ The Commission published a final rule in 1977, providing
a general definition of a bona fide hedging position in Sec.
1.3(z)(1).\382\ The Commission listed certain positions, meeting the
requirements of the general definition of a bona fide hedging position,
in Sec. 1.3(z)(2) (i.e., enumerated bona fide hedging positions). The
Commission provided an application process for market participants to
seek recognition of non-enumerated bona fide hedging positions in
Sec. Sec. 1.3(z)(3) and 1.48.
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\381\ Those amendments to CEA section 4a(3), subsequently re-
designated Sec. 4a(c)(1), 7 U.S.C. 6a(c)(1), provide that no rule
of the Commission shall apply to positions which are shown to be
bona fide hedging positions, as such term is defined by the
Commission. See, sec. 404 of the Commodity Futures Trading
Commission Act of 1974, Pub. L. 93-463, 88 Stat. 1389 (Oct. 23,
1974). See 2013 Position Limits Proposal, 78 FR at 75703 for
additional discussion of the history of the definition of a bona
fide hedging position.
\382\ 42 FR 42748 (Aug. 24, 1977). Previously, the Secretary of
Agriculture, pursuant to section 404 of the Commodity Futures
Trading Commission Act of 1974 (Pub. L. 93-463), promulgated a
definition of bona fide hedging transactions and positions. 40 FR
111560 (March 12, 1975). That definition, largely reflecting the
statutory definition previously in effect, remained in effect until
the newly-established Commission defined that term. Id.
---------------------------------------------------------------------------
During the 1980's, exchanges were required to incorporate the
Commission's general definition of bona fide hedging position into
their exchange-set position limit regulations.\383\ While the
Commission had established position limits on only a few commodity
futures contracts in Sec. 150.2, Commission rule Sec. 1.61
(subsequently incorporated into Sec. 150.5) required DCMs to establish
limits on commodities futures not subject to federal limits. The
Commission directed in Sec. 1.61(a)(3) (subsequently incorporated into
Sec. 150.5(d)(1)) that no DCM regulation regarding position limits
would apply to bona fide hedging positions as defined by a DCM in
accordance with Sec. 1.3(z)(1).
---------------------------------------------------------------------------
\383\ 46 FR 50938 at 50945 (Oct. 16, 1981).
---------------------------------------------------------------------------
In 1987, the Commission provided interpretive guidance regarding
the bona fide hedging definition and risk management exemptions for
futures in financial instruments (now termed excluded
commodities).\384\ This guidance permitted exchanges, for purposes of
exchange-set limits on excluded commodities, to recognize risk
management exemptions.\385\
---------------------------------------------------------------------------
\384\ 52 FR 34633 (Sept. 14, 1987) and 52 FR 27195 (July 20,
1987).
\385\ See December 2013 Position Limits Proposal, 78 FR at
75704.
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In the 1990's, the Commission allowed exchanges to experiment with
substituting position accountability levels for position limits.\386\
The CFMA, in 2000, codified, in DCM Core Principle 5, position
accountability as an acceptable practice.\387\ The CFMA, however, did
not address the definition of a bona fide hedging position.
---------------------------------------------------------------------------
\386\ Exchange rules for position accountability levels require
a market participant whose position exceeds an accountability level
to consent automatically to requests of the exchange: (1) To provide
information about a position; and (2) to not increase or to reduce a
position, if so ordered by the exchange. In contrast, a speculative
position limit rule does not authorize an exchange to order a market
participant to reduce a position. Rather, a position limit sets a
maximum permissible size for a speculative position. The Commission
notes that it may require a market participant to provide
information about a position, for example, by issuing a special call
under Sec. 18.05 to a trader with a reportable position in futures
contracts.
\387\ DCM Core Principle 5 is codified in CEA section 5(d)(5), 7
U.S.C. 7(d)(5). See Section 111 of the Commodity Futures
Modernization Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763 (Dec.
21, 2000) (CFMA).
---------------------------------------------------------------------------
With the passing of the CFMA in 2000, the Commission's requirements
for exchanges to adopt position limits and associated bona fide hedging
exemptions, in Sec. 150.5, were rendered mere guidance. That is,
exchanges were no longer required to establish limits and no longer
required to use the Commission's general definition of a bona fide
hedging position. Nonetheless, the Commission continued to guide
exchanges to adopt position limits, particularly for the spot month in
physical-delivery physical commodity derivatives, and to provide for
exemptions.
The Farm Bill of 2008 authorized the Commission to regulate swaps
traded on exempt commercial markets (ECM) that the Commission
determined to be a significant price discovery contract (SPDC).\388\
The Commission implemented these provisions in part 36 of its
rules.\389\ The Commission provided guidance to ECMs in complying with
Core Principle IV regarding position limitations or
accountability.\390\ That guidance provided, as an acceptable practice
for cleared trades, that the ECM's position limit rules may exempt bona
fide hedging positions.
---------------------------------------------------------------------------
\388\ See Sec. 13201 of the Food, Conservation and Energy Act
of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008) (Farm
Bill of 2008). These provisions were subsequently superseded by the
Dodd-Frank Act.
\389\ 66 FR 42270 (Aug. 10, 2001). Part 36 was removed and
reserved to conform to the amendments to the CEA by the Dodd-Frank
Act.
\390\ 17 CFR part 36, App. B (2010).
---------------------------------------------------------------------------
In 2010, the Dodd-Frank Act added a directive, for purposes of
implementation of CEA section 4a(a)(2), for the Commission to define a
bona fide hedging position for physical commodity derivatives
consistent with, in the Commission's opinion, the reasonably certain
statutory standards in CEA section 4a(c)(2). Those statutory standards
build on, but differ slightly from, the Commission's general definition
in rule 1.3(z)(1).\391\ The Commission interprets those statutory
standards as directing the Commission to narrow the bona fide hedging
position definition for physical commodities.\392\ The Commission
discusses those differences, below.
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\391\ It should be noted that a 2011 final rule of the
Commission would have amended the definition of a bona fide hedging
position in Sec. 1.3(z), to be applicable only to excluded
commodities, and would have added a new definition of a bona fide
hedging position to Part 151, to be applicable to physical
commodities. Position Limits for Futures and Swaps, 76 FR 71626
(Nov.18, 2011). However, prior to the compliance date for that 2011
rulemaking, a federal court vacated most provisions of that
rulemaking, including the amendments to the definition of a bona
fide hedging position. International Swaps and Derivatives Ass'n v.
United State Commodity Futures Trading Comm'n, 887 F. Supp. 2d 259
(D.D.C. 2012). Because the Commission has not instructed Federal
Register to roll back the 2011 changes to the CFR, the current
definition of a bona fide hedging position is found in the 2010
version of the Code of Federal Regulations. 17 CFR 1.3(z) (2010).
\392\ See December 2013 Position Limits Proposal, 78 FR at
75705.
---------------------------------------------------------------------------
b. BFH Definition Summary
Under the December 2013 Position Limits Proposal, the Commission
proposed a new definition of bona fide hedging position, to replace the
current definition in Sec. 1.3(z), that would be applicable to
positions in excluded commodities and in physical commodities.\393\ The
proposed definition was organized into an opening paragraph and five
numbered paragraphs. In the opening paragraph, for positions in either
excluded commodities or physical commodities, the proposed definition
would have applied two general requirements: The incidental test; and
the orderly trading requirement. For excluded commodities, the
Commission proposed in paragraph (1) a definition that conformed to the
Commission's 1987
[[Page 96743]]
interpretations permitting risk management exemptions in excluded
commodity contracts. For physical commodities, the Commission proposed
in paragraph (2) to amend the current general definition to conform to
CEA section 4a(c) and to remove the application process in Sec. Sec.
1.3(z)(3) and 1.48, that permits market participants to seek
recognition of non-enumerated bona fide hedging positions. Rather, the
Commission proposed that a market participant may request either a
staff interpretative letter under Sec. 140.99 \394\ or seek CEA
section 4a(a)(7) exemptive relief.\395\ Paragraphs (3) and (4) listed
enumerated exemptions. Paragraph (5) listed the requirements for cross-
commodity hedges of enumerated exemptions.
---------------------------------------------------------------------------
\393\ See December 2013 Position Limits Proposal, 78 FR at
75702-23. In doing so, the Commission proposed to remove and reserve
Sec. 1.3(z).
\394\ Section 140.99 sets out general procedures and
requirements for requests to Commission staff for exemptive, no-
action and interpretative letters.
\395\ See December 2013 Position Limits Proposal, 78 FR 75719.
---------------------------------------------------------------------------
In response to comments on the December 2013 Position Limits
Proposal, in the 2016 Supplemental Proposal, the Commission amended the
proposed definition of bona fide hedging position.\396\ The amended
definition proposed in the 2016 Supplemental Proposal would no longer
apply the two general requirements (the incidental test and the orderly
trading requirement). For excluded commodities, the Commission again
proposed paragraph (1) of the definition, substantially as in 2013. For
physical commodities, the Commission again proposed to conform
paragraph (2) more closely to CEA section 4a(c), but also proposed an
application process for market participants to seek recognition of non-
enumerated bona fide hedging positions, without the need to petition
the Commission. The Commission again proposed paragraphs (3) through
(5).
---------------------------------------------------------------------------
\396\ See 2016 Supplemental Position Limits Proposal, 81 FR at
38462-64.
---------------------------------------------------------------------------
In response to comments on both the December 2013 Position Limits
Proposal and the 2016 Supplemental Proposal, the Commission is now
reproposing the definition of bona fide hedging position, generally as
proposed in the 2016 Supplemental Proposal, but with a few further
amendments. First, for excluded commodities, the Commission clarifies
further the discretion of exchanges in recognizing risk management
exemptions. Second, for physical commodities, the Commission: (a)
Clarifies the scope of the general definition of a bona fide hedging
position; (b) conforms that general definition more closely to CEA
section 4a(c) by including recognition of positions that reduce risks
attendant to a swap that was used as a hedge; and, (c) re-organizes
additional requirements for enumerated hedges and requirements for
other recognition as a non-enumerated bona fide hedging position, apart
from the general definition.
c. BFH Definition Discussion--Remove Incidental Test and Orderly
Trading Requirement
Proposed Rule: As noted above, the Commission proposed to retain,
in its December 2013 Position Limits Proposal,\397\ then proposed to
remove, in its 2016 Supplemental Position Limits Proposal,\398\ two
general requirements contained in the Sec. 1.3(z)(1) definition of
bona fide hedging position: the incidental test; and the orderly
trading requirement. The incidental test requires, for a position to be
recognized as a bona fide hedging position, that the ``purpose is to
offset price risks incidental to commercial cash, spot, or forward
operations.'' The orderly trading requirement mandates that ``such
position is established and liquidated in an orderly manner in
accordance with sound commercial practices.''
---------------------------------------------------------------------------
\397\ 78 FR at 75706.
\398\ 81 FR at 38462.
---------------------------------------------------------------------------
Comments Received: Commenters generally objected to retaining the
incidental test and the orderly trading requirement in the definition
of bona fide hedging position, as proposed in 2013.\399\ A number of
commenters supported the Commission's 2016 Supplemental Proposal to
remove the incidental test and the orderly trading requirement.\400\
---------------------------------------------------------------------------
\399\ See 2016 Supplemental Position Limits Proposal, 81 FR at
38462.
\400\ See, e.g., CL-NCFC-60930 at 2, CL-FIA-60937 at 5 and 23,
and CL-IECAssn-60949 at 5-7.
---------------------------------------------------------------------------
Incidental Test: Commenters objected to the incidental test,
because that test is not included in the standards in CEA section 4a(c)
for the Commission to define a bona fide hedging position for physical
commodities.\401\
---------------------------------------------------------------------------
\401\ See, e.g., CL-CME-58718 at 47, and CL-NGFA-60941 at 2.
---------------------------------------------------------------------------
However, other commenters noted their belief that eliminating the
incidental test would permit swap dealers or purely financial entities
to avail themselves of bona fide hedging exemptions, to the detriment
of commercial hedgers.\402\
---------------------------------------------------------------------------
\402\ See, e.g., CL-IATP-60951 at 4, CL-AFR-60953 at 2, CL-
Better Markets-60928 at 5, and CL-Rutkowski-60962 at 1.
---------------------------------------------------------------------------
Orderly trading requirement: One commenter urged the Commission to
eliminate the orderly trading requirement, because this requirement
does not apply to over-the-counter markets, the Commission does not
define orderly trading in a bi-lateral market, and this requirement
imposes a duty on end users to monitor market activities to ensure they
do not cause a significant market impact; additionally, the commenter
noted the anti-disruptive trading prohibitions and polices apply
regardless of whether the orderly trading requirement is imposed.\403\
Similarly, another commenter urged the Commission to exempt commercial
end-users from the orderly trading requirement, arguing that an orderly
trading requirement unreasonably requires commercial end-users to
monitor markets to measure the impact of their activities without clear
guidance from the Commission on what would constitute significant
market impact.\404\
---------------------------------------------------------------------------
\403\ See CL-COPE-59662 at 13.
\404\ See CL-DEU-59627 at 5-7.
---------------------------------------------------------------------------
Other commenters to the 2013 Proposal requested the Commission
interpret the orderly trading requirement consistently with the
Commission's disruptive trading practices interpretation (i.e., a
standard of intentional or reckless conduct) and not to apply a
negligence standard.\405\ Yet another commenter requested clarification
on the process the Commission would use to determine whether a position
has been established and liquidated in an orderly manner, whether any
defenses may be available, and what would be the consequences of
failing the requirement.\406\
---------------------------------------------------------------------------
\405\ See, e.g., CL-FIA-59595 at 5, 33-34, CL-EEI-EPSA-59602 at
14-15, CL-ISDA/SIFMA-59611 at 4, 39, CL-CME-59718 at 67, and CL-ICE-
59669 at 11.
\406\ See CL-Working Group-59693 at 14.
---------------------------------------------------------------------------
However, one commenter is concerned that eliminating the orderly
trading requirement for bona fide hedging for swaps positions would
discriminate against market participants in the futures and options
markets. The commenter noted that, if the Commission eliminates this
requirement, the Commission could not use its authority effectively to
review exchange-granted exemptions for swaps from position limits to
prevent or diminish excessive speculation.\407\
---------------------------------------------------------------------------
\407\ See CL-IATP-60951 at 4.
---------------------------------------------------------------------------
Commission Reproposal: In the reproposed definition of bona fide
hedging position, the Commission is eliminating the incidental test and
the orderly trading requirement.
Incidental Test: Under the Reproposal, the incidental test has been
eliminated, because the Commission views the economically appropriate
test (discussed below) as including the concept of the offset of price
risks
[[Page 96744]]
incidental to commercial cash, spot, or forward operations. It was
noted in the 2013 Position Limits Proposal that, ``The Commission
believes the concept of commercial cash market activities is also
embodied in the economically appropriate test for physical commodities
in [CEA section 4a(c)(2)].'' \408\ It should be noted the incidental
test has been part of the regulatory definition of bona fide hedging
since 1975,\409\ but that the requirement was not explained in the 1974
proposing notice (``proposed definition otherwise deviates in only
minor ways from the hedging definition presently contained in [CEA
section 4a(3)]'').\410\
---------------------------------------------------------------------------
\408\ See December 2013 Position Limits Proposal, 78 FR at
75707.
\409\ 40 FR 11560 (March 12, 1975).
\410\ 39 FR 39731 (Nov. 11, 1974).
---------------------------------------------------------------------------
The Commission is not persuaded by the commenters who believe
eliminating the incidental test would permit financial entities to
avail themselves of a bona fide hedging exemption, because the
incidental test is essentially embedded in the economically appropriate
test. In addition, for a physical-commodity derivative, the reproposed
definition, in mirroring the statutory standards of CEA section 4a(c),
requires a bona fide hedging position to be a substitute for a
transaction taken or to be taken in the cash market (either for the
market participant itself or for the market participant's pass-through
swap counterparty), which generally would preclude financial entities
from availing themselves of a bona fide hedging exemption (in the
absence of qualifying for a pass-through swap offset exemption,
discussed below).
Orderly Trading Requirement: The Reproposal also eliminates the
orderly trading requirement. That provision has been a part of the
regulatory definition of bona fide hedging since March 12, 1975 \411\
and previously was found in the statutory definition of bona fide
hedging position prior to the 1974 amendment removing the statutory
definition from CEA section 4a(3). However, the Commission is not aware
of a denial of recognition of a position as a bona fide hedging
position, as a result of a lack of orderly trading. Further, the
Commission notes that the meaning of the orderly trading requirement is
unclear in the context of the over-the-counter (OTC) swap market or in
the context of permitted off-exchange transactions (e.g., exchange of
futures for physicals).
---------------------------------------------------------------------------
\411\ 40 FR 11560 (Mar. 12, 1975).
---------------------------------------------------------------------------
In regard to the anti-disruptive trading prohibitions of CEA
section 4c(a)(5), those prohibitions apply to trading on registered
entities, but not to OTC transactions. It should be noted that 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'' (emphasis added); however, the
Commission has not, under the authority of CEA section 4c(a)(6),
prohibited the intentional or reckless disregard for the orderly
execution of transactions on a registered entity outside of the closing
period.
The Commission notes that an exchange may impose a general orderly
trading on all market participants. Market participants may request
clarification from exchanges on their trading rules. The Commission
does not believe that the absence of an orderly trading requirement in
the definition of bona fide hedging position would discriminate against
any particular trading venue for commodity derivative contracts.
d. BFH Definition Discussion-- Excluded Commodities
Proposed Rule: In both the 2013 Position Limits Proposal and the
2016 Supplement Proposal, the proposed definition of bona fide hedging
position for contracts in an excluded commodity included a standard
that the position is economically appropriate to the reduction of risks
in the conduct and management of a commercial enterprise (the
economically appropriate test) and also specified that such position
should be either (i) specifically enumerated in paragraphs (3) through
(5) of the definition of bona fide hedging position; or (ii) recognized
as a bona fide hedging position by a DCM or SEF consistent with the
guidance on risk management exemptions in proposed Appendix A to part
150.\412\ As noted above, the 2016 Supplemental Proposal would
eliminate the two additional general requirements (the incidental test
and the orderly trading requirement).
---------------------------------------------------------------------------
\412\ December 2013 Position Limits Proposal, 78 FR at 75707;
2016 Supplemental Position Limits Proposal, 81 FR at 38505.
---------------------------------------------------------------------------
Comments Received: One commenter believed that, to avoid an overly
restrictive definition due to the limited set of examples provided by
the Commission, only the general definition of a bona fide hedging
position should be applicable to hedges of an excluded commodity.\413\
---------------------------------------------------------------------------
\413\ CL-BG Group-59656 at 9.
---------------------------------------------------------------------------
Commission Reproposal: After consideration of comments and review
of the record, the Commission has determined in the Reproposal to apply
the economically appropriate test to enumerated exemptions, as
proposed.\414\ However, the Reproposal amends the proposed definition
of a bona fide hedging position for an excluded commodity, to clarify
that an exchange may otherwise recognize risk management exemptions in
an excluded commodity, without regard to the economically appropriate
test. Regarding risk management exemptions, the Commission notes that
Appendix A (which codifies the Commission's two 1987 interpretations of
the bona fide hedging definition in the context of excluded
commodities) includes examples of risk altering transactions, such as a
temporary increase in equity exposure relative to cash bond holdings.
Such risk altering transactions appear inconsistent with the
Commission's interpretation of the economically appropriate test.
Accordingly, the Reproposal removes the economically appropriate test
from the guidance for exchange-recognized risk management exemptions in
excluded commodities.
---------------------------------------------------------------------------
\414\ The Commission did not propose to apply to excluded
commodities any of the additional standards in the general
definition applicable to hedges of a physical commodity.
---------------------------------------------------------------------------
Regarding an exchange's obligation to comply with core principles
pertaining to position limits on excluded commodities, as discussed
further in Sec. 150.5, the Commission clarifies that under the
Reproposal, exchanges have reasonable discretion as to whether to adopt
the Commission's definition of a bona fide hedging position, including
whether to grant risk management exemptions, such as those that would
be consistent with, but not limited to, the examples in Appendix A to
part 150. That is, the set of examples in Appendix A to part 150 is
non-restrictive, as it is guidance. The Reproposal also makes minor
wording changes in Appendix A to part 150, including to clarify an
exchange's reasonable discretion in granting risk management exemptions
and to eliminate a reference to the orderly trading requirement which
has been deleted, as discussed above, but otherwise is adopting
Appendix A as proposed.
e. BFH Definition Discussion--Physical Commodities General Definition
As noted in its proposal, the core of the Commission's approach to
defining bona fide hedging over the years has focused on transactions
that offset a
[[Page 96745]]
recognized price risk.\415\ Once a bona fide hedge is implemented, the
hedged entity should be price insensitive because any change in the
value of the underlying physical commodity is offset by the change in
value of the entity's physical commodity derivative position.
---------------------------------------------------------------------------
\415\ December 2013 Position Limits Proposal, 78 FR at 75702-3.
---------------------------------------------------------------------------
Because a firm that has hedged its price exposure is price neutral
in its overall physical commodity position, the hedged entity should
have little incentive to manipulate or engage in other abusive market
practices to affect prices. By contrast, a party that maintains a
derivative position that leaves it with exposure to price changes is
not neutral as to price and, therefore, may have an incentive to affect
prices. Further, the intention of a hedge exemption is to enable a
commercial entity to offset its price risk; it was never intended to
facilitate taking on additional price risk.
The Commission recognizes there are complexities to analyzing the
various commercial price risks applicable to particular commercial
circumstances in order to determine whether a hedge exemption is
warranted. These complexities have led the Commission, from time to
time, to issue rule changes, interpretations, and exemptions. Congress,
too, has periodically revised the Federal statutes applicable to bona
fide hedging, most recently in the Dodd-Frank Act.
CEA section 4a(c)(1),\416\ as re-designated by the Dodd-Frank Act,
authorizes the Commission to define bona fide hedging positions
``consistent with the purposes of this Act.'' CEA section 4a(c)(2), as
added by the Dodd-Frank Act, provides new requirements for the
Commission to define bona fide hedging positions in physical commodity
derivatives ``[f]or the purposes of implementation of [CEA section
4a(a)(2)] for contracts of sale for future delivery or options on the
contracts of commodities [traded on DCMs].'' \417\
---------------------------------------------------------------------------
\416\ 7 U.S.C. 6a(c)(1).
\417\ The Reproposal provides for a phased approach to
implementation of CEA section 4a(a)(2), to reduce the potential
administrative burden on exchanges and market participants, and to
facilitate adoption of monitoring policies, procedures and systems.
See, e.g., December 2013 Position Limits Proposal, 78 FR at 75725.
The first phase of implementation of CEA section 4a(a)(2), in this
Reproposal, initially sets federal limits on 25 core referenced
futures contracts and their associated referenced contracts. The
Commission is establishing a definition of bona fide hedging
position for physical commodities in connection with its
implementation of CEA section 4a(a)(2), applicable to federal
limits. However, the Reproposal does not mandate adoption of that
definition of a bona fide hedging position for purposes of exchange-
set limits in contracts that are not yet subject to a federal limit.
See below regarding guidance and requirements under reproposed Sec.
150.5 for exchange-set limits in physical commodities.
---------------------------------------------------------------------------
General Definition: The Commission's proposed general definition
for physical commodity derivative contracts, mirroring CEA section
4a(c)(2)(a), specifies a bona fide hedging position is one that:
(a) Temporary substitute test: represents a substitute for
transactions made or to be made or positions taken or to be taken at a
later time in the physical marketing channel;
(b) Economically appropriate test: is economically appropriate to
the reduction of risks in the conduct and management of a commercial
enterprise; and
(c) Change in value requirement: arises from the potential change
in the value of assets, liabilities, or services, whether current or
anticipated.
In addition to the above, the Commission's proposed general
definition, mirroring CEA section 4a(c)(2)(B)(i), also recognizes a
bona fide hedging position that:
(d) Pass-through swap offset: reduces risks attendant to a position
resulting from a swap that was executed opposite a counterparty for
which the transaction would qualify as a bona fide hedging transaction
under the general definition above.
The Commission proposed another provision, based on the statutory
standards, to recognize as a bona fide a position that:
(e) Pass-through swap: is itself the swap executed opposite a pass-
through swap counterparty, provided that the risk of that swap has been
offset.
The Commission received a number of comments on the December 2013
Position Limits Proposal and the 2016 Supplemental Proposal. Those
concerning the incidental test and the orderly trading requirement are
discussed above. Others are discussed below.
i. Temporary Substitute Test and Risk Management Exemptions
Proposed Rule: The temporary substitute test is discussed in the
2013 Position Limits Proposal at 75708-9. As the Commission noted in
the proposal, it believes that the temporary substitute test is a
necessary condition for classification of positions in physical
commodities as bona fide hedging positions. The proposed test mirrors
the statutory test in CEA section 4a(c)(2)(a)(i). The statutory test
does not include the adverb ``normally'' to modify the verb
``represents'' in the phrase ``represents a substitute for transactions
taken or to be taken at a later time in a physical marketing channel.''
Because the definition in Sec. 1.3(z)(1) includes the adverb
``normally,'' the Commission interpreted that provision to be merely a
temporary substitute criterion, rather than a test. Accordingly, the
Commission previously granted risk management exemptions for persons to
offset the risk of swaps and other financial instruments that did not
represent substitutes for transactions or positions to be taken in a
physical marketing channel. However, given the statutory change in
direction, positions that reduce the risk of such speculative swaps and
financial instruments would no longer meet the requirements for a bona
fide hedging position under the proposed definition in Sec. 150.1.
Comments Received: A number of commenters urged the Commission not
to deny risk-management exemptions for financial intermediaries who
utilize referenced contracts to offset the risks arising from the
provision of diversified, commodity-based returns to the
intermediaries' clients.\418\
---------------------------------------------------------------------------
\418\ See, e.g., CL-FIA-59595 at 5, 34-35; CL-AMG-59709 at 2,
12-15; and CL-CME-59718 at 67-69.
---------------------------------------------------------------------------
However, other commenters noted the ``proposed rules properly
refrain from providing a general exemption to financial firms seeking
to hedge their financial risks from the sale of commodity-related
instruments such as index swaps, Exchange Traded Funds (ETFs), and
Exchange Traded Notes (ETNs),'' because such instruments are inherently
speculative and may overwhelm the price discovery function of the
derivative market.\419\
---------------------------------------------------------------------------
\419\ See, e.g., CL-Sen. Levin-59637 at 8, and CL-Better
Markets-60325 at 2.
---------------------------------------------------------------------------
Commission Reproposal: The Reproposal would retain the temporary
substitute test, as proposed. The Commission interprets the statutory
temporary substitute test as more stringent than the temporary
substitute criterion in Sec. 1.3(z)(1); \420\ that is, the Commission
views the statutory test as narrowing the standards for a bona fide
hedging position. Further, the Commission believes that retaining a
risk management exemption for swap intermediaries, without regard to
the purpose of the counterparty's swap, would fly in the face of the
statutory restrictions on pass-through swap offsets (requiring the
position of the pass-through swap counterparty to
[[Page 96746]]
qualify as a bona fide hedging transaction).\421\
---------------------------------------------------------------------------
\420\ See December 2013 Position Limits Proposal, 78 FR at
75709.
\421\ See CEA section 4a(c)(2)(B)(i).
---------------------------------------------------------------------------
Proposed Rule on risk management exemption grandfather provisions:
The Commission proposed in Sec. 150.2(f) and Sec. 150.3(f) to
grandfather previously granted risk-management exemptions, as applied
to pre-existing positions.\422\
---------------------------------------------------------------------------
\422\ See December 2013 Position Limits Proposal, 78 FR at
75734-5 and 75739-41.
---------------------------------------------------------------------------
Comments Received: Commenters requested that the Commission extend
the grandfather relief to permit pre-existing risk management positions
to be increased after the effective date of a limit.\423\ Commenters
also requested that the Commission permit the risk associated with a
pre-existing position to be offset by a futures position in a deferred
contract month, after the liquidation of an offsetting position in a
nearby futures contract month.\424\
---------------------------------------------------------------------------
\423\ See, e.g., CL-AMG-59709 at 2, 18.
\424\ See, e.g., id. at 18-19.
---------------------------------------------------------------------------
Some commenters urged the Commission not to deny risk-management
exemptions for financial intermediaries who utilize referenced
contracts to offset the risks arising from the provision of diversified
commodity-based returns to the intermediaries' clients.\425\
---------------------------------------------------------------------------
\425\ CL-FIA-59595 at 5,34-35; CL-AMG-59709 at 2, 12-15; and CL-
CME-59718 at 67-69.
---------------------------------------------------------------------------
In contrast, other commenters noted that the proposed rules
``properly refrain'' from providing a general exemption to financial
firms seeking to hedge their financial risks from the sale of
commodity-related instruments such as index swaps, ETFs, and ETNs
because such instruments are ``inherently speculative'' and may
overwhelm the price discovery function of the derivative market.\426\
Another commenter noted, because commodity index contracts are
speculative, the Commission should not provide a regulatory exemption
for such contracts.\427\
---------------------------------------------------------------------------
\426\ CL-Sen. Levin-59637 at 8; and CL-Better Markets-60325 at
2.
\427\ CL-CMOC-59720 at 4-5.
---------------------------------------------------------------------------
Commission Reproposal: The Reproposal clarifies and expands the
relief in Sec. 150.3(f) (previously granted exemptions) by: (1)
Clarifying that such previously granted exemptions may apply to pre-
existing financial instruments that are within the scope of existing
Sec. 1.47 exemptions, rather than only to pre-existing swaps; and (2)
recognizing exchange-granted non-enumerated exemptions in non-legacy
commodity derivatives outside of the spot month (consistent with the
Commission's recognition of risk management exemptions outside of the
spot month), and provided such exemptions are granted prior to the
compliance date of the final rule, once adopted, and apply only to pre-
existing financial instruments as of the effective date of that final
rule. These two changes are intended to reduce the potential for market
disruption by forced liquidations, since a market intermediary would
continue to be able to offset risks of pre-effective-date financial
instruments, pursuant to previously-granted federal or exchange risk
management exemptions.
The Reproposal clarifies that the Commission will continue to
recognize the offset of the risk of a pre-existing financial instrument
as bona fide using a derivative position, including a deferred
derivative contract month entered after the effective date of a final
rule, provided a nearby derivative contract month is liquidated.
However, under the Reproposal, such relief will not be extended to an
increase in positions after the effective date of a limit, because that
appears contrary to Congressional intent to narrow the definition of a
bona fide hedging position, as discussed above.
ii. Economically Appropriate Test
Commission proposal: The economically appropriate test is discussed
in the 2013 Position Limits Proposal at 75709-10. The proposed
economically appropriate test mirrors the statutory test, which, in
turn, mirrors the test in current Sec. 1.3(z)(1).
Comments received: Several commenters requested that the Commission
broadly interpret the phrase ``economically appropriate'' to include
more than just price risk, stating that there are other types of risk
that are economically appropriate to address in the management of a
commercial enterprise including operational risk, liquidity risk,
credit risk, locational risk, and seasonal risk.\428\
---------------------------------------------------------------------------
\428\ See, e.g., CL-NCGA-NGSA-60919 at 4, CL-EEI-EPSA-60925 at
14, CL-API-60939 at 2, CL-CMC-60950 at 4-5, CL-NCFC-60930 at 2, CL-
ADM-60934 at 2-6, CL-FIA-60937 at 5 and 20, CL-NGFA-60941 at 4, and
CL-Associations-60972 at 2.
---------------------------------------------------------------------------
Commenters suggested that if the Commission objected to expanding
its interpretation of ``economically appropriate'' risks, then the
Commission should allow the exchanges to utilize discretion in their
interpretations of the economically appropriate test.\429\ Another
commenter believed that the Commission should provide ``greater
flexibility'' in the various bona fide hedging tests, because hedging
that reduces all the various types of risk should be deemed
``economically appropriate.'' \430\ Commenters suggested that a broader
view of the types of risks considered to be ``economically
appropriate'' should not be perceived as being at odds with the
Commission's view of ``price risk'' because all of these risks can
inform and determine price, noting that firms evaluate different risks
and determine a price impact based on a combination of their likelihood
of occurrence and the price impact in the event of occurrence.\431\
---------------------------------------------------------------------------
\429\ See, e.g., CL-CMC-60950 at 4-5, and CL-Olam-59946 at 2-4.
\430\ CL-ICE-60929 at 10.
\431\ See, e.g., CL-ADM-60934 at 2-6, and CL-API-60939 at 2.
---------------------------------------------------------------------------
Commission Reproposal: The Reproposal does not broaden the
interpretation of the phrase ``economically appropriate.'' The
Commission notes that it has provided interpretations and guidance over
the years as to the meaning of ``economically appropriate.'' \432\ The
Commission reiterates its view that, to satisfy the economically
appropriate test and the change in value requirement of CEA section
4a(c)(2)(A)(iii), the purpose of a bona fide hedging position must be
to offset price risks incidental to a commercial enterprise's cash
operations.\433\
---------------------------------------------------------------------------
\432\ See December 2013 Position Limits Proposal, 78 FR at
75709-10.
\433\ Id. at 75710.
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The Commission notes that an exchange is permitted to recognize
non-enumerated bona fide hedging positions under the process of Sec.
150.9, discussed below, subject to assessment of the particular facts
and circumstances, where price risk arises from other types of risk.
The Reproposal does not, however, allow the exchanges to utilize
unbounded discretion in interpreting ``economically appropriate'' in
such recognitions. The Commission believes that such a broad delegation
is not authorized by the CEA and, in the Commission's view, would be
contrary to the reasonably certain statutory standard of the
economically appropriate test. Further, as explained in the discussion
of Sec. 150.9, exchange determinations will be subject to the
Commission's de novo review.
Comments on gross vs. net hedging: A number of commenters requested
that the Commission recognize as bona fide both ``gross hedging'' and
``net hedging,'' without regard to overall risk.\434\ Commenters
generally requested, as ``gross hedging,'' that an enterprise should be
permitted the flexibility to use either a long or short derivative to
offset the risk of any cash position, identified at the discretion of
[[Page 96747]]
the commercial enterprise, irrespective of the commercial enterprise's
net cash market position.\435\ For example, a commenter contended that
a commercial enterprise should be able to hedge fixed-price purchase
contracts (e.g., with a short futures position), without regard to the
enterprise's fixed-price sales contracts, even if such a short
derivative position may increase the enterprise's risk.\436\ One
commenter stated that the ``new proposed interpretation'' of the
``economically appropriate'' test requires a commercial enterprise to
include, and consider for purposes of bona fide hedging, portions of
its portfolio it would not otherwise consider in managing risk.\437\
Another commenter did not agree that market participants should be
required to calculate risk on a consolidated basis, because this
approach would require commercial entities to build out new systems. As
an alternative, that commenter requests the Commission recognize
current risk management tools.\438\
---------------------------------------------------------------------------
\434\ See, e.g., CL-MGEX-60936 at 11, CL-CMC-60950 at 6, CL-
Associations-60972 at 2.
\435\ See, e.g., CL-Olam-59658 at 4-6.
\436\ CL-FIA-59595 at 20-21.
\437\ CL-Working Group-60947 at 15.
\438\ CL-CMC-60950 at 5.
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Commission Reproposal: The Reproposal retains the Commission's
interpretation, as proposed, of economically appropriate gross hedging:
that in circumstances where net hedging does not measure all risk
exposures, an enterprise may appropriately enter into, for example, a
calendar month spread position as a gross hedge. A number of comments
misconstrued the Commission's historical interpretation of gross and
net hedging. The Commission has not recognized selective identification
of cash positions to justify a position as bona fide; rather, the
Commission has permitted a regular practice of excluding certain
commodities, products, or by-products, in determining an enterprise's
risk position.\439\ As proposed, the Reproposal requires such excluded
commodities to be de minimis or difficult to measure, because a market
participant should not be permitted to ignore material cash market
positions and enter into derivative positions that increase risk while
avoiding a position limit restriction; rather, such a market
participant's speculative activity must remain below the level of the
speculative position limit.
---------------------------------------------------------------------------
\439\ See, e.g., instructions to Form 204.
---------------------------------------------------------------------------
Note, however, under a partial reading of a preamble to a 1977
proposal, the Commission has appeared to recognize gross hedging,
without regard to net risk, as bona fide; the Commission noted in 1977
that: ``The previous statutory definition of bona fide hedging
transactions or positions contained in section 4a of the Act before
amendment by the CFTC Act and the present definition permit persons to
classify as hedging any purchase or sale for future delivery which is
offset by their gross cash position irrespective of their net cash
position.'' \440\ However, under a full reading of that 1977 proposal,
the Commission made clear that gross hedging was appropriate in
circumstances where ``net cash positions do not necessarily measure
total risk exposure due to differences in the timing of cash
commitments, the location of stocks, and differences in grades or types
of the cash commodity.'' \441\ Thus, the 1977 proposal noted the
Commission ``does not intend at this time to alter the provisions of
the present definition with respect to the hedging of gross cash
position.'' \442\ At the time of the 1977 proposal, the ``present
definition'' had been promulgated in 1975 by the Administrator of the
Commodity Exchange Authority based on the statutory definition; and the
Administrator had interpreted the statutory definition to recognize
gross hedging as bona fide in the context of a merchant who ``may hedge
his fixed-price purchase commitments by selling futures and at the same
time hedge his fixed-price sale commitments by buying futures,'' rather
than hedging only his net position.\443\
---------------------------------------------------------------------------
\440\ 42FR 14832 at 14834 (Mar. 16, 1977).
\441\ Id.
\442\ Id.
\443\ See, Letter from Roger R. Kauffman, Adm'r, Commodity
Exchange Authority, to Reid Bondurant, Cotton Exchange (Feb. 13,
1959) (emphasis added), cited in CL-Olam-59658 at 5.
---------------------------------------------------------------------------
Comments on specific, identifiable risk: Commenters requested the
Commission consider as economically appropriate any derivative position
that a business can reasonably demonstrate reduces or mitigates one or
more specific, identifiable risks related to individual or aggregated
positions or transactions, based on its own business judgment and risk
management policies, whether risk is managed enterprise-wide or by
legal entity, line of business, or profit center.\444\ One commenter
disagreed with what it called a ``one-size-fits-all'' risk management
paradigm that requires market participants to calculate risk on a
consolidated basis because this approach would require commercial
entities to build out new systems in order to manage risk this way. The
commenter requests that the Commission instead recognize that current
risk management tools are used effectively for positions that are below
current limits and those tools remain effective above position limit
levels as well.\445\
---------------------------------------------------------------------------
\444\ See, e.g., CL-API-59694 at 4, CL-IECAssn-59679 at 10-11,
CL-APGA-59722 at 9-10, CL-NCFC-59942 at 5, CL-EEI-EPSA-59602 at 15,
and CL-EEI-Sup-60386 at 7.
\445\ CL-CMC-60950 at 5.
---------------------------------------------------------------------------
Commission Reproposal: The Reproposal declines to assess the bona
fides of a position based solely on whether a commercial enterprise can
identify any particular cash position within an aggregated person, the
risks of which such derivative position offsets. The Commission
believes that such an approach would run counter to the aggregation
rules in Sec. 150.4 and would permit an enterprise to cherry pick cash
market exposures to justify exceeding position limits, with either a
long or short derivative position, even though such derivative position
increases the enterprise's risk.
The Commission views a derivative position that increases an
enterprise's risk as contrary to the plain language of CEA section
4a(c) and the Commission's bona fide hedging definition, which requires
that a bona fide hedging position ``is economically appropriate to the
reduction of risks in the conduct and management of a commercial
enterprise.'' \446\
---------------------------------------------------------------------------
\446\ CEA section 4a(c)(2)(A)(ii).
---------------------------------------------------------------------------
If a transaction that increases a commercial enterprise's overall
risk should be considered a bona fide hedging position, this would
result in position limits not applying to certain positions that should
be considered speculative. For example, assume an enterprise has
entered into only two cash forward transactions and has no inventory.
The first cash forward transaction is a purchase contract (for a
particular commodity for delivery at a particular later date). The
second cash forward transaction is a sales contract (for the same
commodity for delivery on the same date as the purchase contract).
Under the terms of the cash forward contracts, the enterprise may take
delivery on the purchase contract and re-deliver the commodity on the
sales contract. Such an enterprise does not have a net cash market
position that exposes it to price risk, because it has both purchased
and sold the same commodity for delivery on the same date (such as cash
forward contracts for the same cargo of Brent crude oil). The
enterprise could establish a short derivative position that would
offset the risk of the purchase contract; however, that would increase
the enterprise's price risk. Alternatively, the enterprise
[[Page 96748]]
could establish a long derivative position that would offset the risk
of the sales contract; however, that would increase the enterprise's
price risk. If price risk reduction at the level of the aggregate
person is not a requirement of a bona fide hedging position, such an
enterprise could establish either a long or short derivative position,
at its election, and claim an exemption from position limits for either
derivative position, ostensibly as a bona fide hedging position. If
either such position could be recognized as bona fide, position limits
would simply not apply to such an enterprise's derivative position,
even though the enterprise had no price risk exposure to the commodity
prior to establishing such derivative position and created price risk
exposure to the commodity by establishing the derivative position.
Based on the Commission's experience and expertise, it believes that
such a result (entering either a long or short derivative position,
whichever the market participant elects) simply cannot be recognized as
a legitimate risk reduction that should be exempt from position limits;
rather, such a position should be considered speculative for purposes
of position limits.
The Commission notes that a commercial enterprise that wishes to
separately manage its operations, in separate legal entities, may,
under the aggregation requirements of Sec. 150.4, establish
appropriate firewalls and file a notice for an aggregation exemption,
because separate legal entities with appropriate firewalls are treated
as separate persons for purposes of position limits. The Commission
explained that an aggregation exemption was appropriate in
circumstances where the risk of coordinated activity is mitigated by
firewalls.\447\
---------------------------------------------------------------------------
\447\ See discussion under section II.B.3 (Criteria for
Aggregation Relief in Rule 150.4(b)(2)(i)) of the 2016 Final
Aggregation Rule.
---------------------------------------------------------------------------
Comments on processing hedge: A commenter requested the Commission
recognize, as bona fide, a long or short derivative position that
offsets either inputs or outputs in a processing operation, based on
the business judgment of the commercial enterprise that it might not be
an appropriate time to hedge both inputs and outputs, and requested the
Commission withdraw the processing hedge example on pages 75836-7 of
the 2013 Position Limits Proposal (proposed example 5 in Appendix C to
part 150).\448\
---------------------------------------------------------------------------
\448\ CL-Cargill-59638 at 2-4.
---------------------------------------------------------------------------
Commission Reproposal: For the reasons discussed above regarding
gross hedging and specific, identifiable risks, the Reproposal does not
recognize as a bona fide hedging position a derivative position that
offsets either inputs or outputs in a processing operation, absent
additional facts and circumstances. The Commission reiterates its view
that, as explained in the Commission's 2013 Position Limits Proposal,
by way of example, processing by a soybean crush operation or a fuel
blending operation may add relatively little value to the price of the
input commodity. In such circumstances, it would be economically
appropriate for the processor or blender to offset the price risks of
both the unfilled anticipated requirement for the input commodity and
the unsold anticipated production; such a hedge would, for example,
fully lock in the value of soybean crush processing.\449\ However,
under such circumstances, merely entering an outright derivative
position (i.e., either a long position or a short position, at the
processor's election) appears to be risk increasing, since the price
risk of such outright position appears greater than, and not offsetting
of, the price risk of anticipated processing and, thus, such outright
position would not be economically appropriate to the reduction of
risks.
---------------------------------------------------------------------------
\449\ December 2013 Position Limits Proposal, 78 FR at 75709.
---------------------------------------------------------------------------
Comments on economically appropriate anticipatory hedges:
Commenters requested the Commission recognize derivative positions as
economically appropriate to the reduction of certain anticipatory
risks, such as irrevocable bids or offers.\450\
---------------------------------------------------------------------------
\450\ See, e.g., CL-Cargill-59638 at 2-4.
---------------------------------------------------------------------------
Commission Reproposal: The Commission has a long history of
providing for the recognition, in Sec. 1.3(z)(2), as enumerated bona
fide hedging positions, of anticipatory hedges for unfilled anticipated
requirements and unsold anticipated production, under the process of
Sec. 1.48.\451\ The Reproposal continues to enumerate those two
anticipatory hedges, along with two new anticipatory hedges for
anticipated royalties and contracts for services, as discussed below.
---------------------------------------------------------------------------
\451\ 17 CFR 1.3(z)(2) and 1.48 (2010).
---------------------------------------------------------------------------
The Commission did not propose an enumerated exemption for binding,
irrevocable bids or offers as the Commission believes that an analysis
of the facts and circumstances would be necessary prior to recognizing
such an exemption. Consequently, the Reproposal does not provide for
such an enumerated exemption. However, the Commission withdraws the
view that a binding, irrevocable bid or offer fails to meet the
economically appropriate test.\452\ Rather, the Commission will permit
exchanges, under Sec. 150.9, to make a facts-and-circumstances
determination as to whether to recognize such and other anticipatory
hedges as non-enumerated bona fide hedges, consistent with the
Commission's recognition ``that there can be a gradation of
probabilities that an anticipated transaction will occur.'' \453\
---------------------------------------------------------------------------
\452\ December 2013 Position Limits Proposal, 78 FR at 75720.
\453\ Id. at 75719.
---------------------------------------------------------------------------
iii. Change in Value Requirement
Commission proposal: To satisfy the change in value requirement,
the hedging position must arise from the potential change in the value
of: (I) Assets that a person owns, produces, manufactures, processes,
or merchandises or anticipates owning, producing, manufacturing,
processing, or merchandising; (II) liabilities that a person owes or
anticipates incurring; or (III) services that a person provides,
purchases, or anticipates providing or purchasing.\454\ The proposed
definition incorporated the potential change in value requirement in
current Sec. 1.3(z)(1).\455\ This provision largely mirrors the
provision of CEA section 4a(c)(2)(A)(iii).\456\
---------------------------------------------------------------------------
\454\ Id. at 75710.
\455\ 17 CFR 1.3(z) (2010).
\456\ As noted in the December 2013 Position Limits Proposal, 78
FR at 75710, CEA section 4a(c)(2)(A)(iii)(II) uses the phrase
``liabilities that a person owns or anticipates incurring.'' The
Commission interprets the word ``owns'' to be a typographical error,
and interprets the word ``owns'' to be ``owes.'' A person may owe on
a liability, and may anticipate incurring a liability. If a person
``owns'' a liability, such as a debt instrument issued by another,
then such person owns an asset. Because assets are included in CEA
section 4a(c)(2)(A)(iii)(I), the Commission interprets ``owns'' to
be ``owes.''
---------------------------------------------------------------------------
Comments on change in value: One commenter urged a more narrow
definition of bona fide hedging that restricts exemptions to
``commercial entities that deal exclusively in the production,
processing, refining, storage, transportation, wholesale or retail
distribution, or consumption of physical commodities.'' \457\ However,
numerous commenters urged the Commission to enumerate new exemptions
consistent with the change in value requirement, such as for
merchandising, as discussed below.
---------------------------------------------------------------------------
\457\ CL-PMAA-NEFI-60952 at 2.
---------------------------------------------------------------------------
Commission Reproposal: The Reproposal retains the change in value
requirement as proposed, which mirrors CEA section 4a(c)(2)(A)(iii).
Rather than further restrict the types of commercial entities who may
avail themselves of a
[[Page 96749]]
bona fide hedging exemption under the change in value requirement, the
Commission notes that the reproposed definition also reflects the
statutory requirement under the temporary substitute test, that the
hedging position be a substitute for a position taken or to be taken in
a physical marketing channel, either by the market participant or the
market participant's pass-through swap counterparty.
Comments on anticipatory merchandising or storage: Numerous
commenters asserted the Commission should recognize anticipatory
merchandising as a bona fide hedge, as included in CEA section
4a(c)(A)(iii), such as (1) a merchant desiring to lock in the price
differential between an unfixed price forward commitment and an
anticipated offsetting unfixed price forward commitment, where there is
a reasonable basis to infer that an offsetting transaction was likely
to occur (such as in anticipation of shipping), (2) a bid or offer,
where there is a reasonably anticipated risk that such bid or offer
will be accepted, or (3) an anticipated purchase and/or anticipated
storage of a commodity, prior to anticipated merchandising (or
usage).\458\
---------------------------------------------------------------------------
\458\ See, e.g., CL-FIA-59595 at 30-31, CL-FIA-60303 at 6, CL-
EEI-EPSA-59602 at 17-18, CL-EEI-59945 at 6, CL-CMC-60950 at 6, CL-
CMC-60391 at 4-5, CL-CMC-60318 at 5, CL-CMC-59634 at 3, 20-22, CL-
Cargill-59638 at 2-4, CL-ADM-59640 at 2-3, CL-Olam-59946 at 4, CL-BG
Group-59656 at 10-11, CL-ASCA-59667 at 2, CL-NGSA-60379 at 5, CL-
NGSA-59674 at 2, 18-24, CL-Working Group-60383 at 15, CL-Working
Group-59937 at 5-6, 10-12, CL-Working Group-59656 at 16-18, 21-23,
26, CL-API-59694 at 5-6, CL-MSCGI-59708 at 2-3, 18-20, CL-CME-59718
at 56-57, 59, CL-Armajaro-59729 at 1, CL-AFBF-59730 at 2, CL-NCFC-
59942 at 2-4, CL-ICE-60310 at 4, CL-ICE-60387 at 9, CL-ISDA/SIFMA-
59611 at 37-38, CL-COPE-59662 at 15-16, and CL-GSC-59703 at 3-4.
---------------------------------------------------------------------------
Commenters recommended the Commission recognize unfilled storage
capacity as the basis of a bona fide hedge of, either (1) anticipated
rents (e.g., a type of anticipated asset or liability), (2) anticipated
merchandising, or (3) anticipated purchase and storage prior to
usage.\459\ By way of example, one commenter contended anticipated rent
on a storage asset is like an option and the appropriate hedge position
should be dynamically adjusted.\460\ Also by way of example, another
commenter suggested enumerated hedges should include (1) offsetting
long and short positions in commodity derivative contracts as hedges of
storage or transportation of the commodity underlying such contracts;
and (2) positions that hedge the value of assets owned, or anticipated
to be owned, used to produce, process, store or transport the commodity
underlying the derivative.\461\
---------------------------------------------------------------------------
\459\ See, e.g., CL-Cargill-59638 at 2-4, CL-CME-59718 at 57-58,
CL-NEM-59586 at 4, CL-FIA-59595 32-33, CL-ISDA/SIFMA-59611 at 4, CL-
CMC-59634 at 5, CL-LDC-59643 at 2, CL-BG Group-59656 at 10, CL-COPE-
59950 at 5, CL-COPE-59662 at 14-15, CL--Working Group-59693 at 23-
26, CL-GSC-59703 at 2-3, CL-AFBF-59730 at 2, CL-SEMP-59926 at 6-7,
CL-EDF-60398 at 8-9, CL-EDF-59961 at 2-3, CL-Andersons-60256 at 1-3,
and CL-SEMP-60384 at 4-5.
\460\ CL-ISDA/SIFMA-59611, Annex B at 7.
\461\ CL-EEI-EPSA-60925 at 13.
---------------------------------------------------------------------------
Commission Reproposal: The Commission notes that an exchange, under
reproposed Sec. 150.9, as discussed below, is permitted to recognize
anticipated merchandising or anticipated purchase and storage, as
potential non-enumerated bona fide hedging positions, subject to
assessment of the particular facts and circumstances, including such
information as the market participant's activities (taken or to be
taken) in the physical marketing channel and arrangements for storage
facilities. While the Commission previously discussed its doubt that
storage hedges generally will meet the economically appropriate test,
because the value fluctuations in a calendar month spread in a
commodity derivative contract will likely have at best a low
correlation with value fluctuations in expected returns (e.g., rents)
on unfilled storage capacity,\462\ the Commission now withdraws that
discussion of doubt and, as reproposed, would review exchange-granted
non-enumerated bona fide hedging exemptions for storage with an open
mind.
---------------------------------------------------------------------------
\462\ December 2013 Position Limits Proposal, 78 FR at 75718.
---------------------------------------------------------------------------
The Commission does not express a view as this time on one
commenter's assertion that the anticipated rent on a storage asset is
like an option; the commenter did not provide data regarding the
relationship between calendar spreads and the ``profitability of
filling storage.'' The Commission notes that, under the Reproposal, an
exchange could evaluate the particulars of such a situation in an
application for a non-enumerated hedging position.
Similarly, as reproposed, an exchange could evaluate the
particulars of other situations, such as a commenter's example of
storage or transportation hedges. The Commission notes that it is not
clear from the comments how the value fluctuations of calendar month or
location differentials are related to the fluctuations in value of
storage or transportation. Regarding a commenter's examples of assets
owned or anticipated to be owned, it is not clear how the value
fluctuations of whatever would be the relevant hedging position (e.g.,
long, short, or calendar month spread) are related to the fluctuations
in value of whatever would be the particular assets (e.g., tractors,
combines, silos, semi-trucks, rail cars, pipelines) to be used to
produce, process, store or transport the commodity underlying the
derivative.
Comments on unfixed price commitments: Commenters recommended the
Commission recognize, as a bona fide hedge, the fixing of the price of
an unfixed price commitment, for example, to reduce the merchant's
operational risk and potentially to acquire a commodity through the
delivery process on a physical-delivery futures contract.\463\ Another
commenter provided an example of a preference to shift unfixed-price
exposure on cash commitments from daily index prices to the first-of-
month price under the NYMEX Henry Hub Natural Gas core referenced
futures contract.\464\ A commenter suggested that the interpretation of
a fixed price contract should include ``basis priced contracts which
are purchases or sales with the basis value fixed between the buyer and
the seller against a prevailing futures'' contract; the commenter noted
such basis risk could be hedged with a calendar month spread to lock in
their purchase and sale margins.\465\ Another commenter requested the
Commission explicitly recognize index price transactions as appropriate
for a bona fide hedging exemption, citing concerns that the price of an
unfixed price forward sales contract may fall below the cost of
production.\466\
---------------------------------------------------------------------------
\463\ See, e.g., CL-Olam-59946 at 4, and CL-NCFC -59942 at 2-4.
\464\ CL-NCGA-NGSA-60919 at 4-5.
\465\ CL-NGFA-60941 at 4.
\466\ CL-NCGA-NGSA-60919 at 5.
---------------------------------------------------------------------------
Commission Reproposal: The Commission affirms its belief that a
reduction in a price risk is required under the economically
appropriate test of CEA section 4a(c)(2)(A)(ii); consistent with the
economically appropriate test, a potential change in value (i.e., a
price risk) is required under CEA section 4a(c)(2)(A)(iii). In both the
reproposed and proposed definitions of bona fide hedging position, the
incidental test would require a reduction in price risk. Although the
Reproposal deletes the incidental test from the first paragraph of the
bona fide hedging position definition (as discussed above), the
Commission notes that it interprets risk in the economically
appropriate test as price risk, and does not interpret risk to include
operational risk. Interpreting risk to include operational risk would
broaden the scope of a bona fide hedging position beyond the
Commission's historical interpretation
[[Page 96750]]
and may have adverse impacts that are inconsistent with the policy
objectives of limits in CEA section 4a(a)(3)(B).
The Commission has consistently required a bona fide hedging
position to be a position that is shown to reduce price risk in the
conduct and management of a commercial enterprise.\467\ By way of
background, the Commission notes, in promulgating the definition of
bona fide hedging position in Sec. 1.3(z), it explained that a bona
fide hedging position ``must be economically appropriate to risk
reduction, such risks must arise from operation of a commercial
enterprise, and the price fluctuations of the futures contracts used in
the transaction must be substantially related to fluctuations of the
cash market value of the assets, liabilities or services being
hedged.'' \468\ As noted above, the Dodd-Frank Act added CEA section
4a(c)(2), which copied the economically appropriate test from the
Commission's definition in Sec. 1.3(z)(1). Thus, the Commission
believes it is reasonable to interpret that statutory standard in the
context of the Commission's historical interpretation of Sec. 1.3(z).
---------------------------------------------------------------------------
\467\ The Commission distinguishes operational risk, which may
arise from a potential failure of a counterparty to a cash market
forward transaction, from price risks in the conduct and management
of a commercial enterprise.
\468\ 42 FR 14832 at 14833 (March 16, 1977) (proposed
definition). The Commission also adopted the incidental test
(requiring that the ``purpose is to offset price risks incidental to
commercial cash or spot operations''). 42 FR 42748 at 42751 (Aug.
24, 1977) (final definition). Previously, the Secretary of
Agriculture promulgated a definition of bona fide hedging position
that required a purpose ``to offset price risks incidental to
commercial cash or spot operations.'' 40 FR 11560 at 11561 (Mar. 12,
1975).
---------------------------------------------------------------------------
While the Commission has enumerated a calendar month spread as a
bona fide hedge of offsetting unfixed-price cash commodity sales and
purchases, the Reproposal will permit an exchange, under reproposed
Sec. 150.9, to conduct a facts-and-circumstances, case-by-case review
to determine whether a calendar month spread is appropriately
recognized as a bona fide hedging position for only a cash commodity
purchase or sales contract. For example, assume a merchant enters into
an unfixed-price sales contract (e.g., priced at a fixed differential
to a deferred month futures contract), and immediately enters into a
calendar month spread to reduce the risk of the fixed basis moving
adversely. It may not be economically appropriate to recognize as bona
fide a long futures position in the spot (or nearby) month and a short
futures position in a deferred calendar month matching the merchant's
cash delivery obligation, in the event the spot (or nearby) month price
is higher than the deferred contract month price (referred to as
backwardation, and characteristic of a spot cash market with supply
shortages), because such a calendar month futures spread would lock in
a loss and may be indicative of an attempt to manipulate the spot (or
nearby) futures price.
Regarding the risk of an unfixed price forward sales contract
falling below the cost of production, the Reproposal enumerates a bona
fide hedging exemption for unsold anticipated production; the
Commission clarifies, as discussed below, that such an enumerated hedge
is available regardless of whether production has been sold forward at
an unfixed (that is, index) price.
Comments on cash and carry: Commenters requested the Commission
enumerate, as a bona fide hedging position, a ``cash and carry'' trade,
where a market participant enters a nearby long futures position and a
deferred short futures position, with the intention to take delivery
and carry the commodity for re-delivery.\469\
---------------------------------------------------------------------------
\469\ See, e.g., CL-Armajaro-59729 at 2.
---------------------------------------------------------------------------
Commission Reproposal: The Reproposal does not propose to enumerate
a cash and carry trade as a bona fide hedging position. A cash and
carry trade appears to fail the temporary substitute test, since such
market participant is not using the derivative contract as a substitute
for a position taken or to be taken in the physical marketing channel.
The long futures position in the cash and carry trade is in lieu of a
purchase in the cash market. In the 2016 Supplemental Proposal, the
Commission asked whether, and subject to what conditions (e.g.,
potential facilitation of liquidity for a bona fide hedger of
inventory), a cash and carry position might be recognized by an
exchange as a spread exemption under Sec. 150.10, subject to the
Commission's de novo review.\470\ This issue is discussed under Sec.
150.10, regarding exchange recognition of spread exemptions.
---------------------------------------------------------------------------
\470\ 2016 Supplemental Position Limits Proposal, 81 FR at
38479.
---------------------------------------------------------------------------
iv. Pass-Through Swap Offsets and Offsets of Hedging Swaps
Commission proposal: The Commission proposed to recognize as bona
fide a commodity derivative contract that reduces the risk of a
position resulting from a swap executed opposite a counterparty for
which the position at the time of the transaction would qualify as a
bona fide hedging position.\471\ This proposal mirrors the requirements
in CEA section 4a(c)(B)(i). The proposal also clarified that the swap
itself is a bona fide hedging position to the extent it is offset.
However, the Commission proposed that it would not recognize as bona
fide hedges an offset in physical-delivery contracts during the shorter
of the last five days of trading or the time period for the spot month
in such physical-delivery commodity derivative contract (the ``five-
day'' rule, discussed further below).
---------------------------------------------------------------------------
\471\ December 2013 Position Limits Proposal, 78 FR at 75710.
---------------------------------------------------------------------------
Comments received: As noted above, commenters recommended that the
Commission's bona fide hedging definition should reflect the standards
in CEA section 4a(c). One commenter suggested that the Commission
broaden the pass-through swap offset provisions to accommodate
secondary pass-through transactions among affiliates within a corporate
organization to make ``the most efficient and effective use of their
existing corporate structures.'' \472\
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\472\ CL-NCGA-NGSA-60919 at 8-9.
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Commission Reproposal: The Commission agrees that the bona fide
hedging definition, in general, and the pass-through swap provision, in
particular, should more closely reflect the statutory standards in CEA
section 4a(c). Under the proposed definition, a market participant who
reduced the risk of a swap, where such swap was a bona fide hedging
position for that market participant, would not have received
recognition for the swap offset as a bona fide hedging position, as
this provision in CEA section 4a(c)(2)(B)(ii) was not mirrored in the
proposed definition.\473\ To adhere more closely to the statutory
standards, the Reproposal recognizes such offset as a bona fide hedging
position. Consistent with the proposal for offset of a pass-through
swap, the Reproposal imposes a five-day rule restriction on the offset
in a physical-delivery contract of a swap used as a bona fide hedge;
however, as reproposed, an exchange listing a physical-delivery
contract may recognize, on a case-by-case basis, such offset as a non-
enumerated bona fide hedging position pursuant to the process in
reproposed Sec. 150.9.
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\473\ For example, assume a market participant entered a swap as
a bona fide hedging position and, subsequently, offset (that is,
lifted) that hedge using a futures contract. The Commission's
original proposal would not have recognized the lifting of the hedge
as a bona fide hedging transaction, although the statute does.
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The Reproposal retains and clarifies in subparagraph (ii)(A) that
the bona fides of a pass-through swap may be
[[Page 96751]]
determined at the time of the transaction by the intermediary. The
clarification is intended to reduce the burden on such intermediary of
otherwise needing to confirm the continued bona fides of its
counterparty over the life of the pass-through swap.
In addition, the Reproposal retains, as proposed, application of
the five-day rule to pass-through swap offsets in a physical-delivery
contract. However, the Commission notes that under the Reproposal, an
exchange listing a physical-delivery contract may recognize, on a case-
by-case basis, a pass-through swap offset (in addition to the offset of
a swap used as a bona fide hedge), during the last five days of trading
in a spot month, as a non-enumerated bona fide hedge pursuant to the
process in reproposed Sec. 150.9.
Further, the Reproposal retains the recognition of a pass-through
swap itself that is offset, not just the offsetting position (and,
thus, permitting the intermediary to exclude such pass-through swap
from position limits, in addition to excluding the offsetting
position).
Regarding the request to broaden the pass-through swap offset
provisions to accommodate secondary pass-through transactions among
affiliates, the Commission declines in this Reproposal to broaden the
pass-through swap offset exemption beyond the provisions in CEA section
4a(c)(2)(B)(i). However, the Commission notes that a group of
affiliates under common ownership is required to aggregate positions
under the Commission's requirements in Sec. 150.4, absent an
applicable aggregation exemption. In the circumstance of aggregation of
positions, recognition of a secondary pass-through swap transaction
would not be necessary among such an aggregated group, because the
group is treated as one person for purposes of position limits.
v. Additional Requirements for Enumeration or Other Recognition
Commission proposal: In 2013, the Commission proposed in
subparagraph (2)(i)(D) of the definition of a bona fide hedging
position, that, in addition to satisfying the general definition of a
bona fide hedging position, a position would not be recognized as bona
fide unless it was enumerated in paragraph (3), (4), or (5)(discussed
below), or recognized as a pass-through swap offset or pass-through
swap.\474\ In 2016, in response to comments on the 2013 proposed
definition, the Commission proposed, in subparagraph (2)(i)(D)(2) of
the definition, to also recognize as bona fide any position that has
been otherwise recognized as a non-enumerated bona fide hedging
position by either a designated contract market or a swap execution
facility, each in accordance with Sec. 150.9(a), or by the
Commission.\475\
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\474\ December 2013 Position Limits Proposal, 78 FR at 75711.
\475\ 2016 Supplemental Position Limits Proposal, 81 FR at
38505.
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Comments received: Commenters objected to the requirement for a
position to be specifically enumerated in order to be recognized as
bona fide, noting that the enumerated requirement is not supported by
the legislative history of the Dodd-Frank Act, conflicts with
longstanding Commission practice and precedent, and may be overly
restrictive due to the limited set of specific enumerated hedges.\476\
Other commenters recommended that the Commission expand the list of
enumerated bona fide hedge positions, to encompass all transactions
that reduce risks in the conduct and management of a commercial
enterprise, such as anticipatory merchandising hedges and other general
examples.\477\
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\476\ See, e.g., CL-CME-59718 at 47-53, and CL-BG Group-59656 at
9.
\477\ See, e.g., CL-FIA-59595 at 32, CL-FIA-60303 at 6, CL-API-
60939 at 3, CL-AGA-60943 at 4, CL-CMC-60950 at 6-9, CL-EEI-EPSA-
60925 at 13, and CL-FIA-60937 at 5 and 21.
---------------------------------------------------------------------------
Commission Reproposal: In response to comments, the Reproposal
retains, as proposed in 2016, a proposed definition that recognizes as
bona fide, in addition to enumerated positions, any position that has
been otherwise recognized as a non-enumerated bona fide hedging
position by either a designated contract market or a swap execution
facility, each in accordance with reproposed Sec. 150.9(a), or by the
Commission. These provisions for recognition of non-enumerated
positions are included in re-designated subparagraph (2)(iii)(C) of the
reproposed definition of a bona fide hedging position.
The Commission notes that it is not possible to list all positions
that would meet the general definition of a bona fide hedging position.
However, the Commission observes that the commenters' many general
examples, which they recommended be included in the list of enumerated
bona fide hedging positions, generally did not provide sufficient
context or facts and circumstances to permit the Commission to evaluate
whether recognition as a non-enumerated bona fide hedging position
would be warranted. Context would be supplied, for instance, by the
provision of the particular market participant's historical activities
in the physical marketing channel and such participant's estimate, in
good faith, of its reasonably expected activities to be taken in the
physical marketing channel.
In a clarifying change, the Commission notes that the Reproposal
has re-designated the provisions proposed in subparagraph (2)(i)(D), in
new subparagraph 2(iii), regarding the additional requirements for
recognition of a position in a physical commodity contract as a bona
fide hedging position. Concurrent with this re-designation, the
Commission notes the Reproposal re-organizes, also for clarity, the
application of the five-day rule to pass-through swaps and hedging
swaps in subparagraph (2)(iii)(B), as discussed above.\478\
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\478\ However, as noted above, as reproposed, an exchange
listing a physical-delivery contract may recognize, on a case-by-
case basis, a pass-through swap offset, or the offset of a swap used
as a bona fide hedge, during the last five days of trading in a spot
month, as a non-enumerated bona fide hedge pursuant to the process
in reproposed Sec. 150.9.
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3. Enumerated Hedging Positions
a. Proposed Enumerated Hedges
In paragraph (3) of the proposed definition of a bona fide hedging
position, the Commission proposed four enumerated hedging positions:
(i) Hedges of inventory and cash commodity purchase contracts; (ii)
hedges of cash commodity sales contracts; (iii) hedges of unfilled
anticipated requirements; and (iv) hedges by agents.\479\
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\479\ December 2013 Position Limits Proposal, 78 FR at 75713.
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Comments received: Numerous commenters objected to the provision in
proposed subparagraph (3)(iii)(A) that would have limited recognition
of a hedge for unfilled anticipated requirements to one year for
agricultural commodities. For example, commenters noted a need to hedge
unfilled anticipated requirements for sugar for a time period longer
than twelve months.\480\ Similarly, other commenters noted there may be
a need to offset risks arising from investments in processing capacity
in agricultural commodities for a period in excess of twelve
months.\481\
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\480\ See, e.g., Ex Parte No-869, notes of Feb. 25, 2015 ex
parte meeting with The Hershey Company, The J.M. Smucker Co., Louis
Dreyfus Commodities, Noble Americans Corp., et al.
\481\ See, e.g., CL-NGFA-60941 at 8.
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Other commenters recommended the Commission (1) remove the
restriction that unfilled anticipated requirement hedges by a utility
be ``required or encouraged to hedge by its public utility commission''
because most public utility commissions do not require or encourage
such hedging, (2) expand the reach beyond utilities, by including
[[Page 96752]]
entities designated as providers of last resort who serve the same role
as utilities, and (3) clarify the meaning of unfilled anticipated
requirements, consistent with CFTC Staff Letter No. 12-07.\482\
---------------------------------------------------------------------------
\482\ See, e.g., CL-Working Group-59693 at 27-28, CL-EEI-EPSA-
55953 at 19. CFTC Staff Letter No. 12-07 notes that unfilled
anticipated requirements may be recognized as the basis of a bona
fide hedging position or transaction under Commission Regulation
151.5(a)(2)(ii)(C) when a commercial enterprise has entered into
long-term, unfixed-price supply or requirements contracts as the
price risk of such ``unfilled'' anticipated requirements is not
offset by an unfixed price forward contract as the price risk
remains with the commercial, even though the commercial enterprise
has contractually assured a supply of the commodity. Instead, the
price risk continues until the forward contract's price is fixed;
once the price is fixed on the supply contract, the commercial
enterprise no longer has price risk and the derivative position, to
the extent the position is above an applicable speculative position
limit, must be liquidated in an orderly manner in accordance with
sound commercial practices.
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Commission Reproposal: The Reproposal retains the enumerated
exemptions as proposed, with two amendments. First, the Commission
agrees with the commenters' request to remove the twelve month
constraint on hedging unfilled anticipated requirements for
agricultural commodities, as that provision appears no longer to be a
necessary prudential constraint. Second, the Commission agrees with the
commenters' request to remove the condition that a utility be
``required or encouraged to hedge by its public utility commission.''
Accordingly, the condition that a utility be ``required or encouraged
to hedge by its public utility commission'' is omitted from the
reproposed definition. The Commission notes that under the Reproposal,
a market participant, who is not a utility, may request that an
exchange consider recognizing a non-enumerated exemption, as it is not
clear who would be appropriately identified as a ``provider of last
resort'' and under what circumstance such person would reasonably
estimate its unfilled requirements.
Consistent with CFTC Staff Letter No. 12-07, the Commission affirms
its belief that unfilled anticipated requirements are those anticipated
inputs that are estimated in good faith and that have not been filled.
Under the Reproposal, an anticipated requirement may be filled, for
example, by fixed-price purchase commitments, holdings of commodity
inventory by the market participant, or unsold anticipated production
of the market participant. However, an unfixed-price purchase
commitment does not fill an anticipated requirement, in that the market
participant's price risk to the input has not been fixed.
b. Proposed Other Enumerated Hedges Subject to the Five-Day Rule
In paragraph (4) of the proposed definition of a bona fide hedging
position, the Commission proposed four other enumerated hedging
positions: (i) Hedges of unsold anticipated production; (ii) hedges of
offsetting unfixed-price cash commodity sales and purchases; (iii)
hedges of anticipated royalties; and (iv) hedges of services.\483\ The
Commission proposed to apply the five-day rule to all such positions.
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\483\ December 2013 Position Limits Proposal, 78 FR at 75714.
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Comments received on the five-day rule: Numerous commenters
requested that the five-day rule be removed from the Commission's other
enumerated bona fide hedging positions, as that condition is not
included in CEA section 4a(c).
Commission Reproposal on the five-day rule: The Commission is
retaining the prudential condition of the five-day rule in the other
enumerated hedging positions. The Commission has a long history of
applying the five-day rule, in its legacy agricultural federal position
limits, to hedges of unsold anticipated production and hedges of
offsetting unfixed-price cash commodity sales and purchases. However,
as discussed in relation to reproposed Sec. 150.9, the Commission will
permit an exchange, in effect, to remove the five-day rule on a case-
by-case basis in physical-delivery contracts, as a non-enumerated bona
fide hedging position, by applying the exchange's experience and
expertise in protecting its own physical-delivery market.
Comments on other enumerated exemptions: As noted above, commenters
recommended removing the twelve-month limitation on agricultural
production, as unnecessarily short in comparison to the expected life
of investment in production facilities.\484\
---------------------------------------------------------------------------
\484\ See, e.g., CL-NGFA-60941 at 8.
---------------------------------------------------------------------------
Commission Reproposal on other enumerated exemptions: The
Reproposal removes the twelve-month limitations on unsold anticipated
agricultural production and hedges of services for agricultural
commodities. As noted above, that provision appears no longer to be a
necessary prudential constraint. Otherwise, the Reproposal retains the
other enumerated exemptions, as proposed.
c. Proposed Cross-Commodity Hedges
In paragraph (5) of the proposed definition of a bona fide hedging
position, the Commission proposed to recognize as bona fide cross-
commodity hedges.\485\ Cross-commodity hedging would be conditioned on:
(i) The fluctuations in value of the position in the commodity derivate
contract (or the commodity underlying the commodity derivative
contract) being substantially related to the fluctuations in value of
the actual or anticipated cash position or pass-through swap (the
substantially related test); and (ii) the five-day rule being applied
to positions in any physical-delivery commodity derivative contract.
The Commission proposed a non-exclusive safe harbor for cross-commodity
hedges that would have two factors: A qualitative factor; and a
quantitative factor.
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\485\ December 2013 Position Limits Proposal, 78 FR at 75716.
---------------------------------------------------------------------------
Comments on cross-commodity hedges: Numerous commenters requested
the Commission withdraw the safe harbor quantitative ``test,'' and
noted such test is impracticable where there is no relevant cash market
price series for the commodity being hedged.\486\ Some commenters
requested the Commission retain a qualitative approach to assessing
whether the fluctuations in value of the position in the commodity
derivate contract are substantially related to the fluctuations in
value of the actual or anticipated cash position.
---------------------------------------------------------------------------
\486\ See, e.g., CL-ICE-60929 at 16, CL-NCGA-NGSA-60919 at 6-7,
CL-NCFC-60930 at 2-3, CL-API-60939 at 2, CL-NGFA-60941 at 8, CL-EEI-
EPSA-60925 at 10, and CL-IECAssn-60949 at 5-7.
---------------------------------------------------------------------------
One commenter urged the Commission to clarify that market
participants need not treat as enumerated cross-commodity hedges
strategies where the cash position being hedged is the same cash
commodity as the commodity underlying the futures contract even if the
cash commodity is not deliverable against the contract. The commenter
believes that this clarification would verify that non-deliverable
grades of certain commodities could be deemed as the same cash
commodity and thus not be deemed a cross-commodity hedge subject to the
five-day rule.\487\
---------------------------------------------------------------------------
\487\ CL-CME-60926 at 6.
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Commenters requested the Commission not apply a five-day rule to
cross-commodity hedges or, alternatively, permit exchanges to determine
the appropriate facts and circumstances where a market participant may
be permitted to hold such positions into the spot month,
[[Page 96753]]
noting that a cross-commodity hedge in a physical-delivery contract may
be the best hedge of its commercial exposure.\488\
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\488\ See, e.g., CL-FIA-60937 at 22, CL-CCI-60935 at 8-9.
---------------------------------------------------------------------------
Commission Reproposal: The Reproposal retains the cross-commodity
hedge provision in paragraph (5) of the definition of a bona fide
hedging position as proposed. However, for the reasons requested by
commenters and because of confusion regarding application of a safe
harbor, the Reproposal does not include the safe harbor quantitative
test. If questions arise regarding the bona fides of a particular
cross-commodity hedge, it would, as reproposed, be reviewed based on
facts and circumstances, including a market participant's qualitative
review of a particular cross-commodity hedge.
The Reproposal retains the five-day rule, because a market
participant who is hedging the price risk of a non-deliverable cash
commodity has no need to make or take delivery on a physical-delivery
contract. However, the Commission notes that an exchange may consider,
on a case-by-case basis in physical-delivery contracts, whether to
recognize such cross-commodity positions as non-enumerated bona fide
hedges during the shorter of the last five days of trading or the time
period for the spot month, by applying the exchange's experience and
expertise in protecting its own physical-delivery market, under the
process of Sec. 150.9.
4. Commodity Trade Options Deemed Cash Equivalents
Commission proposal: The Commission requested comment as to whether
the Commission should use its exemptive authority under CEA section
4a(a)(7) to provide that the offeree of a commodity option would be
presumed to be a pass-through swap counterparty for purposes of the
offeror of the trade option qualifying for the pass-through swap offset
exemption.\489\ Alternatively, the Commission, noting that forward
contracts may serve as the basis of a bona fide hedging position
exemption, proposed that it may similarly include trade options as one
of the enumerated bona fide hedging exemptions. The Commission noted,
for example, such an exemption could be similar to the enumerated
exemption for the offset of the risk of a fixed-price forward contract
with a short futures position.
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\489\ December 2013 Position Limits Proposal, 78 FR at 75711.
The Commission also requested comment on whether it would be
appropriate to exclude commodity trade options from the definition
of referenced contract. As discussed above, the Commission has
determined to exclude trade options from the definition of
referenced contract. Previous to this reproposed rule, the
Commission observed that federal position limits should not apply to
trade options. 81 FR 14966 at 14971 (Mar. 21, 2016).
---------------------------------------------------------------------------
Comments on trade option exemptions: Commenters requested that the
Commission clarify that hedges of commodity trade options be recognized
as bona fide hedges, as would be available for other cash
positions.\490\
---------------------------------------------------------------------------
\490\ See, e.g., CL-EEI-EPSA-60925 at 15.
---------------------------------------------------------------------------
Commission Reproposal: The Commission agrees with the commenters
and has determined to address the request that commodity trade options
should be recognized as the basis for a bona fide hedging position, as
would be available for other cash positions. The reproposed definition
of a bona fide hedging position adds new paragraph (6), specifying that
a commodity trade option meeting the requirements of Sec. 32.3 may be
deemed a cash commodity purchase or sales contract, as the case may be,
provided that such option is adjusted on a futures-equivalent basis.
The reproposed definition also provides non-exclusive guidance on
making futures-equivalent adjustments to a commodity trade option. For
example, the guidance provides that the holder of a trade option, who
has the right, but not the obligation, to call the commodity at a fixed
price, may deem that trade option, converted on a futures-equivalent
basis, to be a position in a cash commodity purchase contract, for
purposes of showing that the offset of such cash commodity purchase
contract is a bona fide hedging position.
Because the price risk of an option, including a trade option with
a fixed strike price, should be measured on a futures-equivalent
basis,\491\ the Commission has determined that under the reproposed
definition, a trade option should be deemed equivalent to a cash
commodity purchase or sales contract only if adjusted on a futures-
equivalent basis. The Commission notes that it may not be possible to
compute a futures-equivalent basis for a trade option that does not
have a fixed strike price. Thus, under the reproposed definition, a
market participant may not use a trade option as a basis for a bona
fide hedging position until a fixed strike price reasonably may be
determined.
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\491\ See the discussion of the definition of futures-equivalent
in reproposed Sec. 150.1, above.
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5. App. C to Part 150--Examples of Bona Fide Hedging Positions for
Physical Commodities
Commission proposal: The Commission proposed a non-exhaustive list
of examples meeting the requirements of the proposed definition of a
bona fide hedging position, noting that market participants could see
whether their practices fall within the list.\492\
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\492\ December 2013 Position Limits Proposal, 78 FR at 75739,
75828.
---------------------------------------------------------------------------
Comments on examples: Comments regarding the processing hedge
example number 5 of proposed Appendix C to part 150 are discussed
above. Another commenter requested the Commission affirm that
aggregation is required pursuant to an express or implied agreement
when that agreement is to trade referenced contracts, and that
aggregation is not triggered by the condition in example number 7 of
proposed Appendix C to part 150, where a Sovereign grants an option to
a farmer at no cost, conditioned on the farmer entering into a fixed-
price forward sale.\493\
---------------------------------------------------------------------------
\493\ CL-FIA-59595 at 35, CL-FIA-59566 at 3-7, citing December
2013 Position Limits Proposal, 78 FR at 75837.
---------------------------------------------------------------------------
Commission Reproposal: The Commission agrees with the commenter
that aggregation is required pursuant to an express or implied
agreement when that agreement is to trade referenced contracts.
Proposed example number 7 was focused on recognizing the legitimate
public policy objectives of a sovereign furthering the development of a
cash spot and forward market in agricultural commodities. To avoid
confusion regarding the aggregation policy under rule 150.4, in the
Reproposal, the Commission has revised example number 7, and has
provided an interpretation that a farmer's synthetic position of a long
put option may be deemed a pass-through swap, for purposes of a
sovereign who has granted a cash-settled call option at no cost to such
farmer in furtherance of a public policy objective to induce such
farmer to sell production in the cash market. The Commission notes the
combination of a farmer's forward sale agreement and a granted call
option is approximately equivalent to a purchased put option. A farmer
anticipating production or holding inventory may use such a long
position in a put option as a bona fide hedging position.
The Reproposal also includes a number of conforming amendments and
corrections of typographical errors. Specifically, it conforms example
number 4 regarding a utility to the
[[Page 96754]]
changes to paragraph (3)(iii)(B) of the bona fide hedging position
definition, as discussed above. The references in the examples to a 12-
month restriction on hedges of agricultural commodities have also been
removed because the Reproposal eliminates those proposed restrictions
from the reproposed enumerated bona fide hedging positions, as
discussed above. In addition, based on discussions with cotton
merchants, example number 6, regarding agent hedging, has been amended
from a generic example to a specific illustration of the hedge of
cotton equities purchased by a cotton merchant from a producer, under
the USDA loan program. Finally, the Reproposal corrects typographical
errors in example number 12, regarding the hedge of copper inventory
and the cross-hedge of copper wire inventory, to correctly reflect the
25,000 pound unit of trading in the Copper core referenced futures
contract, and deletes the unnecessary reference to the price
relationship between the nearby and deferred Copper futures contracts.
B. Sec. 150.2--Position Limits
1. Setting Levels of Spot Month Limits
In the December 2013 Position Limits Proposal, the Commission
proposed to establish speculative position limits on 28 core referenced
futures contracts in physical commodities.\494\
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\494\ See generally December 2013 Position Limits Proposal, 78
FR at 75725. The 28 core referenced futures contracts for which
initial limit levels were proposed are: Chicago Board of Trade
(``CBOT'') Corn, Oats, Rough Rice, Soybeans, Soybean Meal, Soybean
Oil and Wheat; Chicago Mercantile Exchange Feeder Cattle, Lean Hog,
Live Cattle and Class III Milk; Commodity Exchange, Inc., Gold,
Silver and Copper; ICE Futures U.S. Cocoa, Coffee C, FCOJ-A, Cotton
No. 2, Sugar No. 11 and Sugar No. 16; Kansas City Board of Trade
Hard Winter Wheat (on September 6, 2013, CBOT and the Kansas City
Board of Trade (``KCBT'') requested that the Commission permit the
transfer to CBOT, effective December 9, of all contracts listed on
the KCBT, and all associated open interest); Minneapolis Grain
Exchange Hard Red Spring Wheat; and New York Mercantile Exchange
(``NYMEX'') Palladium, Platinum, Light Sweet Crude Oil, NY Harbor
ULSD, RBOB Gasoline and Henry Hub Natural Gas.
---------------------------------------------------------------------------
As stated in the December 2013 Position Limits Proposal, the
Commission proposed to set the initial spot month position limit levels
for referenced contracts at the existing DCM-set levels for the core
referenced futures contracts because the Commission believed this
approach to be consistent with the regulatory objectives of the Dodd-
Frank Act amendments to the CEA and many market participants are
already used to those levels.\495\ The Commission also stated that it
was considering setting initial spot month limits based on estimated
deliverable supplies submitted by CME Group Inc. (``CME'') in
2013.\496\ The Commission suggested that it might use the exchange's
estimated deliverable supplies if it could verify that they are
reasonable.\497\ The Commission further stated that it was considering
another alternative of using, in the Commission's discretion, the
recommended level, if any, of the spot month limit as submitted by each
DCM listing a core referenced futures contract (if lower than 25
percent of estimated deliverable supply).\498\
---------------------------------------------------------------------------
\495\ December 2013 Position Limits Proposal, 78 FR at 75727.
Several commenters supported establishing the initial levels of spot
month speculative position limit levels at the levels then
established by DCMs and listed in Appendix D to part 150, December
2013 Position Limits Proposal, 78 FR at 75739-40 (generally stating
that the then current levels are high enough and raising them could
cause problems with contract performance. E.g., CL-WGC-59558 at 1-2;
CL-Sen. Levin-59637 at 7; CL-AFBF-59730 at 3; CL-NGFA-59956 at 2;
CL-NGFA-60312 at 3; CL-NCBA-59624 at 3; CL-Bakers-59691 at 1.
Several commenters expressed the view that DCMs are best able to
determine appropriate spot month limits and the Commission should
defer to their expertise. E.g., CL-NCBA-59624 at 3; CL-Cactus-59660
at 3; CL-TCFA-59680 at 3; CL-NGFA-59610 at 2; CL-MGEX-59635 at 2;
CL-MGEX-59932 at 2; CL-MGEX-60380 at 1; CL-ICE-60311 at 1; CL-
Thornton-59729 at 1.
\496\ December 2013 Position Limits Proposal, 78 FR at 75727.
The CME July 1, 2013 deliverable supply estimates are available on
the Commission's Web site at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/cmegroupdeliverable070113.pdf; see also
December 2013 Position Limits Proposal, 78 FR at 75727, n. 406.
Several commenters supported using the alternative level of spot-
month position limits based on CME's deliverable supply estimates as
listed in Table 9 of the December 2013 Position Limits Proposal,
generally stating that the alternative estimates are more up to date
than the deliverable supply estimates underlying the spot month
speculative position limits currently established by the DCMs, and
therefore more appropriate for use in setting federal limits. E.g.,
CL-FIA-59595 at 3, 8; CL-EEI-EPSA-59602 at 9; CL-CMC-59634 at 14;
CL-Olam-59658 at 1, 3; CL-BG Group-59656 at 6; CL-COPE-59662 at 21;
CL-Calpine-59663 at 3; CL-NGSA-59673 at 37; CL-NGSA-59900 at 11; CL-
Working Group-59693 at 58-59; CL-CME-60406 at 2-3 and App. A; CL-
CME-60307 at 4; CL-CME-59718 at 3, 20-23; CL-Sempra-59926 at 3-4;
CL-BG Group-59937 at 2-3; CL-EPSA-59953 at 2-3; CL-ICE-59966 at 5-6;
CL-ICE-59962 at 5; CL-US Dairy-59597 at 4; CL-Rice Dairy-59601 at 1;
CL-NMPF-59652 at 4; CL-FCS-59675 at 5.
\497\ December 2013 Position Limits Proposal, 78 FR at 75727.
The U.S. Chamber of Commerce's Center for Capital Markets
Competitiveness commented that the CFTC must update estimates of
deliverable supply, rather than relying on existing exchange-set
spot month limit levels. CL-Chamber-59684 at 6-7.
\498\ December 2013 Position Limits Proposal, 78 FR at 75728.
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2. Verification of Estimated Deliverable Supply
The Commission received comment letters from CME, Intercontinental
Exchange (``ICE'') and Minneapolis Grain Exchange, Inc. (``MGEX'')
containing estimates of deliverable supply. CME submitted updated
estimates of deliverable supply for CBOT Corn (C), Oats (O), Rough Rice
(RR), Soybeans (S), Soybean Meal (SM), Soybean Oil (SO), Wheat (W), and
KC HRW Wheat (KW); COMEX Gold (GC), Silver (SI), Platinum (PL),
Palladium (PA), and Copper (HG); NYMEX Natural Gas (NG), Light Sweet
Crude Oil (CL), NY Harbor ULSD (HO), and RBOB Gasoline (RB).\499\ ICE
submitted estimates of deliverable supply for Cocoa (CC), Coffee C
(KC), Cotton No. 2 (CT), FCOJ-A (OJ), Sugar No. 11 (SB), and Sugar No.
16 (SF).\500\ MGEX submitted an estimate of deliverable supply for Hard
Red Spring Wheat (MWE).\501\
---------------------------------------------------------------------------
\499\ CL-CME-61007 at 5. See also CL-CME-61011; CL-CME-61012;
CL-CME-60785 (earlier submission of deliverable supply estimates);
CL-CME-60435 (earlier submission of deliverable supply estimates);
CL-CME-60406 (earlier submission of deliverable supply estimates).
The Commission did not receive an estimate for Live Cattle (LC).
\500\ CL-ICE-60786. ICE also submitted an estimate for Henry Hub
natural gas. CL-ICE-60684.
\501\ CL-MGEX-61038 at Exhibit A; see also CL-MGEX-60938 at 2
(earlier submission of deliverable supply estimate).
---------------------------------------------------------------------------
The Commission is verifying that the estimates for C, O, RR, S, SM,
SO, W, and KW submitted by CME are reasonable. The Commission is
verifying that the estimate for MWE submitted by MGEX is reasonable.
The Commission is verifying that the estimates for CC, KC, CT, OJ, SB,
and SF submitted by ICE are reasonable. The Commission is verifying
that the estimates for GC, SI, PL, PA, and HG submitted by CME are
reasonable. Finally, the Commission is verifying that the estimates for
NG, CL, HO, and RB submitted by CME are reasonable. In verifying that
all of these estimates of deliverable supply are reasonable, Commission
staff reviewed the exchange submissions and conducted its own research.
Commission staff reviewed the data submitted, confirmed that the data
submitted accurately reflected the source data, and considered whether
the data sources were authoritative. Commission staff considered
whether the assumptions made by the exchanges in the submissions were
acceptable, or whether alternative assumptions would lead to similar
results. In response to Commission staff questions about the exchange
submissions, the Commission received revised estimates from exchanges.
In some cases, Commission staff conducted trade source interviews.
Commission staff replicated the calculations included in the
submissions.
[[Page 96755]]
In verifying the exchange estimates of deliverable supply, the
Commission is not endorsing any particular methodology for estimating
deliverable supply beyond what is already set forth in Appendix C to
part 38 of the Commission's regulations.\502\ As circumstances change
over time, exchanges may need to adjust the methodology, assumptions
and allowances that they use to estimate deliverable supply to reflect
then current market conditions and other relevant factors. The
Commission anticipates that it will base initial spot-month position
limits on the current verified exchange estimates as and to the extent
described below, unless an exchange provides additional updates during
the Reproposal comment period that the Commission can verify as
reasonable.
---------------------------------------------------------------------------
\502\ 17 CFR part 38, Appendix C.
---------------------------------------------------------------------------
3. Single-Month and All-Months-Combined Limits
Commission Proposal: In the December 2013 Position Limits Proposal,
the Commission proposed to set the level of single-month and all-
months-combined limits (collectively, non-spot month limits) based on
total open interest for all referenced contracts in a commodity.\503\
The Commission also proposed to estimate average open interest based on
the largest annual average open interest computed for each of the past
two calendar years, using either month-end open contracts or open
contracts for each business day in the time period, as the Commission
finds in its discretion to be reliable.\504\ For setting the levels of
initial non-spot month limits, the Commission proposed to use open
interest for calendar years 2011 and 2012 in futures contracts, options
thereon, and in swaps that are significant price discovery contracts
that are traded on exempt commercial markets.\505\ The Commission
explained that it had reviewed preliminary data submitted to it under
part 20, but preliminarily decided not to use it for purposes of
setting the initial levels of single-month and all-months-combined
position limits because the data prior to January 2013 was less
reliable than data submitted later.\506\ The Commission noted that it
was considering using part 20 data, should it determine such data to be
reliable, in order to establish higher initial levels in a final
rule.\507\
---------------------------------------------------------------------------
\503\ December 2013 Position Limits Proposal, 78 FR at 75729.
The Commission currently sets the single-month and all-months-
combined limits based on total open interest for a particular
commodity futures contract and options on that futures contract, on
a futures-equivalent basis.
\504\ December 2013 Position Limits Proposal, 78 FR at 75730.
\505\ Id.
\506\ December 2013 Position Limits Proposal, 78 FR at 75733.
Thus, the initial levels as proposed in the December 2013 Position
Limits Proposal represented the lower bounds for the initial levels
that the Commission would establish in final rules.
\507\ December 2013 Position Limits Proposal, 78 FR at 75734.
The Commission also stated that it was considering using data from
swap data repositories, as practicable. Id. The Commission has
determined that it is not yet practicable to use data from swap data
repositories.
---------------------------------------------------------------------------
In the June 2016 Supplemental Proposal, the Commission noted that,
since the December 2013 Position Limits Proposal, the Commission worked
with industry to improve the quality of swap position data reported to
the Commission under part 20.\508\ The Commission also noted that, in
light of the improved quality of such swap position data reporting, the
Commission intended 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.
---------------------------------------------------------------------------
\508\ 2016 Supplemental Position Limits Proposal, 81 FR at
38459.
---------------------------------------------------------------------------
Comments Received: Commenters requested that the Commission delay
the imposition of hard non-spot month limits until it has collected and
evaluated complete open interest data.\509\
---------------------------------------------------------------------------
\509\ E.g., CL-FIA-59595 at 3, 14; CL-EEI-EPSA-59602 at 10-11;
CL-MFA-60385 at 4-7; CL-MFA-59606 at 22-23; CL-ISDA/SIFMA-59611 at
28-29; CL-CMC-59634 at 13; CL-Olam-59658 at 3; CL-COPE-59662 at 22;
CL-Calpine-59663 at 4; CL-CCMC-59684 at 4-5; CL-NFP-59690 at 20; CL-
Just Energy-59692 at 4; CL-Working Group-59693 at 62.
---------------------------------------------------------------------------
Commission Reproposal: The Commission has determined that certain
part 20 large trader position data, after processing and editing by
Commission staff as described below,\510\ is reliable. The Commission
has determined to repropose the initial non-spot month position limit
levels based on the combination of such adjusted part 20 swaps data and
data on open interest in physical commodity futures and options from
the relevant exchanges, as described below. The Commission is using two
12-month periods of data, covering a total of 24 months, rather than
two calendar years of data, as is practicable, in reproposing the
initial non-spot month position limit levels.
---------------------------------------------------------------------------
\510\ Where relevant and practicable, Commission staff consulted
and followed the Office of Management and Budget Standards and
Guidelines for Statistical Surveys, September 2006, available at
https://www.whitehouse.gov/sites/default/files/omb/inforeg/statpolicy/standards_stat_surveys.pdf.
---------------------------------------------------------------------------
Data Editing
Commission staff analyzed and evaluated the quality of part 20 data
for the period from July 1, 2014 through June 30, 2015 (``Year 1''),
and the period from July 1, 2015 through June 30, 2016 (``Year
2'').\511\ The Commission used open contracts as reported for each
business day in the time periods, rather than month-end open contracts,
primarily because it lessens the impact of missing data. Averaging
generally also smooths over errors in reporting when there is both
under- and over-reporting, both of which the Commission observed in the
part 20 data. By calculating a daily average for each month for each
reporting entity,\512\ one calculates a reporting entity's open
contracts on a ``representative day'' for each month. The Commission
then summed the open contracts for each reporting entity on this
representative day, to determine the average open interest for a
particular month.\513\
---------------------------------------------------------------------------
\511\ There is no part 20 swaps data for Sugar No. 16 (SF).
\512\ A reporting entity is a clearing member or a swap dealer
required to report large trader position data for physical commodity
swaps, as defined in 17 CFR 20.1.
\513\ Because there may be missing data, using open contracts
for each business day in the time period that a reporting entity
submits a report may overestimate open interest, compared to taking
a straight average of the open contracts over all business days in
the time period. However, the Commission believes it is reasonable
to assume that the open position in swaps for a reporting entity
failing to report for a particular business day is more accurately
reflected by that reporting entity's average reported open swaps for
the month, rather than zero. Hence, in choosing this approach, the
Commission chooses to repropose higher non-spot month limit levels.
---------------------------------------------------------------------------
First, for each of Year 1 and Year 2, Commission staff identified
all reported positions in swaps that do not satisfy the definition of
referenced contract as proposed in the December 2013 Position Limits
Proposal \514\ and removed those positions from the data set. For
example, swaps settled using the price of the LME Gold PM Fix contract
do not meet the definition of referenced contract for the gold core
referenced futures contract (GC) but positions reported based on these
types of swaps represented 14% of records submitted
[[Page 96756]]
under part 20 by reporting entities for gold swaps. The percentage of
average daily open interest excluded from the adjusted part 20 swaps
data resulting from this deletion are set forth in Table 1 below. Other
adjustments to the data are described below. Because not all
commodities required exclusion of non-referenced contracts, the
Commission reports only the 11 commodities that required this type of
exclusion.
---------------------------------------------------------------------------
\514\ This adjustment may have removed fewer than all of the
reported positions in swaps that do not satisfy the definition of
referenced contract as adopted, and therefore may have resulted in a
higher level of open interest (which would result in a higher limit
level). For instance, swaps reported under part 20 include trade
options, and the Commission is reproposing an amended definition of
``referenced contract'' to expressly exclude trade options. See the
discussion of the defined term ``referenced contract'' under Sec.
150.1, above. Because part 20 does not require trade options to be
identified, the Commission could not exclude records of trade
options from open interest or position size.
Table III-B-1--Percent of Adjusted Average Daily Open Interest Excluded
as Not Meeting the Definition of Referenced Contract
------------------------------------------------------------------------
Year 1 percent Year 2 percent
of excluded of excluded
Core referenced futures contract adjusted open adjusted open
interest (%) interest (%)
------------------------------------------------------------------------
Cotton No. 2 (CT)....................... 0.22 0.00
Sugar No. 11 (SB)....................... 0.05 0.00
Gold (GC)............................... 42.59 0.00
Silver (SI)............................. 48.10 0.00
Platinum (PL)........................... 9.12 5.36
Palladium (PA).......................... 56.87 6.87
Copper (HG)............................. 37.58 0.25
Natural Gas (NG)........................ 12.49 12.52
Light Sweet Crude (CL).................. 3.60 0.83
New York Harbor ULSD (HO)............... 0.96 1.74
RBOB Gasoline (RB)...................... 1.34 1.30
------------------------------------------------------------------------
Second, Commission staff checked and edited the remaining data to
mitigate certain types of errors. Commission staff identified three
general types of reporting errors and made edits to adjust the data
for:
(i) Positions that were clearly reported in units of a commodity
when they should have been reported in the number of gross futures-
equivalent contracts. For example, a position in gold (GC) with a
futures contract unit of trading of 100 ounces might be reported as
480,000 contracts, when other available information, reasonable
assumptions, consultation with reporting entities and/or Commission
expertise indicate that the position should have been reported as 4,800
contracts (that is, 480,000 ounces divided by 100 ounces per contract).
Commission staff corrected such reported swaps position data and
included the corrected data in the data set.
(ii) Positions that are not obviously reported in units of a
commodity but appear to be off by one or more decimal places (e.g., a
position is overstated, but not by a multiple of the contract's unit of
trading). For example, a position in COMEX gold is reported as 100,000
and the notional value might be reported as $13,000,000, when the price
of gold is $1300 and the COMEX gold contract is for 100 ounces,
indicating that the position should have been reported as 100 futures-
equivalent contracts. Staff corrected such reported swaps position data
and included the corrected data in the data set.
(iii) Positions reported multiple times per day or otherwise
extremely different from surrounding days' reported open interest. In
some cases, reporting entities submitted the same report using
different reporting identifiers, for the same day. In other cases, a
position would inexplicably spike for one day, to a multiple of other
days' reported open interest. When Commission staff checked with the
reporting entity, the reporting entity confirmed that the reports were,
indeed, erroneous. Commission staff did not include such incorrectly
reported duplicative swaps position data in its analysis. In other
cases, positions that were clearly reported incorrectly, but for which
Commission staff could discern neither a reason nor a reasonable
adjustment, were not included. For example, Commission staff deleted
all swap position data reports submitted by one swap dealer from its
analysis because the reports were inexplicably anomalous in light of
other available information, reasonable assumptions and Commission
expertise. As another example, one reporting entity reported extremely
large values for only certain types of positions. After speaking with
the reporting entity, Commission staff determined that there was no
systematic adjustment to be made, but that the actual positions were,
in fact, small. Hence, Commission staff did not include such reported
swaps position data in its analysis.
The number of principal records edited, resulting from the edits
relating to the three types of edits to erroneous position reports
noted above, is set forth in Table 2 below. A principal record is a
report of a swaps open position where the reporting entity is a
principal to the swap, as opposed to a counterparty record.
Table III-B-2--Percentage of Principal Records Adjusted by Edit Type and Underlying Commodity, Referenced
Contracts Only
----------------------------------------------------------------------------------------------------------------
Number of Number of
records records
Edit type adjusted year adjusted year
1 (%) 2 (%)
----------------------------------------------------------------------------------------------------------------
Corn (C).................................... (i)............................... 0.00 0.0001
(iii)............................. 0.00 0.66
Oats (O).................................... (iii)............................. 0.00 0.20
Rough Rice (RR)............................. (iii)............................. 0.38 0.00
[[Page 96757]]
Soybeans (S)................................ (i)............................... 0.00 0.03
(iii)............................. 2.38 1.46
Soybean Meal (SM)........................... (iii)............................. 0.00 0.41
Soybean Oil (SO)............................ (iii)............................. 9.15 4.93
Wheat (W)................................... (i)............................... 0.00 0.01
(iii)............................. 1.77 0.71
Wheat (MWE)................................. (iii)............................. 0.043 0.002
Wheat (KW).................................. (iii)............................. 1.34 0.68
Cocoa (CC).................................. (i)............................... 0.001 0.0005
(iii)............................. 1.79 0.25
Coffee C (KC)............................... (i)............................... 0.00 0.01
(iii)............................. 5.33 0.60
Cotton No. 2 (CT)........................... (iii)............................. 16.76 5.59
FCOJ-A (OJ)................................. (iii)............................. 13.30 17.43
Sugar No. 11 (SB)........................... (i)............................... 0.00 0.0009
(iii)............................. 1.21 0.54
Live Cattle (LC)............................ (i)............................... 0.002 0.00
(iii)............................. 45.65 15.50
Gold (GC)................................... (i)............................... 1.99 0.02
(ii).............................. 0.32 0.00
(iii)............................. 91.45 89.04
Silver (SI)................................. (i)............................... 3.01 0.19
(iii)............................. 93.08 89.52
Platinum (PL)............................... (i)............................... 2.75 0.01
(ii).............................. 0.33 0.01
(iii)............................. 23.51 21.11
Palladium (PA).............................. (i)............................... 0.62 0.00
(ii).............................. 0.30 0.00
(iii)............................. 32.97 22.29
Copper (HG)................................. (i)............................... 4.94 0.48
(iii)............................. 20.80 16.82
Natural Gas (NG)............................ (i)............................... 0.01 1.03
(iii)............................. 7.68 3.80
Light Sweet Crude (CL)...................... (i)............................... 0.001 0.003
(iii)............................. 9.53 8.43
New York Harbor ULSD (HO)................... (i)............................... 0.01 0.0006
(iii)............................. 29.58 4.33
RBOB Gasoline (RB).......................... (i)............................... 0.22 0.60
(iii)............................. 30.46 24.62
----------------------------------------------------------------------------------------------------------------
Some records also appeared to contain errors attributable to other
factors that Commission staff could detect and for which Commission
staff can correct. For example, there were instances where the
reporting entity misreported the ownership of the position, i.e.,
principal vs. counterparty. Commission staff corrected the misreported
ownership data and included the corrected data in the data set. Such
corrections are important to ensure that data is not double counted. In
Year 1, eight reporting entities required an adjustment to the reported
position ownership information. In Year 2, five reporting entities
required an adjustment to the reported position ownership information.
Third, in the part 20 large trader swap data, staff checked and
adjusted the average daily open interest for positions resulting from
inter-affiliate transactions and duplicative reporting of positions due
to transactions between reporting entities. For an example of
duplicative reporting by reporting entities (which is reporting in
terms of futures-equivalent contracts), assume Swap Dealer A and Swap
Dealer B have an open swap equivalent to 50 futures contracts, Swap
Dealer A also has a swap equivalent to 25 futures contracts with End
User X, and Swap Dealer B has a swap equivalent to 200 futures
contracts with End User Y. The total open swaps in this scenario is
equivalent to 275 futures contracts. However, Swap Dealer A will report
a gross position of 75 contracts and Swap Dealer B will report a gross
position of 250 contracts. Simply summing these two gross positions
would overestimate the open swaps as 325 contracts--50 contracts more
than there actually should be. For this reason, Commission staff used
the counterparty accounts of each reporting entity to flag counterparty
accounts of other reporting entities. Commission staff then used the
daily average of the gross positions for these accounts to reduce the
amount of average daily open swaps. Similarly, Commission staff flagged
the counterparty accounts for entities that are affiliates of each
reporting entity in order to adjust the amount of average daily open
swaps. These adjustments to the Year 1 data are reflected in Table 3
below, and the corresponding adjustments to the Year 2 data are
reflected in Table 4 below.
[[Page 96758]]
Table III-B-3--Average Daily Open Interest in Year 1 Adjusted for Duplicate and Affiliate Reporting by
Underlying Commodity
----------------------------------------------------------------------------------------------------------------
Average adjusted
Average adjusted daily open
Average adjusted daily open interest reporting
Paired swaps for daily open interest reporting entity
interest entity duplication &
duplication affiliates
removed removed
----------------------------------------------------------------------------------------------------------------
Corn (C)............................................ 655,492 522,566 359,715
Oats (O)............................................ 684 667 646
Rough Rice (RR)..................................... 916 640 362
Soybeans (S)........................................ 157,017 139,608 109,858
Soybean Meal (SM)................................... 125,444 99,795 71,887
Soybean Oil (SO).................................... 74,831 64,854 55,265
Wheat (W)........................................... 272,839 229,453 162,999
Wheat (MGE)......................................... 3,430 3,021 1,944
Wheat (KW).......................................... 14,918 14,213 9,436
Cocoa (CC).......................................... 15,207 13,792 11,257
Coffee C (KC)....................................... 31,540 28,539 24,164
Cotton No. 2 (CT)................................... 51,442 42,806 35,102
FCOG-A (OJ)......................................... 160 142 121
Sugar No. 11 (SB)................................... 279,355 256,887 211,994
Live Cattle (LC).................................... 46,361 36,999 23,626
Gold (GC)........................................... 79,778 64,363 47,727
Silver (SI)......................................... 19,373 14,678 9,867
Platinum (PL)....................................... 25,145 24,530 21,566
Palladium (PA)...................................... 2,044 1,939 1,929
Copper (HG)......................................... 31,143 28,718 22,859
Natural Gas (NG).................................... 4,100,419 3,603,368 2,866,128
Light Sweet Crude (CL).............................. 2,039,963 1,875,660 1,587,450
NY Harbor ULSD (HO)................................. 178,978 161,617 138,360
RBOB Gasoline (RB).................................. 103,586 100,021 81,822
----------------------------------------------------------------------------------------------------------------
Table III-B-4--Average Daily Open Interest in Year 2 Adjusted for Duplicate and Affiliate Reporting by
Underlying Commodity
----------------------------------------------------------------------------------------------------------------
Average adjusted
Average adjusted daily open
Average adjusted daily open interest reporting
Paired swaps for daily open interest reporting entity
interest entity duplication &
duplication affiliates
removed removed
----------------------------------------------------------------------------------------------------------------
Corn (C)............................................ 1,265,639 960,088 641,014
Oats (O)............................................ 1,029 858 480
Rough Rice (RR)..................................... 396 250 4
Soybeans (S)........................................ 453,419 351,279 235,679
Soybean Meal (SM)................................... 282,123 209,023 134,399
Soybean Oil (SO).................................... 282,207 198,744 125,106
Wheat (W)........................................... 437,711 334,136 222,420
Wheat (MWE)......................................... 15,167 9,511 3,079
Wheat (KW).......................................... 65,533 47,722 29,563
Cocoa (CC).......................................... 141,526 100,564 56,853
Coffee C (KC)....................................... 97,128 74,739 51,846
Cotton No. 2 (CT)................................... 137,295 99,496 60,477
FCOJ-A (OJ)......................................... 1,137 640 5
Sugar No. 11 (SB)................................... 717,967 558,423 382,816
Live Cattle (LC).................................... 102,131 77,783 52,330
Gold (GC)........................................... 62,804 50,054 36,029
Silver (SI)......................................... 9,306 6,207 3,510
Platinum (PL)....................................... 2,575 2,507 2,285
Palladium (PA)...................................... 889 857 823
Copper (HG)......................................... 82,479 65,187 47,365
Natural Gas (NG).................................... 4,239,581 3,828,739 3,331,141
Light Sweet Crude (CL).............................. 2,318,074 2,050,270 1,744,137
NY Harbor ULSD (HO)................................. 170,316 117,004 65,721
RBOB Gasoline (RB).................................. 102,094 66,560 30,477
----------------------------------------------------------------------------------------------------------------
Staff made numerous significant adjustments to the part 20 data for
natural gas, due to numerous reports in units rather than the number of
gross futures-equivalent contracts and the large number of reports of
swaps that did not meet the definition of referenced contract.
[[Page 96759]]
The Commission continues to be concerned about the quality of data
submitted in large trader reports pursuant to part 20 of the
Commission's regulations. Commissioners and staff have expressed
concerns about data reporting publicly on a variety of occasions.\515\
Nevertheless, the Commission anticipates that over time part 20
submissions will become more reliable and intensive efforts by
Commission staff to process and edit raw data will become less
necessary. As stated in the December 2013 Position Limits Proposal, for
setting subsequent levels of non-spot month limits, the Commission
proposes to estimate average open interest in referenced contracts
using data reported pursuant to parts 16, 20, and/or 45.\516\ It is
crucial, therefore, that market participants make sure they submit
accurate data to the Commission, and resubmit data discovered to be
erroneous, because subsequent limit levels will be based on that data.
Reporting is at the heart of the Commission's market and financial
surveillance programs, which are critical to the Commission's mission
to protect market participants and promote market integrity. Failure to
meet reporting obligations to the Commission by submitting reports and
data that contain errors and omissions in violation of the part 20
regulations may subject reporting entities to enforcement actions and
remedial sanctions.\517\
---------------------------------------------------------------------------
\515\ See, e.g., CFTC Staff Advisory No. 15-66, available at
http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/15-66.pdf (reminding swap dealers and major swap participants
of their swap data reporting obligations); Remarks of Chairman
Timothy Massad before the ABA Derivatives and Futures Law Committee,
2016 Winter Meeting, Jan. 22, 2016, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-37 (improving
data reporting).
\516\ December 2013 Position Limits Proposal, 78 FR at 75734.
\517\ The CFTC announced its first case enforcing the Reporting
Rules in September 2015. See Order: Australia and New Zealand
Banking Group Ltd. (``ANZ''), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfaustraliaorder091715.pdf (the Order finds that during the period
from at least March 1, 2013 through November 30, 2014, ANZ filed
large trader reports that routinely contained errors).
---------------------------------------------------------------------------
4. Setting Levels of Spot-Month Limits
In the December 2013 Position Limits Proposal, the Commission
proposed to set the initial spot month speculative position limit
levels for referenced contracts at the existing DCM-set levels for the
core referenced futures contracts.\518\ As an alternative, the
Commission stated that it was considering using 25 percent of an
exchange's estimate of deliverable supply if the Commission verified
the estimate as reasonable.\519\ As a further alternative, the
Commission stated that it was considering setting initial spot month
position limit levels at a recommended level, if any, submitted by a
DCM (if lower than 25 percent of estimated deliverable supply).\520\
---------------------------------------------------------------------------
\518\ December 2013 Position Limits Proposal, 78 FR at 75727.
One commenter urged the Commission to retain the legacy speculative
limits for enumerated agricultural products. The ``enumerated''
agricultural products refer to the list of commodities contained in
the definition of ``commodity'' in CEA section 1a; 7 U.S.C. 1a. This
list of agricultural contracts includes nine currently traded
contracts: Corn (and Mini-Corn), Oats, Soybeans (and Mini-Soybeans),
Wheat (and Mini-wheat), Soybean Oil, Soybean Meal, Hard Red Spring
Wheat, Hard Winter Wheat, and Cotton No. 2. See 17 CFR 150.2. The
position limits on these agricultural contracts are referred to as
``legacy'' limits because these contracts on agricultural
commodities have been subject to federal positions limits for
decades. This commenter stated, ``There is no appreciable support
within our industry or, as far as we know, from the relevant
exchanges to move beyond current levels . . . . Changing current
limits, as proposed in the rule, will have a negative impact on
futures-cash market convergence and will compromise contract
performance.'' CL-AFBF-59730 at 3. Contra CL-ISDA/SIFMA-59611 at 32
(setting initial spot-month limits at the existing exchange-set
levels would be arbitrary because the exchange-set levels have not
been calibrated to apply as ``a ceiling on the spot-month positions
that a trader can hold across all exchanges for futures, options and
swaps''); CL-ICE-59966 at 6 (``the Proposed Rule . . . effectively
halves the present position limit in the spot month by aggregating
across trading venues and uncleared OTC swaps''). See also CL-ISDA/
SIFMA-59611 at 3 (the spot month limit methodology is ``both
arbitrary and unjustified'').
\519\ December 2013 Position Limits Proposal, 78 FR at 75727.
The Commission also stated that if the Commission could not verify
an exchange's estimate of deliverable supply for any commodity as
reasonable, the Commission might adopt the existing DCM-set level or
a higher level based on the Commission's own estimate, but not
greater than would result from the exchange's estimated deliverable
supply for a commodity.
One commenter was unconvinced that estimated deliverable supply
is ``the appropriate metric for determining spot month position
limits'' and opined that the ``real test'' should be whether limits
``allow convergence of cash and futures so that futures markets can
still perform their price discovery and risk management functions.''
CL-NGFA-60941 at 2. Another commenter stated, ``While 25% may be a
reasonable threshold, it is based on historical practice rather than
contemporary analysis, and it should only be used as a guideline,
rather than formally adopted as a hard rule. Deliverable supply is
subject to numerous environmental and economic factors, and is
inherently not susceptible to formulaic calculation on a yearly
basis.'' CL-MGEX-60301 at 1. Another commenter expressed the view
that the 25 percent formula is not ``appropriately calibrated to
achieve the statutory objective'' set forth in section
4a(a)(3)(B)(i) of the CEA, 7 U.S.C. 6a(a)(3)(B)(i). CL-CME-60926 at
3. Another commenter opined that because the Commission ``has not
established a relationship between `estimated deliverable supply'
and spot-month potential for manipulation or excessive
speculation,'' the 25 percent formula is arbitrary. CL-ISDA/SIFMA-
59611 at 31.
Several commenters opined that 25 percent of deliverable supply
is too high. E.g., CL-AFR-59685 at 2; CL-Tri-State Coalition for
Responsible Investment-59682 at 1; CL-CMOC-59720 at 3; CL-WEED-59628
(``Only a lower limit would ensure market stability and prevent
market manipulation.''); CL-Public Citizen-60313 at 1 (``There is no
good reason for a single firm to take 25% of a market.''); CL-IECA-
59964 at 3 (25 percent of deliverable supply ``is a lot of market
power in the hands of speculators''). One commenter stated that
``position limits should be set low enough to restore a commercial
hedger majority in open interest in each core referenced contract,''
CL-IATP-60323 at 5 (suggesting in a later submission that position
limits at 5-10 percent of estimated deliverable supply in each
covered contract applied on an aggregated basis might ``enable
commercial hedgers to regain for all covered contracts their pre-
2000 average share of 70 percent of agricultural contracts''). CL-
IATP-60394 at 2. One commenter supported expanding position limits
``to ensure rough or approximate convergence of futures and
underlying cash at expiration.'' CL-Thornton-59702 at 1.
Several commenters supported setting limits based on updated
estimates of deliverable supply which reflect current market
conditions. E.g., CL-ICE-59966 at 5; CL-FIA-59595 at 8; CL-EEI-EPSA-
59602 at 9; CL-MFA-59606 at 5; CL-CMC-59634 at 14; CL-Olam-59658 at
3; CL-CCMC-59684 at 6-7.
\520\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------
In determining the levels at which to repropose the initial
speculative position limits, the Commission considered, without
limitation, the recommendations of the exchanges as well as data to
which the exchanges do not have access. In considering these and other
factors, the Commission became very concerned about the effect of
alternative limit levels on traders in the cash-settled referenced
contracts. A DCM has reasonable discretion in establishing the manner
in which it complies with core principle 5 regarding position
limits.\521\ As the Commission observed in the December 2013 Position
Limits Proposal, ``there may be a range of spot month limits, including
limits set below 25 percent of deliverable supply, which may serve as
practicable to maximize . . . [the] policy objectives [set forth in
section 4a(a)(3)(B) of the CEA].'' \522\ The Commission must also
consider the competitiveness of futures markets.\523\ Thus, the
Commission accepts the recommendations of the exchanges and has
determined to repropose federal limits below 25 percent of deliverable
supply, where setting a limit level at less than 25 percent of
deliverable supply does not appear to restrict unduly positions in the
cash-settled referenced contracts. The exchanges retain the ability to
adopt lower exchange-set limit levels than the initial
[[Page 96760]]
speculative position limit levels that the Commission reproposes today.
---------------------------------------------------------------------------
\521\ CEA section 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B).
\522\ December 2013 Position Limits Proposal, 78 FR at 75729.
\523\ CEA section 15(a)(2)(B), 7 U.S.C. 19(a)(2)(B).
---------------------------------------------------------------------------
a. CME and MGEX Agricultural Contracts
As explained above, the Commission has verified that the estimates
of deliverable supply for each of the CBOT Corn (C), Oats (O), Rough
Rice (RR), Soybeans (S), Soybean Meal (SM), Soybean Oil (SO), Wheat (W)
core referenced futures contract, the Hard Red Winter Wheat (KW) core
referenced futures contract submitted by CME, and the Hard Red Spring
Wheat (MWE) core referenced futures contract submitted by MGEX are
reasonable.
Nevertheless, the Commission has determined to repropose the
initial speculative spot month position limit levels for C, O, RR, S,
SM, SO, W and KW at the recommended levels submitted by CME,\524\ all
of which are lower than 25 percent of estimated deliverable
supply.\525\ As is evident from the table set forth below, this also
means that the Commission is reproposing the initial speculative
position limit levels for these eight contracts as proposed in the
December 2013 Position Limits Proposal. These initial levels track the
existing DCM-set levels for the core referenced futures contracts;
\526\ therefore, as noted in the December 2013 Position Limits
Proposal, many market participants are already used to these
levels.\527\ The Commission continues to believe this approach is
consistent with the regulatory objectives of the Dodd-Frank Act
amendments to the CEA.
---------------------------------------------------------------------------
\524\ CL-CME-61007 at 5.
\525\ The Commission noted in the December 2013 Position Limits
Proposal ``that DCMs historically have set or maintained exchange
spot month limits at levels below 25 percent of deliverable
supply.'' December 2013 Position Limits Proposal, 78 FR at 75729.
\526\ See CL-CME-61007 (specifying lower exchange-set limit
levels for W and RR in certain circumstances).
\527\ December 2013 Position Limits Proposal, 78 FR at 75727.
Table III-B-5--CME Agricultural Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
Previously 25% of estimated Reproposed
Contract proposed limit deliverable speculative limit
level \528\ supply \529\ level
----------------------------------------------------------------------------------------------------------------
C................................................... 600 900 600
O................................................... 600 900 600
RR.................................................. 600 2,300 600
S................................................... 600 1,200 600
SM.................................................. 720 2,000 720
SO.................................................. 540 3,400 540
W \530\............................................. 600 1,000 600
KW.................................................. 600 3,000 600
----------------------------------------------------------------------------------------------------------------
The Commission has also determined to repropose the initial
speculative spot month position limit level for MWE at 1,000 contracts,
which is the level requested by MGEX \531\ and just slightly lower than
25 percent of estimated deliverable supply.\532\ This is an increase
from the previously proposed level of 600 contracts and is greater than
the reproposed speculative spot month position limit levels for W and
KW.\533\ Upon deliberation, the Commission accepts the recommendation
of MGEX.\534\
---------------------------------------------------------------------------
\528\ December 2013 Position Limits Proposal, 78 FR at 75839
(Appendix D to Part 150--Initial Position Limit Levels).
\529\ Rounded up to the next 100 contracts.
\530\ The W core referenced futures contract refers to soft red
winter wheat, the KW core reference futures contract refers to hard
red winter wheat, and the MWE core reference futures contract refers
to hard red spring wheat; i.e., the contracts are for different
products.
\531\ CL-MGEX-61038 at 2; see also CL-MGEX-60938 at 2 (earlier
submission of deliverable supply estimate).
\532\ The difference is due to rounding. The MGEX estimate of
4,005 contract equivalents for MWE deliverable would have supported
a spot-month limit level of 1,100 contracts (rounded up to the next
100 contracts). The Commission noted in the December 2013 Position
Limits Proposal ``that DCMs historically have set or maintained
exchange spot month limits at levels below 25 percent of deliverable
supply.'' December 2013 Position Limits Proposal, 78 FR at 75729.
\533\ Most commenters who supported establishing the same level
of speculative limits for each of the three wheat core referenced
futures contracts focused on parity in the non-spot months. However,
some commenters did support wheat party in the spot month. See,
e.g., CL-CMC-59634 at 15; CL-NCFC-59942 at 6.
\534\ The difference between an estimate of 4,000 contracts,
which would result in a limit level of 1,000, and 4,005 contracts,
which results in a limit level of 1,100 contracts, is small enough
that the Commission's prior statements regarding the 25% formula are
instructive. As stated in the December 2013 Position Limits
Proposal, the 25 percent formula ``is consistent with the
longstanding acceptable practices for DCM core principle 5 which
provides that, for physical-delivery contracts, the spot-month limit
should not exceed 25 percent of the estimated deliverable supply.''
December 2013 Position Limits Proposal, 78 FR at 75729. The
Commission continues to believe, based on its experience and
expertise, that the 25 percent formula is an ``effective
prophylactic tool to reduce the threat of corners and squeezes, and
promote convergence without compromising market liquidity.''
December 2013 Position Limits Proposal, 78 FR at 75729.
Table III-B-6--CME and MGEX Agricultural Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
Unique persons over spot month
limit
Core referenced futures Basis of spot- -------------------------------- Reportable
contract month level Limit level Physical persons spot
Cash settled delivery month only
contracts contracts
----------------------------------------------------------------------------------------------------------------
Corn (C)...................... CME [dagger] 600 0 36 1,050
recommendation.
25% DS.......... 900 0 20
Oats (O)...................... CME [dagger] 600 0 0 33
recommendation.
25% DS.......... 900 0 0
Soybeans (S).................. CME [dagger] 600 0 22 929
recommendation.
25% DS.......... 1,200 0 14
Soybean Meal (SM)............. CME [dagger] 720 0 14 381
recommendation.
25% DS.......... 2,000 0 *
[[Page 96761]]
Soybean Oil (SO).............. CME [dagger] 540 0 21 397
recommendation.
25% DS.......... 3,400 0 0
Wheat (W)..................... CME [dagger] 600 0 11 444
recommendation.
25% DS.......... 1,000 0 6
Wheat (MWE)................... Parity w/CME [dagger] 600 0 * 102
recommendation.
25% DS.......... [dagger][dagge 0 *
r] 1,000
Wheat (KW).................... CME [dagger] 600 0 4 250
recommendation.
25% DS (MW)..... 1,000 0 *
25% DS (KW)..... 3,000 0 *
Rough Rice (RR)............... CME [dagger] 600 0 0 91
recommendation.
25% DS.......... 2,300 0 0
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
futures contract.
[dagger] Denotes existing limit level.
[dagger][dagger] Limit level requested by MGEX.
* Denotes fewer than 4 persons.
The Commission's impact analysis reveals no traders in cash settled
contracts in any of C, O, S, SM, SO, W, MWE, KW, or RR, and no traders
in physical delivery contracts for O and RR, above the initial
speculative limit levels for those contracts. The Commission found
varying numbers of traders in the C, S, SM, SO, W, MWE, KW physical
delivery contracts over the initial levels, but the numbers were very
small for MWE and KW.\535\ Because the levels that the Commission
reproposes today for C, O, S, SM, SO, W, KW, and RR maintain the status
quo for those contracts, the Commission assumes that some or possibly
all of such traders over the initial levels are hedgers. Hedgers may
have to file for an applicable exemption, but hedgers with bona fide
hedging positions should not have to reduce their positions as a result
of speculative position limits per se. Thus, the number of traders in
the C, S, SM, SO, W and KW physical delivery contracts who would need
to reduce speculative positions below the initial limit levels should
be lower than the numbers indicated by the impact analysis. The
Commission believes that setting initial speculative levels at 25
percent of deliverable supply would, based upon logic and the
Commission's impact analysis, affect fewer traders in the C, S, SM, SO,
W and KW physical delivery contracts. Consistent with its statement in
the December 2013 Position Limits Proposal, the Commission believes
that accepting the recommendation of the DCM to set these lower levels
of initial spot month limits will serve the objectives of preventing
excessive speculation, manipulation, squeezes and corners,\536\ while
ensuring sufficient market liquidity for bona fide hedgers in the view
of the listing DCM and ensuring that the price discovery function of
the market is not disrupted.\537\
---------------------------------------------------------------------------
\535\ Four or fewer traders.
\536\ Contra CL-ISDA/SIFMA-59611 at 55 (proposed spot month
limits ``are almost certainly far smaller than necessary to prevent
corners or squeezes'').
\537\ December 2013 Position Limits Proposal, 78 FR at 75729.
---------------------------------------------------------------------------
b. Softs
As explained above, the Commission has verified that the estimates
of deliverable supply for each of the IFUS Cocoa (CC), Coffee ``C''
(KC), Cotton No. 2 (CT), FCOJ-A (OJ), Sugar No. 11 (SB), and Sugar No.
16 (SF) core referenced futures contracts submitted by ICE are
reasonable.
The Commission has determined to repropose the initial speculative
spot month position limit levels for the CC, KC, CT, OJ, SB, and SF
\538\ core referenced futures contracts at 25 percent of estimated
deliverable supply, based on the estimates of deliverable supply
submitted by ICE.\539\ As is evident from the table set forth below,
this also means that the Commission is reproposing initial speculative
position limit levels that are significantly higher than the levels for
these six contracts as previously proposed. As stated in the December
2013 Position Limits Proposal, the 25 percent formula ``is consistent
with the longstanding acceptable practices for DCM core principle 5
which provides that, for physical-delivery contracts, the spot-month
limit should not exceed 25 percent of the estimated deliverable
supply.'' \540\ The Commission continues to believe, based on its
experience and expertise, that the 25 percent formula is an ``effective
prophylactic tool to reduce the threat of corners and squeezes, and
promote convergence without compromising market liquidity.'' \541\
---------------------------------------------------------------------------
\538\ One commenter supported considering ``tropicals (sugar/
coffee/cocoa) . . . separately from those agricultural crops
produced in the US domestic market.'' CL-Thornton-59702 at 1; see
also CL-Armajaro-59729 at 1.
\539\ CL-IFUS-60807.
\540\ December 2013 Position Limits Proposal, 78 FR at 75729.
The Commission also noted ``that DCMs historically have set or
maintained exchange spot month limits at levels below 25 percent of
deliverable supply.'' December 2013 Position Limits Proposal, 78 FR
at 75729.
\541\ December 2013 Position Limits Proposal, 78 FR at 75729.
Table III-B-7--IFUS Soft Agricultural Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
Previously 25% of estimated Reproposed
Contract proposed limit deliverable speculative limit
level \542\ supply \543\ level
----------------------------------------------------------------------------------------------------------------
CC.................................................. 1,000 5,500 5,500
[[Page 96762]]
KC.................................................. 500 2,400 2,400
CT.................................................. 300 1,600 1,600
OJ.................................................. 300 2,800 2,800
SB.................................................. 5,000 23,300 23,300
SF.................................................. 1,000 7,000 7,000
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\542\ December 2013 Position Limits Proposal, 78 FR at 75839-40
(Appendix D to Part 150--Initial Position Limit Levels).
\543\ Rounded up to the next 100 contracts.
---------------------------------------------------------------------------
The Commission did not receive any estimate of deliverable supply
for the CME Live Cattle (LC) core referenced futures contract from CME,
nor did CME recommend any change in the limit level for LC. In the
absence of any such update, the Commission is reproposing the initial
speculative position limit level of 450 contracts. Of 616 reportable
persons, the Commission's impact analysis did not reveal any unique
person trading cash settled or physical delivery spot month contracts
who would have held positions above this level for LC.
With respect to the IFUS CC, KC, CT, OJ, SB, and SF core referenced
futures contracts, the Commission's impact analysis did not reveal any
unique person trading cash settled spot month contracts who would have
held positions above the initial levels that the Commission adopts
today; as illustrated below, lower levels would mostly have affected
small numbers of traders in physical delivery contracts.
Table III-B-8--IFUS Soft Agricultural Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
Unique persons over spot month
limit
Core referenced futures Basis of spot- -------------------------------- Reportable
contract month level Limit level Physical persons spot
Cash settled delivery month only
contracts contracts
----------------------------------------------------------------------------------------------------------------
Cocoa (CC).................... 15% DS.......... 3,300 0 0 164
25% DS.......... [dagger][dagge 0 0
r] 5,500
Coffee ``C'' (KC)............. 15% DS.......... 1,440 0 * 336
25% DS.......... [dagger][dagge 0 *
r] 2,400
Cotton No. 2 (CT)............. 15% DS.......... 960 0 * 122
25% DS.......... [dagger][dagge 0 0
r] 1,600
FCOJ-A (OJ)................... 15% DS.......... 1,680 0 0 38
25% DS.......... [dagger][dagge 0 0
r] 2,800
Sugar No. 11 (SB)............. 15% DS.......... 13,980 * 10 443
25% DS.......... [dagger][dagge 0 *
r] 23,300
Sugar No. 16 (SF)............. 15% DS.......... 4,200 0 0 12
[dagger][dagger] [dagger][dagge 0 0
25% DS. r] 7,000
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``15% DS'' means 15 percent of the deliverable supply as estimated by the exchange listing the core referenced
futures contract and is included to provide information regarding the distribution of reportable traders.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
futures contract.
[dagger][dagger] Limit level requested by ICE.
* Denotes fewer than 4 persons.
c. Metals
As explained above, the Commission has verified that the estimates
of deliverable supply for each of the COMEX Gold (GC), COMEX Silver
(SI), NYMEX Platinum (PL), NYMEX Palladium (PA), and COMEX Copper (HG)
core referenced futures contracts submitted by CME are reasonable.
Nevertheless, the Commission has determined to repropose the
initial speculative spot month position limit levels for GC, SI, and HG
at the recommended levels submitted by CME,\544\ all of which are lower
than 25 percent of estimated deliverable supply.\545\ In the case of GC
and SI, this is a doubling of the current exchange-set limit
levels.\546\ In the case of HG, the initial level is the same as the
existing DCM-set level for the core referenced futures contract and
lower than the level previously proposed.
---------------------------------------------------------------------------
\544\ CL-CME-61007 at 5.
\545\ The Commission noted in the December 2013 Position Limits
Proposal ``that DCMs historically have set or maintained exchange
spot month limits at levels below 25 percent of deliverable
supply.'' December 2013 Position Limits Proposal, 78 FR at 75729.
\546\ One commenter cautioned against raising limit levels for
GC to 25 percent of deliverable supply, and expressed concern that
higher federal limits would incentivize exchanges to raise their own
limits. CL-WGC-59558 at 2-4.
Table III-B-9--CME Metals Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
Previously 25% of estimated Reproposed
Contract proposed limit deliverable speculative limit
level \547\ supply \548\ level
----------------------------------------------------------------------------------------------------------------
GC.................................................. 3,000 11,200 6,000
[[Page 96763]]
SI.................................................. 1,500 5,600 3,000
PL.................................................. 500 900 100
PA.................................................. 650 900 -500
HG.................................................. 1,200 1,100 1,000
----------------------------------------------------------------------------------------------------------------
The Commission has also determined to repropose the initial
speculative spot month position limit level for PL at 100 contracts and
PA at 500 contracts, which are the levels recommended by CME. In the
case of PL and PA, the reproposed level is the same as the existing
DCM-set level for the core referenced futures contract, and a decrease
from the previously proposed levels of 500 and 650 contracts,
respectively.
---------------------------------------------------------------------------
\547\ December 2013 Position Limits Proposal, 78 FR at 75840
(Appendix D to Part 150--Initial Position Limit Levels).
\548\ Rounded up to the next 100 contracts.
---------------------------------------------------------------------------
The Commission found varying numbers of traders in the GC, SI, PL,
PA, and HG physical delivery contracts over the initial levels, but the
numbers were very small except for PA.\549\ Because the levels that the
Commission reproposes today for PL, PA, and HG maintain the status quo
for those contracts, the Commission assumes that some or possibly all
of such traders over the reproposed levels are hedgers. The Commission
reiterates the discussion above regarding agricultural contracts:
hedgers may have to file for an applicable exemption, but hedgers with
bona fide hedging positions should not have to reduce their positions
as a result of speculative position limits per se. Thus, the number of
traders in the metals physical delivery contracts who would need to
reduce speculative positions below the reproposed limit levels should
be lower than the numbers indicated by the impact analysis. And, while
setting initial speculative levels at 25 percent of deliverable supply
would, based upon logic and the Commission's impact analysis, affect
fewer traders in the metals physical delivery contracts, consistent
with its statement in the December 2013 Position Limits Proposal, the
Commission believes that setting these lower levels of initial spot
month limits will serve the objectives of preventing excessive
speculation, manipulation, squeezes and corners,\550\ while ensuring
sufficient market liquidity for bona fide hedgers in the view of the
listing DCM and ensuring that the price discovery function of the
market is not disrupted.
---------------------------------------------------------------------------
\549\ Fewer than four unique persons.
\550\ Contra CL-ISDA/SIFMA-59611 at 55 (proposed spot month
limits ``are almost certainly far smaller than necessary to prevent
corners or squeezes'').
Table III-B-10--CME Metal Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
Unique persons over spot month
limit
Core referenced futures Basis of spot- -------------------------------- Reportable
contract month level Limit level Physical persons spot
Cash settled delivery month only
contracts contracts
----------------------------------------------------------------------------------------------------------------
Gold (GC)..................... CME 6,000 * * 518
recommendation.
25% DS.......... 11,200 0 0
Silver (SI)................... CME 3,000 0 0 311
recommendation.
25% DS.......... 5,600 0 0
Platinum (PL)................. CME [dagger] 500 13 * 235
recommendation.
25% DS.......... 900 10 *
50% DS.......... 1,800 * 0
Palladium (PA)................ CME [dagger] 100 6 14 164
recommendation.
25% DS.......... 900 0 0
Copper (HG)................... CME [dagger] 1,000 0 * 493
recommendation.
25% DS.......... 1,100 0 *
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
futures contract.
``50% DS'' means 50 percent of the deliverable supply as estimated by the exchange listing the core referenced
futures contract and is included to provide information regarding the distribution of reportable traders.
[dagger] Denotes existing exchange-set limit level.
* Denotes fewer than 4 persons.
The Commission's impact analysis reveals no unique persons in the
SI and HG cash settled referenced contracts, and very few unique
persons in the cash settled GC referenced contract, whose positions
would have exceeded the initial limit levels for those contracts. Based
on the Commission's impact analysis, setting the initial federal spot
month limit levels for PL and PA at the lower levels recommended by CME
would impact a few traders in PL and PA cash settled contracts.
The Commission has carefully considered the numbers of unique
persons that would be impacted by each of the cash-settled and
physical-delivery spot month limits in the PL and PA referenced
contracts. The Commission notes those limits would appear to impact
more traders in the physical-delivery PA contract than in the cash-
settled PA contract, while fewer traders would be impacted in the
physical-delivery PL contract than in the cash-settled PL contract (in
any event, few traders would appear to be affected).\551\
---------------------------------------------------------------------------
\551\ In this regard, the Commission notes that CME did not have
access to the Commission's impact analysis when CME recommended
levels for its physical-delivery core referenced futures contracts.
---------------------------------------------------------------------------
[[Page 96764]]
The Commission also observed the distribution of those cash-settled
traders over time; as reflected in the open interest table discussed
below regarding setting non-spot month limits, it can be readily
observed that open interest in each of the cash-settled PL and PA
referenced contracts was markedly lower in the second 12-month period
(year 2) than in the prior 12-month period (year 1). Accordingly, the
Commission accepts the CME recommended levels in PL and PA referenced
contracts.
d. Energy
As explained above, the Commission has verified that the estimates
of deliverable supply for each of the NYMEX Natural Gas (NG), Light
Sweet Crude (CL), NY Harbor ULSD (HO), and RBOB Gasoline (RB) core
referenced futures contracts submitted by CME are reasonable.
The Commission has determined to repropose the initial speculative
spot month position limit levels for the NG, CL, HO, and RB core
referenced futures contracts at 25 percent of estimated deliverable
supply which, in the case of CL, HO, and RB is higher than the levels
recommended by CME.\552\ As is evident from the table set forth below,
this also means that the Commission is reproposing speculative position
limit levels that are significantly higher than the levels for these
four contracts as previously proposed. As stated in the December 2013
Position Limits Proposal, the 25 percent formula ``is consistent with
the longstanding acceptable practices for DCM core principle 5 which
provides that, for physical-delivery contracts, the spot-month limit
should not exceed 25 percent of the estimated deliverable supply.''
\553\ The Commission continues to believe, based on its experience and
expertise, that the 25 percent formula is an ``effective prophylactic
tool to reduce the threat of corners and squeezes, and promote
convergence without compromising market liquidity.'' \554\
---------------------------------------------------------------------------
\552\ CL-CME-61007 at 5. One commenter opined that 25 percent of
deliverable supply would result in a limit level that is too high
for natural gas, and suggest 5 percent as an alternative that
``would provide ample liquidity and significantly reduce the
potential for excessive speculation.'' CL-Industrial Energy
Consumers of America-59964 at 3. Another commenter supported
increasing ``the spot-month position limit levels for Henry Hub
Natural Gas referenced contracts to be consistent with CME Group's
or ICE's estimates of deliverable supply and more generally the
significant new sources of natural gas.'' CL-NGSA-59674 at 3.
\553\ December 2013 Position Limits Proposal, 78 FR at 75729.
\554\ December 2013 Position Limits Proposal, 78 FR at 75729.
\555\ December 2013 Position Limits Proposal, 78 FR at 75840
(App. D to part 150--Initial Position Limit Levels).
\556\ Rounded up to the next 100 contracts.
Table III-B-11--CME Energy Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
Previously 25% of estimated Reproposed
Contract proposed limit deliverable speculative limit
level \555\ supply \556\ level
----------------------------------------------------------------------------------------------------------------
NG.................................................. 1,000 2,000 2,000
CL.................................................. 3,000 10,400 10,400
HO.................................................. 1,000 2,900 2,900
RB.................................................. 1,000 6,800 6,800
----------------------------------------------------------------------------------------------------------------
The levels that CME recommended for NG, CL, HO, and RB are twice
the existing exchange-set spot month limit levels. Nevertheless, the
Commission is reproposing speculative spot month limit levels at 25
percent of deliverable supply for CL, HO, and RB because the Commission
believes that higher levels will lessen the impact on a number of
traders in both cash settled and physical delivery contracts. For NG,
the Commission is reproposing the physical delivery limit at 25% of
deliverable supply, as recommended by CME; \557\ the Commission is also
reproposing a conditional spot month limit exemption of 10,000 for
cash-settled contracts in natural gas only.\558\ This exemption would
to some degree maintain the status quo in natural gas because each of
the NYMEX and ICE cash-settled natural gas contracts, which settle to
the final settlement price of the physical delivery contract, include a
conditional spot month limit exemption of 5,000 contracts (for a total
of 10,000 contracts).\559\ However, neither the
[[Page 96765]]
NYMEX and ICE penultimate contracts, which settle to the daily
settlement price on the next to last trading day of the physical
delivery contract, nor OTC swaps, are currently subject to any spot
month position limit. In addition, the Commission's impact analysis
suggests that a conditional spot month limit exemption greater than 25%
of deliverable supply for cash settled contracts in natural gas would
potentially benefit many traders.
---------------------------------------------------------------------------
\557\ One commenter expressed concern about setting the spot
month limit for natural gas swaps at the same level as for the
physically settled futures contract, because some referenced
contracts cease to be economically equivalent ``during the limited
window at expiry.'' CL-BG Group-59937 at 3.
\558\ This exemption for up to 10,000 contracts would be five
times the spot month limit of 2,000 contracts, consistent with the
December 2013 Position Limits Proposal. See December 2013 Position
Limits Proposal, 78 FR at 75736-8. Under vacated Sec. 151.4, the
Commission would have applied a spot-month position limit for cash-
settled contracts in natural gas at a level of five times the level
of the limit for the physical delivery core referenced futures
contract. See Position Limits for Futures and Swaps, 76 FR 71626,
71687 (Nov. 18, 2011).
\559\ Some commenters supported retaining a conditional spot
month limit in natural gas. E.g., CL-ICE-60929 at 12 (``Any changes
to the current terms of the Conditional Limit would disrupt present
market practice for no apparent reason. Furthermore, changing the
limits for cash-settled contracts would be a significant departure
from current rules, which have wide support from the broader market
as evidenced by multiple public comments supporting no or higher
cash-settled limits.''). Contra CL-Sen. Levin-59637 at 7 (``The
proposed higher limit for cash settled contracts is ill-advised. It
would not only raise the affected position limits to levels where
they would be effectively meaningless, it would also introduce
market distortions favoring certain contracts and certain exchanges
over others, and potentially disrupt important markets, including
the U.S. natural gas market that is key to U.S. manufacturing.'');
CL-Public Citizen-59648 at 5 (``Congress, in allowing an exemption
for bona fide hedgers but not pure speculators, could not possibly
have intended for the Commission to implement position limits that
allow market speculators to hold 125 percent of the estimated
deliverable supply. Once again, while this exception for cash-
settled contracts would avoid market manipulations such as corners
and squeezes (since cash-settled contracts give no direct control
over a commodity), it does not address the problem of undue
speculative influence on futures prices.''); CL-Better Markets-60401
at 17 (``There is no justification for treating cash and physically-
settled contracts differently in any month, and settlement
characteristics should not be a determinant of the ability to exceed
the limits in any month.''). One commenter urged the Commission ``to
eliminate the requirement that traders hold no physical-delivery
position in order to qualify for the conditional spot-month limit
exemption'' in order to maintain liquidity in the NYMEX natural gas
futures contract. CL-BG Group-59656 at 6-7. See also CL-NGSA-59674
at 38-39 (supporting the higher conditional spot month limit in
natural gas without restricting positions in the underlying physical
delivery contract); CL-EEI-EPSA-59602 at 10 (the Commission should
permit ``market participants to rely on higher speculative limits
for cash-settled contracts while still holding a position in the
physical-delivery contract''); CL-APGA-59722 at 8 (the Commission
should condition the spot month limit exemption for cash settled
natural gas contracts by precluding a trader from holding more than
one quarter of the deliverable supply in physical inventory). Cf.
CL-CME-59971 at 3 (eliminate the five times natural gas limit
because it ``encourages participants to depart from, or refrain from
establishing positions in, the primary physical delivery contract
market and instead opt for the cash-settled derivative contract
market, especially during the last three trading days when the five
times limit applies. By encouraging departure from the primary
contract market, the five times limit encourages a process of de-
liquefying the benchmark physically delivered futures market and
directly affects the determination of the final settlement price for
the NYMEX NG contract- the very same price that a position
representing five times the physical limit will settle against.'').
Table III-B-12--Energy Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
Unique persons over spot month
limit
Core referenced futures Basis of spot- -------------------------------- Reportable
contract month level Limit level Physical persons spot
Cash settled delivery month only
contracts contracts
----------------------------------------------------------------------------------------------------------------
Natural Gas (NG).............. CME 2,000 131 16 1,400
recommendation.
50% DS.......... 4,000 77 *
Conditional 10,000 20 0
Exemption.
Light Sweet Crude (CL)........ CME [dagger][dagge 19 8 1,733
recommendation. r] 6,000
25% DS.......... 10,400 16 *
50% DS.......... 20,800 * 0
NY Harbor ULSD (HO)........... CME 2,000 24 11 470
recommendation.
25% DS.......... 2,900 15 5
50% DS.......... 5,800 5 0
RBOB Gasoline (RB)............ CME 2,000 23 14 463
recommendation.
25% DS.......... 6,800 * 0
50% DS.......... 13,600 0 0
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
futures contract.
``50% DS'' means 50 percent of the deliverable supply as estimated by the exchange listing the core referenced
futures contract and is included to provide information regarding the distribution of reportable traders.
[dagger][dagger] CME recommended a step-down spot month limit of 6,000/5,000/4,000 contracts in the last three
days of trading.
* Denotes fewer than 4 persons.
5. Setting Levels of Single-Month and All-Months-Combined Limits
The Commission has determined to use the futures position limits
formula, 10 percent of the open interest for the first 25,000 contracts
and 2.5 percent of the open interest thereafter, to repropose the non-
spot month speculative position limits for referenced contracts,
subject to the details and qualifications set forth in this
Notice.\560\ The Commission continues to believe that ``the non-spot
month position limits would restrict the market power of a speculator
that could otherwise be used to cause unwarranted price movements.''
\561\
---------------------------------------------------------------------------
\560\ As noted in the December 2013 Position Limits Proposal,
the Commission has used the 10, 2.5 percent formula in administering
the level of the legacy all-months position limits since 1999.
December 2013 Position Limits Proposal, 78 FR at 75729-30.
Several commenters did not support establishing non-spot month
limits. See, e.g., CL-ISDA/SIFMA-59611 at 27 (``There is no
justification whatsoever for non-spot-month limits.''); CL-EEI-EPSA-
59602 at 10 (``limits outside the spot month are not necessary'');
CL-AMG-59709 at 10 (the Commission should ``decline to adopt non-
spot-month position limits''); CL-CME-59718 at 39 (the Proposal's
non-spot-month position limit formula should be withdrawn''); CL-
CAM-60097 at 2 (``Non-spot month limits are neither necessary nor
appropriate.''); CL-BG Group-60383 at 2 (``Any final rule should be
limited to a federally mandated spot-month limit (not any/all month
limits).''). Some of these same commenters supported position
accountability in the non-spot months rather than limits. See, e.g.,
CL-EEI-EPSA-59602 at 10, CL-FIA-59595 at 3, CL-MFA-60385 at 5, CL-
ISDA/SIFMA-59611 at 29, CL-Calpine-59663 at 3-4, CL-Working Group-
60396 at 10, CL-EDF-60398 at 4, CL-ICE-59966 at 8, CL-BG Group-60383
at 2, CL-CMC-59634 at 11. Some commenters also urged the Commission
to wait until it has reliable data before establishing non-spot
month limits. See, e.g., CL-EEI-EPSA-59602 at 11; CL-FIA-59595 at 3,
14; CL-MFA-60385 at 5; CL-ISDA/SIFMA-59611 at 29; CL-Olam-59658 at
1, 3. See also discussion of part 20 data adjustments under Sec.
150.2, below. Contra CL-O SEC-59972 (``corners and other supply
fluctuations can occur during non-spot months'').
A commenter who did not support adopting non-spot month limits
suggested a fall-back position of adopting ``any months limits'' but
not ``all months limits,'' and suggested an alternative 10, 5
percent formula in specified circumstances. CL-Working Group-59693
at 62. See also CL-CME-59718 at 44 (supporting a 10, 5 percent
formula). One commenter supported abolishing single month limits
``in favor of an ``all months'' or gross position that would
effectively allow the player to adapt their position to the
realities of an agricultural crop that doesn't flow in equal monthly
chunks.'' CL-Thornton-59702 at 1. Another commenter stated that
``[p]osition limits should be a function of the liquidity of the
market,'' CL-MFA-59606 at 21, and asserted that applying the 10, 2.5
percent formula will result in ``a self-reinforcing cycle of lower
open interest and lower position limits in successive years.'' CL-
MFA-59696 at 22. Another commenter supported ``tying the overall
non-spot month position limits to an acceptable aggregate (market-
wide) level of speculation, and tying individual trader limits to
that aggregate level.'' CL-Public Citizen-59648 at 4. Another
commenter expressed the belief that the 10, 2.5 percent formula
would result in non-spot month limits that ``are much too high to
adequately regulate excessive speculation that might lead to price
fluctuations.'' CL-Tri-State-59682 at 1. To ``address the
cumulative, disruptive effect of traders who hold large, but not
dominant positions,'' one commenter suggested basing non-spot month
position limits on ``an acceptable total level of speculation that
approximates the historic ratio of hedging to investor/speculative
trading.'' CL-A4A-59714 at 4. See CL-Better Markets-60401 at 4
(``Historically, speculators in commodity futures have constituted
between 15%-30% of market activity, and within this range
speculators productively facilitated effective hedging without
meaningfully disrupting or independently shaping the market's
behavior.'').
\561\ December 2013 Position Limits Proposal, 78 FR at 75730.
---------------------------------------------------------------------------
a. CME and MGEX Agricultural Contracts
The Commission is reproposing the non-spot month speculative
position limit levels for the Corn (C), Oats (O), Rough Rice (RR),
Soybeans (S), Soybean Meal (SM), Soybean Oil (SO), and Wheat (W) core
referenced futures contracts based on the 10, 2.5 percent open interest
formula.\562\ Based on the Commission's experience since 2011 with non-
spot month speculative position limit levels for the Hard Red Winter
Wheat (KW) and Hard Red Spring Wheat (MWE) core referenced futures
contracts, the Commission is reproposing the limit levels for those two
commodities at the current level of 12,000 contracts rather than
reducing them to the lower levels that would result from applying the
10, 2.5 percent formula.\563\
---------------------------------------------------------------------------
\562\ One commenter expressed concern ``that proposed all-
months-combined speculative position limits based on open interest
levels is not necessarily the appropriate methodology and could lead
to contract performance problems.'' This commenter urged ``that all-
months-combined limits be structured to `telescope' smoothly down to
legacy spot-month limits in order to ensure continued convergence.''
CL-NGFA-60312 at 4.
\563\ One commenter supported a higher limit for KW than
proposed to promote growth and to enable liquidity for Kansas City
hedgers who often use the Chicago market. CL-Citadel-59717 at 8.
Another commenter supported setting ``a non-spot month and combined
position limit of no less than 12,000 for all three wheat
contracts.'' CL-MGEX-60301 at 1. Contra CL-O SEC-59972 at 7-8
(commending ``the somewhat more restrictive limitations . . . on
wheat trading'').
\564\ The W core referenced futures contract refers to soft red
winter wheat, the KW core reference futures contract refers to hard
red winter wheat, and the MWE core reference futures contract refers
to hard red spring wheat; i.e., the contracts are for different
products.
[[Page 96766]]
Table III-B-13--CME and MGEX Agricultural Contracts--Non-Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
Previously Reproposed
Contract Current limit proposed speculative
level limit level limit level
----------------------------------------------------------------------------------------------------------------
C............................................................... 33,000 53,500 62,400
O............................................................... 2,000 1,600 5,000
RR.............................................................. 1,800 2,200 5,000
S............................................................... 15,000 26,900 31,900
SM.............................................................. 6,500 9,000 16,900
SO.............................................................. 8,000 11,900 16,700
W \564\......................................................... 12,000 16,200 32,800
KW.............................................................. 12,000 6,500 12,000
MWE............................................................. 12,000 3,300 12,000
----------------------------------------------------------------------------------------------------------------
Maintaining the status quo for the non-spot month limit levels for
the KW and MWE core referenced futures contracts means there will be
partial wheat parity.\565\ The Commission has determined not to raise
the reproposed limit levels for KW and MWE to the limit level for W, as
32,800 contracts appears to be extraordinarily large in comparison to
open interest in the KW and MWE markets, and the limit levels for KW
and MWE are already larger than a limit level based on the 10, 2.5
percent formula. Even when relying on a single criterion, such as
percentage of open interest, the Commission has historically recognized
that there can ``result . . . a range of acceptable position limit
levels.'' \566\
---------------------------------------------------------------------------
\565\ Several commenters supported adopting equivalent non-spot
month position limits for the three existing wheat referenced
contracts traders. See, e.g., CL-FIA-59595 at 4, 15; CL-CMC-60391 at
8; CL-CMC-60950 at 11; CL-CME-59718 at 44; CL-AFBF-59730 at 4; CL-
MGEX-59932 at 2; CL-MGEX-60301 at 1; CL-MGEX-59610 at 2-3; CL-MGEX-
60936 at 2-3; CL-NCFC-59942 at 6; CL-NGFA-59956 at 3.
\566\ Revision of Speculative Position Limits, 57 FR 12770,
12766 (Apr. 13, 1992). See also Revision of Speculative Position
Limits and Associated Rules, 63 FR 38525, 38527 (July 17, 1998). Cf.
December 2013 Position Limits Proposal, 78 FR at 75729 (there may be
range of spot month limits that maximize policy objectives).
Table III-B-14--CME and MGEX Agricultural Contracts--Non-Spot Months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Open interest Unique persons above limit Reportable
---------------------------------------------------------------- Initial limit level persons in
Core-referenced futures contract level -------------------------------- market-- all
Year Futures Swaps Total All months Single month months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Corn (C)........................................................ 1 1,829,359 359,715 2,189,074 62,400 * * 2,606
2 1,779,977 641,014 2,420,991
Oats (O)........................................................ 1 10,097 646 10,743 5,000 0 0 173
2 11,223 480 11,703
Rough Rice (RR)................................................. 1 10,585 362 10,948 5,000 0 0 281
2 12,769 4 12,773
Soybeans (S).................................................... 1 973,037 109,858 1,082,895 31,900 6 4 2,503
2 962,636 235,679 1,198,315
Soybean Meal (SM)............................................... 1 422,611 71,887 494,498 16,900 5 4 978
2 463,549 134,399 597,948
Soybean Oil (SO)................................................ 1 421,114 55,265 476,379 16,700 5 4 1,034
2 464,373 125,106 589,478
Wheat (W)....................................................... 1 1,072,107 162,999 1,235,105 32,800 * * 1,867
2 1,010,342 222,420 1,232,762
Wheat (MWE)..................................................... 1 67,653 1,944 69,596 [dagger] 5,000 10 7 342
2 66,608 3,079 69,687 12,000 0 0
Wheat (KW)...................................................... 1 169,059 9,436 178,495 [dagger] 8,100 9 8 718
2 216,236 29,563 245,799 12,000 * *
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015
Year 2 = July 1, 2015 to June 30, 2016
Reproposed speculative position limit levels are shown in bold.
[dagger] Application of the 10, 2.5 percent formula would result in a level lower than the level adopted by the Commission in 2011.
* Denotes fewer than 4 persons.
b. Softs
The Commission is reproposing non-spot month speculative position
limit levels for the CC, KC, CT, OJ, SB, SF and LC \567\ core
referenced futures contracts based on the 10, 2.5 percent open interest
formula.
---------------------------------------------------------------------------
\567\ One commenter expressed concern that too high non-spot
month limit levels could lead to a repeat of convergence problems
experienced by certain contracts and that ``the imposition of all
months combined limits in continuously produced non-storable
commodities such as livestock . . . will reduce the liquidity needed
by hedgers in deferred months who often manage their risk using
strips comprised of multiple contract months.'' CL-AFBF-59730 at 3-
4. One commenter requested that the Commission withdraw its proposal
regarding non-spot month limits, citing, among other things, the
Commission's previous approval of exchange rules lifting all-months-
combined limits for live cattle contracts ``to ensure necessary
deferred month liquidity.'' CL-CME-59718 at 4. Another commenter
expressed concern that non-spot month limits would have a negative
impact on live cattle market liquidity. CL-CMC-59634 at 12-13. See
also CL-CME-59718 at 41.
[[Page 96767]]
Table III-B-15--Softs and Other Agricultural Contracts--Non-Spot Month
Limit Levels
------------------------------------------------------------------------
Previously
proposed Reproposed
Contract limit level speculative
\568\ limit level
------------------------------------------------------------------------
CC...................................... 7,100 10,200
KC...................................... 7,100 8,800
CT...................................... 8,800 9,400
OJ...................................... 2,900 5,000
SB...................................... 23,500 38,400
SF...................................... 1,200 7,000
LC...................................... 12,900 12,200
------------------------------------------------------------------------
Set forth below is a summary of the impact analysis for softs and
live cattle.
---------------------------------------------------------------------------
\568\ December 2013 Position Limits Proposal, 78 FR at 75839-40
(App. D to part 150--Initial Position Limit Levels).
Table III-B-16--Softs and Other Agricultural Contracts--Non-Spot Months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Open interest Unique persons above limit Reportable
---------------------------------------------------------------- Initial limit level persons in
Core-referenced futures contract level -------------------------------- market-- all
Year Futures Swaps Total All months Single month months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cocoa (CC)...................................................... 1 240,984 11,257 252,240 10,200 12 7 682
2 273,134 56,853 329,987
Coffee C (KC)................................................... 1 211,051 24,164 235,215 8,800 6 * 1,175
2 223,885 51,846 275,731
Cotton No. 2 (CT)............................................... 1 238,580 35,102 273,682 9,400 13 8 1,000
2 239,321 60,477 299,798
FCOJ-A (OJ)..................................................... 1 16,883 121 17,004 5,000
* * 242
2 16,336 5 16,341
Sugar No. 11 (SB)............................................... 1 1,016,271 211,994 1,228,265 38,400 14 9 874
2 1,077,452 382,816 1,460,268
Sugar No. 16 (SF)............................................... 1 8,385 0 8,385 7,000 * 0 22
2 9,608 0 9,608
Live Cattle (LC)................................................ 1 387,896 23,626 411,522 12,200 9 * 1,436
2 350,147 52,330 402,478
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015. Year 2 = July 1, 2015 to June 30, 2016. Reproposed speculative position limit levels are shown in bold.
* Denotes fewer than 4 persons.
c. Metals
The Commission is reproposing non-spot month speculative position
limit levels for the GC, SI, PL, PA, and HG core referenced futures
contracts based on the 10, 2.5 percent open interest formula.\569\
---------------------------------------------------------------------------
\569\ One commenter was concerned that applying the 10, 2.5
percent formula to open interest for gold would result in a lower
non-spot month limit level than the spot month limit level, and
urged the Commission to ``apply a consistent methodology to both
spot and non-spot months.'' CL-WGC-59558 at 5.
[[Page 96768]]
Table III-B-17--CME Metals Contracts--Non-Spot Month Limit Levels
------------------------------------------------------------------------
Previously Reproposed
Contract proposed speculative
limit level limit level
------------------------------------------------------------------------
GC...................................... 21,500 19,500
SI...................................... 6,400 7,600
PL...................................... 5000 5,000
PA...................................... 5000 5,000
HG...................................... 5,600 7,800
------------------------------------------------------------------------
Set forth below is a summary of the impact analysis for
metals.\570\
---------------------------------------------------------------------------
\570\ One commenter expressed concern that imposing non-spot
position limits on copper would negatively affect liquidity as
evidenced by the number of unique persons affected. CL-CMC-59634 at
13, n. 26. Another commenter cited the number of unique traders with
all-months overages as shown in the open interest data for the GC,
SI and PL contracts in the December 2013 Position Limits Proposal as
an indication that ``the impact of the Commission's non-spot-month
position limits is random and arbitrarily inflexible with no
relationship to preventing excessive speculation or manipulation.''
CL-CME-59718 at 41.
Table III-B-18--CME Metals Contracts--Non-Spot Months
--------------------------------------------------------------------------------------------------------------------------------------------------------
Open interest Unique persons above limit Reportable
Core-referenced futures --------------------------------------------------------- Initial limit level persons in
contract level -------------------------------- market--all
Year Futures Swaps Total All months Single month months
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gold (GC)...................... 1 618,738 47,727 666,465 19,500 19 17 1,557
2 667,495 36,029 703,525
Silver (SI).................... 1 218,028 9,867 227,895 7,600 15 18 1,023
2 203,645 3,510 207,155
Platinum (PL).................. 1 70,151 21,566 91,717 5,000 26 26 842
2 70,713 2,285 72,997
Palladium (PA)................. 1 37,488 1,929 39,417 5,000 * * 580
2 28,276 823 29,099
Copper (HG).................... 1 170,784 22,859 193,643 7,800 19 12 1,457
2 186,525 47,365 233,890
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015
Year 2 = July 1, 2015 to June 30, 2016
Reproposed speculative position limit levels are shown in bold.
* Denotes fewer than 4 persons.
d. Energy
The Commission is reproposing non-spot month speculative position
limit levels for the NG, CL, HO, and RB core referenced futures
contracts based on the 10, 2.5 percent open interest formula.\571\
---------------------------------------------------------------------------
\571\ One commenter suggested deriving non-spot month limit
levels for the CL, HO, and RB referenced contracts from the usage
ratios for U.S. crude oil and oil products rather than open interest
and expressed concern that ``unnecessarily low limits will hamper
legitimate hedging activity.'' CL-Citadel-59717 at 7-8. Another
commenter suggested setting limit levels based on customary position
size. CL-APGA-59722 at 6. This commenter also supported setting the
single month limit at two-thirds of the all months combined limit in
order to relieve market congestion as traders exit or roll out of
the next to expire month into the spot month. CL-APGA-59722 at 7.
[[Page 96769]]
Table III-B-19--CME Energy Contracts--Non-Spot Month Limit Levels
------------------------------------------------------------------------
Previously Reproposed
Contract proposed limit speculative
level limit level
------------------------------------------------------------------------
NG...................................... 149,600 200,900
CL...................................... 109,200 148,800
HO...................................... 16,100 21,300
RB...................................... 11,800 15,300
------------------------------------------------------------------------
Set forth below is a summary of the impact analysis for energy
contracts.
Table III-B-20--CME Energy Contracts--Non-Spot Months
--------------------------------------------------------------------------------------------------------------------------------------------------------
Open interest Unique persons above limit Reportable
Core-referenced futures --------------------------------------------------------- Initial limit level persons in
contract level -------------------------------- market--all
Year Futures Swaps Total All months Single month months
--------------------------------------------------------------------------------------------------------------------------------------------------------
Natural Gas (NG)............... 1 4,919,841 2,866,128 7,785,969 200,900 * 0 1,846
2 4,628,471 3,331,141 7,959,612
Light Sweet Crude (CL)......... 1 4,071,681 1,587,450 5,659,130 148,800 0 0 2,673
2 4,130,131 1,744,137 5,874,268
NY Harbor ULSD (HO)............ 1 638,040 138,360 776,400 21,300 6 * 760
2 587,796 65,721 653,518
RBOB Gasoline (RB)............. 1 448,598 81,822 530,420 15,300 8 7 837
2 505,849 30,477 536,327
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015.
Year 2 = July 1, 2015 to June 30, 2016.
Reproposed speculative position limit levels are shown in bold.
* Denotes fewer than 4 persons.
6. Subsequent Levels of Limits
The Commission notes that many of the comments referenced above,
regarding setting initial position limits, are also discussed below,
regarding re-setting levels of limits.
a. General Procedure for Re-Setting Levels of Limits
Commission Proposal: The Commission proposed in Sec. 150.2(e)(2)
that it would fix subsequent levels of speculative position limits no
less frequently than every two calendar years, in accordance with the
procedures in Sec. 150.2(e)(3) for spot-month limits and Sec.
150.2(e)(3) for non-spot-month limits, discussed below.\572\ The
Commission proposed it would publish such subsequent levels on its Web
site.
---------------------------------------------------------------------------
\572\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------
Comments Received: Regarding Sec. 150.2(e)(2), commenters
requested the Commission review the level of limits more frequently
than every two years to address changes that may occur within the
commodities markets.\573\
---------------------------------------------------------------------------
\573\ CL-Public Citizen-59648 at 5; CL-AFR-59711 at 2; CL-IECA-
59713 at 3; CL-Better Markets-60325 at 2-3; CL-Better Markets-60401
at 19-20; CL-CMOC-59720 at 3; CL-Cota-59706 at 2; CL-RF-60372 at 3.
---------------------------------------------------------------------------
Commission Reproposal: The Commission has determined to repropose
this provision as previously proposed in the December 2013 Position
Limits Proposal, and reiterates that it will fix subsequent levels no
less frequently than every two calendar years. The Commission is not
proposing to establish a procedural requirement to reset limit levels
more frequently than every two years, because as the frequency of reset
increases, the burdens on market participants to update compliance
systems and strategies, and on exchanges to submit deliverable supply
estimates and reset exchange limit levels, also increase. The
Commission believes that a two year timetable should reduce burdens on
market participants while still maintaining limits based on recent
market data. Should higher limit levels be desired, exchanges or market
participants may petition the Commission to change limit levels within
the two year period.
b. Re-setting Levels of Spot-Month Limits
Commission Proposal: The Commission proposed in Sec. 150.2(e)(3)
to reset each spot month limit at a level no greater than one-quarter
of the estimated spot-month deliverable supply, based on the estimate
of deliverable supply provided by the exchange listing the core
referenced futures contract. The Commission proposed that it could, in
its discretion, rely on its own estimate of deliverable supply. The
Commission further proposed that, alternatively, it could set spot-
month limits based on the recommended level of the exchange listing the
core referenced futures contract, if lower than 25 percent of estimated
deliverable supply.\574\
---------------------------------------------------------------------------
\574\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------
Comments Received: Commenters generally recommended the Commission
enhance predictability and reduce uncertainty for market participants,
by either restricting how much adjustment would be made to the position
limit level, or having the discretion to not alter position limit
[[Page 96770]]
levels, for example, if there have not been problems with
convergence.\575\
---------------------------------------------------------------------------
\575\ CL-FIA-60303 at 8, Agricultural Advisory Committee Meeting
Transcript at 126-134 (Dec. 9, 2014).
---------------------------------------------------------------------------
Commenters were divided regarding the proposed methodology for
computing spot month position limit levels (which is calculated by
determining a figure that is no more than 25 percent of estimated
deliverable supply).\576\ Several commenters stated that the proposed
formula for setting spot month limits based on 25 percent of
deliverable supply results in spot month position limits that would be
too high and may result in contract performance issues.\577\ Other
commenters thought the formula results in spot-month position limits
that would be too low and hinder market liquidity.\578\ Yet another
requested that the Commission do further research to determine whether
deliverable supply or open interest was a better means of setting spot
month position limits, and apply the same metric (deliverable supply or
open interest) to spot month limits and to non-spot month limits.\579\
Several commenters recommended that the Commission consider an
alternative means of limiting excessive speculation, that is, by
setting position limits at a level low enough to restore a hedger
majority in open interest in each core referenced futures
contract.\580\
---------------------------------------------------------------------------
\576\ E.g., CL-WGC-59558 at 5; CL-MFA-60385 at 4-6; CL-ISDA/
SIFMA-59611 at 3, 31, 55-56, and 63-64; CL-MGEX-59610 at 2; CL-NGFA-
59681 at 4-5.
\577\ See, e.g., CL-WGC-59558 at 5; CL-Public Citizen-60313 at
1; CL-Tri-State-59682 at 1-2; CL-AFR-59711 at 2; CL-WEED-59628 at 1;
CL-Industrial Energy Consumers of America-59671 at 3; CL-CMOC-59720
at 3; CL-IATP-60394 at 2; CL-NGFA-59681 at 4-5.
\578\ CL-ISDA/SIFMA-59611 at 55; CL-Armajaro-59729 at 1; CL-CAM-
60097 at 3-4.
\579\ CL-WGC-59558 at 5.
\580\ E.g., CL-IATP-60323 at 5; CL-IATP-60394 at 2; CL-RF-60372
at 3.
---------------------------------------------------------------------------
In estimating deliverable supply, some commenters recommended that
the Commission include supply that is subject to long-term supply
contracts, arguing that such supply can be readily made available for
futures delivery.\581\ One commenter recommended that the Commission
permit the inclusion in the deliverable supply calculation of supplies
that can be readily transported to the futures delivery location.\582\
Another commenter recommended that the deliverable supply estimate
should include related commodities that a DCM allows to be used to
liquidate a futures position through an EFP transaction.\583\ One
commenter recommended that the deliverable supply estimate for natural
gas should include supplies that are available at other major locations
in addition to the specific futures delivery location of Erath,
Louisiana, because commercials at these locations use the futures
contract for hedging and price basing and basing spot month limits on a
more limited delivery area would be too restrictive.\584\ In estimating
deliverable supply, one commenter recommended that the Commission not
include supplies that do not meet delivery specifications.\585\ The
same commenter said that DCMs should provide documentation if including
long term supply agreements in deliverable supply estimates to enable
the Commission to verify the information. The commenter expressed
concern about financial holding companies' ability to own, warehouse
and trade physical commodities and urged the Commission to assess how
such firms might affect deliverable supply.\586\
---------------------------------------------------------------------------
\581\ CL-FIA-59595 at 3, 9-10; CL-NGSA-59941 at 15.
\582\ CL-MFA-59606 at 18; CL-MFA-60385 at 6.
\583\ CL-MSCGI-59708 at 2, 11.
\584\ CL-CAM-60097 at 3-4.
\585\ CL-IATP-60323 at 6.
\586\ CL-IATP-60323 at 7.
---------------------------------------------------------------------------
Commission Reproposal: The Commission is reproposing to reset each
spot-month limit, in its discretion, either: Based on 25 percent of
deliverable supply as estimated by an exchange listing the core
referenced futures contract; to the existing spot-month position limit
level (that is, not changing such level); or to the recommended level
of the exchange listing the core referenced futures contract, but not
greater than 25 percent of estimated deliverable supply. In the
alternative, if the Commission elects to rely on its own estimate of
deliverable supply, it will first publish that estimate for comment in
the Federal Register.
Thus, the Commission accepts the commenter's recommendation that
the Commission have discretion to retain current spot-month position
limit levels. In this regard, the Commission provides, in reproposed
Sec. 150.2(e)(3)(ii)(B), that an exchange need not submit an estimate
of deliverable supply, if the exchange provides notice to the
Commission, not less than two calendar months before the due date for
its submission of an estimate, that it is recommending the Commission
not change the spot-month limit, and the Commission accepts such
recommendation.
The Commission notes that it has long used deliverable supply as
the basis for spot month position limits due to concerns regarding
corners, squeezes, and other settlement-period manipulative activity.
By restricting derivative positions to a proportion of the deliverable
supply of the commodity, spot month position limits reduce the
possibility that a market participant can use derivatives, including
referenced contracts, to affect the price of the cash commodity (and
vice versa). Limiting a speculative position based on a percentage of
deliverable supply also restricts a speculative trader's ability to
establish a leveraged position in cash-settled derivative contracts,
diminishing that trader's incentive to manipulate the cash settlement
price. Commenters did not provide evidence that would suggest that the
open interest formula would respond more effectively to these concerns,
and the Commission does not believe that using open interest would be
preferable for calculating spot-month position limit levels.
In addition, setting the limit levels at no greater than 25 percent
of deliverable supply has historically been effective on both the
federal and exchange level to combat corners and squeezes. In the
preamble to the final rules for vacated Part 151, the Commission noted
that the 25 percent of deliverable supply formula appears to ``work
effectively as a prophylactic tool to reduce the threat of corners and
squeezes and promote convergence without compromising market
liquidity.'' Commenters did not provide evidence to support claims that
this historical formula is no longer effective.
In response to concerns that 25 percent of deliverable supply may
result in a limit level that is too high, the Commission notes that
exchanges can and often do--and are permitted under reproposed Sec.
150.5(a) to--set limits at a level lower than 25 percent of estimated
deliverable supply, which allows the exchanges to alter exchange-set
limits easily based on changing market conditions.
In response to commenters' suggestion to restore a hedger majority,
the Commission notes such an alternative may fail the requirements of
CEA section 4a(a)(3)(B)(iv) to ensure sufficient liquidity for bona
fide hedgers. Hedgers may not be transacting on opposite sides of the
market simultaneously and, thus, need speculators to provide liquidity.
Simply changing the proportion of hedgers in the market does not mean
that the markets would operate more efficiently for bona fide hedgers.
In addition, in order to adopt the commenter's suggestion, the
Commission would need to reintroduce the withdrawn '03 series forms
which required traders to identify which positions were speculative and
which were hedging, since any entity,
[[Page 96771]]
even a commercial end-user, can establish speculative positions.
In response to commenters' suggestions regarding methods for
estimating deliverable supply, the Commission notes that deliverable
supply estimates are calculated and submitted by DCMs. Guidance for
calculating deliverable supply can be found in Appendix C to part 38.
Amendments to part 38 are beyond the scope of this rulemaking. However,
such guidance already provides that deliverable supply calculations are
estimates based on what ``reasonably can be expected to be readily
available'' (including estimates of long-term supply that can be shown
to be regularly made available for futures delivery).
c. Re-Setting Levels of Non-Spot-Month Limits
Commission Proposal--General Procedure: For setting subsequent
levels of non-spot month limits no less frequently than every two
calendar years, the Commission proposed in Sec. 150.3(e)(4) to use the
open interest formula: 10 percent of the first 25,000 contracts and 2.5
percent of the open interest thereafter (10, 2.5 percent formula).\587\
---------------------------------------------------------------------------
\587\ December 2013 Position Limits Proposal, 78 FR at 75729.
---------------------------------------------------------------------------
Comments Received and Commission Response: ``In order to enhance
the predictability and reduce uncertainty in business planning,'' one
commenter recommended that the Commission ``adjust limits gradually and
by no more than a minimum percentage in one biennial cycle.'' \588\ The
Commission declines this suggestion because, as explained below, the
Commission is reproposing a minimum non-spot month limit level of 5,000
contracts; market participants would be certain that in no circumstance
would the limit level fall below that figure. Also, because exchanges
can set limits at levels below the federal limit level, a change in the
federal limit may not have an effect on exchange limit levels.
---------------------------------------------------------------------------
\588\ CL-FIA-60303 at 8. This commenter did not recommend any
specific percentage limitation.
---------------------------------------------------------------------------
Several commenters recommended that the Commission review the
levels of position limits more frequently than once every two years to
address changes that may occur within the commodities markets.\589\ In
response these concerns, the Commission notes that exchanges may set
limits at a level lower than the federal limits in order to more
readily adapt to changing market conditions. Should higher limit levels
be desired, exchanges may petition the Commission or the Commission may
determine to change limit levels within the two year period. Thus, the
flexibility to change limit levels more frequently than every two years
is already permitted by the reproposed rules and the Commission is not
changing the timeline.
---------------------------------------------------------------------------
\589\ E.g., CL-Public Citizen-59648 at 5 (annually); CL-AFR-II
at 2 (greater frequency); CL-Better Markets-60325 at 2-3
(``[b]iennial updates . . . are completely inadequate''); CL-Better
Markets-59716 at 34 (biennial updates values ``the input of swap
dealers and their trade groups over that of commercial hedgers'');
CL-CMOC-59720 at 3 (annual consultation with hedgers and end users);
CL-RF-60372 at 3 (``review position limits every six months'').
---------------------------------------------------------------------------
One commenter recommended that the Commission ``adopt final rules
that give the Commission the flexibility to increase position limits
immediately or with little delay so that the market can accurately
respond to external forces without violating position limits'' or, in
the alternative, ``include peak open interest levels beyond the most
recent two years when it determines the level of open interest on which
to base position limits.\590\ In response, the Commission notes that
using peak open interest figures, as opposed to an average, as
reproposed, may not necessarily represent an accurate portrait of
current market conditions. Using the most recent two years of data is
designed to ensure that the non-spot-month limit levels are set
relative to the current size of the market.
---------------------------------------------------------------------------
\590\ CL-MFA-59606 at 21.
---------------------------------------------------------------------------
Several commenters expressed the view that the proposed limits
based on the open interest formula would result in limit levels that
are too high and would not accomplish the goal of reducing excessive
speculation.\591\ In response, the Commission believes the open
interest formula provides a level that is low enough to reduce the
potential for excessive speculation and market manipulation without
unduly impairing liquidity for bona fide hedgers. Under the rules
reproposed today, both the Commission and the exchanges would have
flexibility to impose non-spot month limit levels at the greater of the
open interest formula, the spot month limit level, or 5,000 contracts.
---------------------------------------------------------------------------
\591\ E.g., CL-Tri-State-59682 at 1-2; CL-A4A-59714 at 3; CL-
Better Markets-59716 at 24; CL-APGA-59722 at 3, 6; CL-AFBF-59730 at
3; CL-NGFA-59681 at 5.
---------------------------------------------------------------------------
Several commenters expressed the view that the proposed limits
based on the open interest formula would result in limit levels for
dairy contracts that are too low and would restrict hedging use by
limiting liquidity.\592\ The Commission responds that it is deferring
the imposition of position limits on the Class III Milk contract, as
discussed below.\593\ The Commission also observes that reproposed
Sec. 150.9 permits market participants to apply directly to the
exchanges to obtain an exemption to exceed speculative position limits.
---------------------------------------------------------------------------
\592\ E.g., CL-U.S. Dairy-59597 at 4, 6; CL-Hood-59582; CL-
McCully-59592 at 1; CL-Rice Dairy-59601 at 1; CL-Agri-Mark-59609 at
1-2; CL-Jacoby-59622 at 1; CL-Pedestal-59630 at 2; CL-Darigold-59651
at 1-2; CL-Traditum-59655 at 1; CL-Leprino-59707 at 2; CL-IDFA-59771
at 1-2; CL-Fonterra-59608 at 1-2; CL-NCFC-59613 at 6; CL-NMPF-59936
at 2; CL-DFA-59621 at 7-8; CL-Glanbia Foods-60316 at 1; CL-Leprino
Foods-59707 at 2; CL-NMPF-59936 at 2.
\593\ Some commenters urged the Commission to establish an
individual month position limit in Class III Milk equal to the spot
month limit but no less than 3,000 contracts net, and an all-months-
limit as a multiple of four times the spot month limit, to foster
needed liquidity in the non-spot months. See, e.g., CL-NCFC-59942 at
6. Another commenter urged an all-months-limit in Class III Milk of
ten times the spot month limit for a similar reason. CL-U.S. Dairy-
59597 at 4. These comments are now moot.
---------------------------------------------------------------------------
Several commenters recommended that the Commission consider an
alternative means of limiting speculative traders, by setting position
limits at a level low enough to restore a hedger majority in open
interest in each core referenced futures contract.\594\ As discussed
above, the Commission is concerned that ``restoring'' a hedger majority
may not ensure sufficient liquidity for bona fide hedgers. Hedgers may
not be transacting on opposite sides of the market simultaneously and,
thus, need speculators to provide liquidity. Simply changing the
proportion of hedgers in the market does not mean that the markets
would operate more efficiently for bona fide hedgers. In addition, in
order to implement this suggestion, the Commission would need to
reintroduce the long defunct '03 series forms which required traders to
identify which positions were speculative and which were hedging,
because any entity, even a commercial end-user, can establish
speculative positions.
---------------------------------------------------------------------------
\594\ E.g., CL-IATP-60323 at 5; CL-IATP-60394 at 2; CL-RF-60372
at 3; CL-A4A-59686 at 4; CL-Better Markets-59716 at 5; CL-Better
Markets-60325 at 2.
---------------------------------------------------------------------------
One commenter noted that the open interest formula permits a
speculator to hold a larger percentage of open interest in a smaller
commodity market and thus the formula's entire rationale seems
``arbitrary . . . and . . . capricious.'' \595\ The Commission
acknowledges that, because of the way the 10, 2.5 percent formula
works, a speculator in a market with open interest of fewer than 25,000
contracts may have a larger share of the open interest than a
speculator in a market with an open interest of greater
[[Page 96772]]
than 25,000 contracts. The Commission responds that it is by design
that the 10, 2.5 percent open interest formula provides that a
speculator may hold a larger percentage of total open interest in a
smaller market, potentially providing liquidity for bona fide hedgers
in such a smaller market. As open interest increases, the 2.5% marginal
increase results in limit levels that become a progressively smaller
percentage of total open interest, essentially placing a greater
emphasis on deterring market manipulation and protecting the price
discovery process in a larger market.
---------------------------------------------------------------------------
\595\ CL-USCF-59644 at 3-4.
---------------------------------------------------------------------------
Another commenter suggested that the Commission use a 10, 5 percent
open interest formula rather than a 10, 2.5 percent formula as
proposed, arguing that the 10, 5 percent formula has worked well for
certain agricultural futures markets and should be applied more
broadly. Alternatively, this commenter said that Commission should use
the 10, 5 percent formula for at least spread positions.\596\ The
Commission notes the 10, 2.5 percent formula has produced limit levels
that should sufficiently maximize the CEA section 4a(a)(3)(B) criteria,
and the Commission does not believe increasing the marginal percentage
is necessary. A larger limit such as would be produced from a 10, 5
percent formula may not adequately prevent excessive speculation. In
the preamble to the proposed rules, the Commission noted that the 10,
2.5 percent formula was first proposed in 1992, and the commenter has
not provided sufficient justification for moving away from this
established standard.
---------------------------------------------------------------------------
\596\ CL-Working Group-59693 at 62.
---------------------------------------------------------------------------
One commenter recommended that the Commission consider commodity-
related ratios in establishing limits, such as the ratio between crude
oil and its products, diesel (30 percent) and gasoline (50 percent),
rather than on separate open interest formulas applied to each.\597\ In
response, the Commission notes setting limit levels based on the open
interest of a related commodity may result in limit levels that are too
large to be effective in the smaller commodity markets. For example,
based on the levels proposed in this release in Appendix D,
implementing a limit for NYMEX RBOB Gasoline equal to 50 percent of the
crude oil limit, as suggested by the commenter, would result in a limit
almost 10 times the size otherwise indicated by the open interest
formula, and would equal almost 28 percent of total average open
interest in the RBOB referenced contract. Further, hedgers with
positions in multiple contracts could establish positions in various
ratios without violating a position limit, provided they comply with
the bona fide hedging position definition and any applicable
requirements. The Commission also notes that the process in reproposed
Sec. 150.10 exempting certain spread positions may allow speculators
some flexibility in inter- and intra-commodity spreads for the purpose
of providing liquidity to bona fide hedgers.
---------------------------------------------------------------------------
\597\ CL-Citadel-59717 at 7-8.
---------------------------------------------------------------------------
One commenter suggested the Commission consider setting position
limits on ``customary position size'' which had been used for setting
non-spot month limits by the Commission in the past and which the
commenter argues is a more effective means of curtailing large
speculative positions.\598\ In response, the Commission believes the
10, 2.5 percent formula has been effective in preventing excessive
speculation without unduly limiting liquidity for bona fide hedgers.
The Commission notes when the ``customary position size'' methodology
was used to set non-spot-month limit levels, such levels were below the
levels established using 10, 2.5 percent formula.
---------------------------------------------------------------------------
\598\ CL-APGA-59722 at 6.
---------------------------------------------------------------------------
Commission Reproposal Regarding General Procedure for Re-Setting
Levels of Non-Spot Month Limits: The Commission has determined to
repropose the 10, 2.5 percent formula, generally as proposed in the
December 2013 Position Limits Proposal, for the reasons discussed
above. However, the Commission has determined, in response to requests
by commenters requesting wheat parity, as discussed above, to provide
that it may determine not to change the level of a non-spot month
limit. This would permit, for example, the Commission to continue to
retain a level of 12,000 contracts for the non-spot month limits in the
KW and MWE contracts, even if average open interest did not exceed
405,000 contracts (which is the level that, when applying the 10, 2.5
percent formula, would result in a limit of 12,000 contracts).
Commission Proposal for Time Periods, Data Sources, Publication and
Minimum Levels for Re-Setting Levels of Non-Spot Month Limits: Under
proposed in Sec. 150.2(e)(4)(i) and (ii), the Commission would
estimate average open interest in referenced contracts using data
reported for each of the last two calendar years pursuant to parts 16,
20, and/or 45.\599\ The Commission also proposed under Sec.
150.2(e)(4)(iii) to publish on the Commission's Web page estimates of
average open interest in referenced contracts on a monthly basis to
make it easier for market participants to estimate changes in levels of
position limits.\600\ Finally, the Commission proposed under Sec.
150.2(e)(4)(iv) to establish minimum non-spot month levels of 1,000
contracts for agricultural commodity contracts and 5,000 contracts for
exempt commodity contracts.
---------------------------------------------------------------------------
\599\ December 2013 Position Limits Proposal, 78 FR at 75734.
\600\ Id.
---------------------------------------------------------------------------
Comments Received and Commission Response: Regarding the time
period for average open interest, as noted above, one commenter
recommended that the Commission, as an alternative, ``include peak open
interest levels beyond the most recent two years when it determines the
level of open interest on which to base position limits.'' \601\ In
response, the Commission notes that using peak open interest figures,
as opposed to an average, as reproposed, may not necessarily represent
an accurate portrait of current market conditions.
---------------------------------------------------------------------------
\601\ CL-MFA-59606 at 21.
---------------------------------------------------------------------------
Regarding data sources for average open interest, several
commenters noted that the open interest data used by the Commission in
determining the non-spot month limits was not complete since it did not
include all OTC swaps data and that the Commission should correct this
deficiency before it sets the limits using the open interest
formula.\602\ In response, the Commission notes it used futures-
equivalent open interest for swaps reported under part 20, in
determining the initial non-spot month limits, as discussed above, and
believes this data also is acceptable for re-setting limit levels, as
reproposed.
---------------------------------------------------------------------------
\602\ E.g., CL-DBCS-59569 at 6; CL-FIA-59595 at 14; CL-EEI-60386
at 11; CL-MFA-59606 at 5, 20, 22-23; CL-ISDA/SIFMA-59611 at 29,
including footnote 108; CL-CMC-59634 at 13; CL-Olam-59658 at 3; CL-
COPE-59662 at 22; CL-Calpine-59663 at 4; CL-Chamber-59684 at 5; CL-
NFP-59690 at 20; CL-Just Energy-59692 at 4; CL-Working Group-59693
at 62; CL-Working Group-60396 at 8-10; CL-Citadel-59717 at 4-5.
---------------------------------------------------------------------------
The Commission received no comments regarding publication of
average open interest.
Regarding minimum levels for non-spot month limits, some commenters
urged the Commission to afford itself the flexibility to set non-spot
month limits at least as high as the spot-month position limit, rather
than base the non-spot month limit strictly on the open interest
formula in cases where the latter would result in a relatively small
limit that would hinder liquidity.\603\ The Commission accepts these
[[Page 96773]]
commenters' recommendation. Upon consideration of proposing minimum
initial non-spot month limits, as discussed above, the Commission is
removing the distinction between agricultural and exempt commodities.
This change would establish a minimum non-spot month limit level of
5,000 contracts in either agricultural or exempt commodities.
---------------------------------------------------------------------------
\603\ CL-ICE-59966 at 6; CL-U.S. Dairy-59597 at 4.
---------------------------------------------------------------------------
Commission Reproposal: The Commission has determined to repropose
these provisions generally as proposed in the December 2013 Position
Limits Proposal, but with the changes described above to provide
flexibility for a higher minimum level of non-spot month limits.
7. Deferral of Limits on Cash-Settled Core Referenced Futures Contracts
Commission Proposal:
The Commission proposed, but is not reproposing, positon limits on
three cash-settled core referenced futures contracts: CME Class III
Milk; CME Feeder Cattle; and CME Lean Hogs.\604\
---------------------------------------------------------------------------
\604\ Each of these contracts is cash settled to a U.S.
Department of Agriculture price series; Feeder Cattle and Lean Hogs
settle to a CME-calculated index of daily USDA livestock prices,
while Class III Milk settles to the monthly USDA Class III Milk
price.
---------------------------------------------------------------------------
Comments Received: Commenters raised concerns with these cash-
settled contracts and how they fit within the federal position limits
regime. While many of these concerns were raised in the context of the
dairy industry, they apply to all three cash-settled core referenced
futures contracts. Concerns raised include: (1) How to apply spot month
limits in a contract that is cash-settled; \605\ (2) the ``five-day
rule'' for bona fide hedging; \606\ and (3) the length of the spot
month period.\607\ Commenters contended that the Commission's rationale
in the December 2013 Position Limits Proposal focused on concerns with
physical-delivery contracts, which the commenters believe do not apply
to cash-settled core referenced futures contracts because there is no
physical delivery process and because the contracts settle to
government-regulated price series (through the USDA).\608\ Commenters
were concerned that the Commission's ``one-size-fits-all'' approach
discriminates against participants in dairy and livestock because the
spot-month limit is effectively smaller compared to the separate spot-
month limits for physical-delivery and cash-settled contracts in other
commodities.\609\ Several commenters suggested limit levels that do not
follow the proposed formulae for determining limit levels for both spot
and non-spot-month limits due to the unique aspects of cash-settled
core referenced futures contracts, including the relatively large cash
market and trading strategies not found in other core referenced
futures markets.\610\
---------------------------------------------------------------------------
\605\ CL-Rice Dairy-59960 at 1; CL-US Dairy-59597 at 3-4; CL-
NMPF-59652 at 4; CL-DFA-59948 at 4-5.
\606\ CL-NMPF-59652 at 5; CL-DFA-59948 at 8.
\607\ CL-NGSA-59674 at 44; CL-ICE-59669 at 5-6.
\608\ See, e.g., CL-US Dairy-59597 at 3-4.
\609\ CL-DFA-59948 at 6.
\610\ CL-Rice Dairy-59601 at 1; CL-US Dairy-59597 at 3; CL-NMPF-
59652 at 4; CL-DFA-59948 at 4-5.
---------------------------------------------------------------------------
Commission Determination: The Commission, as part of the phased
approach to implementing position limits on all physical commodity
derivative contracts, is deferring action so that it may, at a later
date: (1) Clarify the application of limits to cash-settled core
referenced futures contracts; and (2) consider further which method to
use to determine a level for a spot-month limit for a cash-settled core
referenced futures contract. The Commission notes that the December
2013 Position Limits Proposal discussed spot-month limits primarily in
the context of protecting the price discovery process by preventing
corners and squeezes.\611\ There was limited discussion of cash-settled
core referenced futures contracts.\612\ The Commission did not propose
alternate means of calculating limit levels for cash-settled core
referenced futures contracts in the December 2013 Position Limits
Proposal.
---------------------------------------------------------------------------
\611\ For example, the Commission stated that concerns regarding
corners and squeezes are most acute in the markets for physical-
delivery contracts in the spot month. December 2013 Position Limits
Proposal, 78 FR at 75737.
\612\ See, e.g., December 2013 Position Limits Proposal 78 FR at
75688, including n. 82.
---------------------------------------------------------------------------
C. Sec. 150.3--Exemptions
1. Current Sec. 150.3
Statutory authority: CEA section 4a(c)(1) exempts positions that
are shown to be bona fide hedging positions, as defined by the
Commission, from any Commission rule establishing speculative position
limits under CEA section 4a(a).\613\ In addition, CEA section 4a(a)(1)
authorizes the Commission to exempt transactions normally know to the
trade as ``spreads.'' \614\ Further, CEA section 4a(a)(7) authorizes
the Commission to exempt any person, contract, or transaction from any
position limit requirement the Commission establishes.\615\
---------------------------------------------------------------------------
\613\ 7 U.S.C. 6a(c)(1). Section 737 of the Dodd-Frank Act did
not substantively change CEA section 4a(c)(1) (renumbering existing
provision by inserting ``(1)'' after ``(c)'').
\614\ 7 U.S.C. 6a(a)(1). Section 737 of the Dodd-Frank Act did
not change the Commission's authority to exempt spreads under CEA
section 4a(a)(1).
\615\ 7 U.S.C. 6a(a)(7). Section 737 of the Dodd-Frank Act added
CEA section 4a(a)(7). The Commission interprets CEA section 4a(a)(7)
to provide the Commission with plenary authority to grant exemptive
relief from position limits, consistent with the purposes of the
CEA. Specifically, under Section 4a(a)(7), the Commission ``by rule,
regulation, or order, may exempt, conditionally or unconditionally,
any person, or class of persons, any swap or class of swaps, any
contract of sale of a commodity for future delivery or class of such
contracts, any option or class of options, or any transaction or
class of transactions from any requirement it may establish . . .
with respect to position limits.''
---------------------------------------------------------------------------
Current exemptions: The three existing exemptions in current Sec.
150.3(a), promulgated prior to the enactment of the Dodd-Frank Act, are
part of the Commission's regulatory framework for speculative position
limits.\616\ First, current Sec. 150.3(a)(1) exempts positions shown
to be bona fide hedging positions from federal position limits.\617\
Second, current Sec. 150.3(a)(3) exempts spread positions between
single months of a futures contract (and/or, on a futures-equivalent
basis, options) outside of the spot month, provided a trader's spread
position in any single month does not exceed the all-months limit.\618\
Third, under current Sec. 150.3(a)(4), positions carried for an
eligible entity \619\ in the separate account of an independent account
controller (``IAC'') \620\ that manages customer positions need not be
aggregated with the other positions owned or controlled by that
eligible entity (the ``IAC exemption'').\621\
---------------------------------------------------------------------------
\616\ For completeness, the Commission notes it previously
provided an exemption in Sec. 150.3(a)(2) for spreads of futures
positions which offset option positions. However, the Commission
removed and reserved that provision once it was rendered obsolete by
the Commission determination to impose speculative limits on a
trader's net position in futures and options combined, rather than
separately. 58 FR 17973 at 17979 (April 7, 1993).
\617\ 17 CFR 150.3(a)(1). The term bona fide hedging position is
currently defined at 17 CFR 1.3(z) (2010). As discussed above, the
Commission is reproposing a new definition of bona fide hedging
position in Sec. 150.1.
\618\ The Commission clarifies that a spread position in this
context means a short position in a single month of a futures
contract and a long position in another contract month of that same
futures contract, outside of the spot month, in the same crop year.
The short and/or long positions may also be in options on that same
futures contract, on a futures equivalent basis. Such spread
positions, when combined with any other net positions in the single
month, must not exceed the all-months limit set forth in current
Sec. 150.2, and must be in the same crop year. 17 CFR 150.3(a)(3).
\619\ ``Eligible entity'' is defined in current 17 CFR 150.1(d).
\620\ ``Independent account controller'' is defined in current
17 CFR 150.1(e).
\621\ 17 CFR 150.3(a)(4). See also discussion of the IAC
exemption in the 2016 Final Aggregation Rule.
---------------------------------------------------------------------------
[[Page 96774]]
2. Proposed Sec. 150.3
In the December 2013 Position Limits Proposal, the Commission
proposed a number of organizational and substantive amendments to Sec.
150.3, generally resulting in an increase in the number of exemptions
to speculative position limits. First, the Commission proposed to amend
the three exemptions from federal speculative limits contained in
current Sec. 150.3. These previously proposed amendments would update
cross references, relocate the IAC exemption and consolidate it with
the Commission's separate proposal to amend the aggregation
requirements of Sec. 150.4,\622\ and delete the calendar month spread
provision which is unnecessary under changes to Sec. 150.2 that would
set the level of each single month position limit to that of the all-
months position limit. Second, the Commission proposed to add
exemptions from the federal speculative position limits for financial
distress situations, certain spot-month positions in cash-settled
referenced contracts, and grandfathered pre-Dodd-Frank and transition
period swaps. Third, the Commission proposed to revise recordkeeping
and reporting requirements for traders claiming any exemption from the
federal speculative position limits.
---------------------------------------------------------------------------
\622\ See November 2013 Aggregation Proposal. See also 2016
Final Aggregation Rule.
---------------------------------------------------------------------------
a. Proposed Amendments to Existing Exemptions
Proposed Rule: In the December 2013 Position Limits Proposal, the
Commission proposed to update cross-references within Sec. 150.3 to
reflect other changes in part 150. Specifically, the Commission
proposed: To update references to the bona fide hedging definition to
Sec. 150.1 from Sec. 1.3(z); to require that those filing for
exemptive relief must meet the reporting requirements in part 19; and
to add a cross-reference to aggregation provisions in proposed Sec.
150.4.
The Commission also proposed to move the existing IAC exemption to
Sec. 150.4, thereby deleting the current exemption in Sec.
150.3(a)(4). The Commission also proposed to delete the spread
exemption in current Sec. 150.3, because it noted that the proposed
non-spot month limits rendered such an exemption unnecessary.\623\
---------------------------------------------------------------------------
\623\ Under the 2016 Supplemental Position Limits Proposal, DCMs
and SEFs that are trading facilities would have authority to grant
spread exemptions to both exchange and federal position limits. See
infra discussion of Sec. Sec. 150.5 and 150.10.
---------------------------------------------------------------------------
In the 2016 Supplemental Position Limits Proposal, the Commission
proposed to conform Sec. 150.3(a) to accommodate processes proposed in
other sections of part 150. Specifically, the Commission proposed under
Sec. 150.3(a)(1)(i) exemptions for those bona fide hedging positions
that have been recognized by a DCM or SEF in accordance with proposed
Sec. Sec. 150.9 and 150.11. The Commission also proposed under Sec.
150.3(a)(1)(iv) exemptions for those spread positions that have been
recognized by a DCM or SEF in accordance with proposed Sec. 150.10.
Recognition of other positions exempted under proposed Sec. 150.3(e)
was re-numbered as subsection (v) from subsection (iv) of Sec.
150.3(a)(1) of the 2013 Position Limits Proposal.
Comments Received: The Commission received no comments on the
proposed conforming changes to Sec. 150.3.\624\ The Commission
addresses comments on the IAC exemption in its final rule amending the
aggregation policy under Sec. 150.4, published separately.
---------------------------------------------------------------------------
\624\ The Commission received many comments on the changes to
the bona fide hedging definition in Sec. 150.1 and the processes
for exchange recognition of exemptions in Sec. Sec. 150.9-11. See
discussion of the bona fide hedging definition, above, and of the
processes in Sec. Sec. 150.9-11, below.
---------------------------------------------------------------------------
Commission Reproposal: The Commission is reproposing these
amendments as previously proposed in the December 2013 Position Limits
Proposal.
b. Positions Which May Exceed Limits--Sec. 150.3(a)
Proposed Rule: In the December 2013 Position Limits Proposal, the
Commission listed positions which may exceed limits in proposed Sec.
150.3(a). Such positions included: (i) Bona fide hedging positions as
defined in Sec. 150.1; (ii) financial distress positions exempted
under Sec. 150.3(b); (iii) conditional spot month limit positions
exempted under Sec. 150.3(c); and (iv) other positions exempted under
Sec. 150.3(e). Proposed Sec. 150.3(a) also provided that all such
positions may exceed limits only if recordkeeping requirements in Sec.
150.3(g) are met and any applicable reporting requirements in part 19
are met.
In the 2016 Supplemental Position Limits Proposal, the Commission
proposed to revise Sec. 150.3(a) to include, in addition to bona fide
hedging positions as defined in Sec. 150.1, positions that are
recognized by a DCM or SEF in accordance with Sec. 150.9 or Sec.
150.11 as well as spread positions recognized by a DCM or SEF in
accordance with Sec. 150.10.
Comments Received: The Commission received many comments on the
definition of bona fide hedging in Sec. 150.1, as well as on the
processes proposed in Sec. Sec. 150.9-11.\625\ The Commission
addresses those comments in the discussion of the definition of bona
fide hedging position in Sec. 150.1, above, and in the discussion of
the processes proposed in Sec. Sec. 150.9-11, below. The Commission
did not receive comments specific to the conforming revisions to Sec.
150.3(a).
---------------------------------------------------------------------------
\625\ Id.
---------------------------------------------------------------------------
Commission Reproposal: The Commission is reproposing Sec. 150.3(a)
as previously proposed in the December 2013 Position Limits Proposal,
with conforming changes consistent with the reproposed definition of a
bona fide hedging position in Sec. 150.1, which includes positions
that are recognized by a DCM or SEF in accordance with reproposed Sec.
150.9 or Sec. 150.11, or by the Commission, and conforming changes
consistent with the process for spread positions recognized by a DCM or
SEF in accordance with reproposed Sec. 150.10, or by the Commission.
c. Proposed Additional Exemptions From Position Limits
i. Financial Distress Exemption--Sec. 150.3(b)
Proposed Rule: The Commission proposed to add in Sec. 150.3(b) an
exemption from position limits for market participants in financial
distress circumstances, upon the Commission's approval of a specific
request.\626\ For example, the Commission recognized that, in periods
of financial distress, it may be beneficial for a financially sound
market participant to take on the positions (and corresponding risk) of
a less stable market participant. The Commission explained that it has
historically provided an exemption from position limits in these types
of situations in order to avoid sudden liquidations that could
potentially reduce liquidity, disrupt price discovery, and/or increase
systemic risk. The Commission therefore proposed to codify this
historical practice.
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\626\ December 2013 Position Limits Proposal, 78 FR at 75736.
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Comments Received: One commenter requested the non-exclusive
circumstances for the financial distress exemption be clarified by
adding ``bud not limited to'' after the word ``include'' to permit
other situations not listed.\627\
---------------------------------------------------------------------------
\627\ CL-CME-59718 at 71.
---------------------------------------------------------------------------
Commission Reproposal: In response to the commenter, the Commission
clarifies that the circumstances under which a financial distress
exemption may be claimed include, but are not limited to, the specific
scenarios in the definition. However, the Commission believes that the
proposed definition
[[Page 96775]]
sufficiently articulates that the list of potential circumstances for
claiming the financial distress exemption is non-exclusive, and,
therefore, is reproposing the definition as previously proposed.
ii. Pre-Enactment and Transition Period Swaps Exemption--Sec. 150.3(d)
Proposed Rule: In the December 2013 Position Limits Proposal, the
Commission proposed to provide an exemption from federal position
limits for (1) pre-enactment swaps, defined as swaps entered into prior
to July 21, 2010 (the date of the enactment of the Dodd-Frank Act of
2010), so long as the terms of which have not expired as of that date,
and (2) transition period swaps, defined as swaps entered into during
the period commencing July 22, 2010 and ending 60 days after the
publication of the final position limit rules in the Federal Register,
the terms of which have not expired as of that date. The Commission
also proposed to allow both pre-enactment and transition period swaps
to be netted with commodity derivative contracts acquired more than 60
days after publication of the final rules in the Federal Register for
purposes of complying with non-spot-month position limits.\628\
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\628\ December 2013 Position Limits Proposal, 78 FR at 75738.
---------------------------------------------------------------------------
Comments Received: One commenter suggested that ``grandfathering''
relief should be extended to pre-existing positions, and should also
permit the pre-existing positions to be increased after the effective
date of the limit. The commenter also suggested that the Commission
should permit the risk associated with a pre-existing position to be
offset through roll of a position from a prompt month into a deferred
contract month.\629\
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\629\ CL-AMG-59709 at 2, 18-19.
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Commission Reproposal: The Commission declines to accept the
commenter's recommendation regarding increasing positions, because
allowing pre-existing positions to be increased after the effective
date of the limits effectively would create a loophole for exceeding
position limits. Further, the Commission declines the commenter's
recommendation to permit a roll of a pre-existing position, because
that would permit a market participant to extend indefinitely the
holding of a speculative economic exposure in commodity derivative
contracts exempt from position limits, frustrating the intent of
speculative position limits. The Commission notes, however, that
reproposed Sec. 150.3(d), like the previous proposal, allows for
netting of pre- and post-effective date positions, allowing a market
participant to offset the risk of the position provided the offsetting
position is not held into a spot month. The Commission is reproposing
Sec. 150.3(d) as proposed in the December 2013 Position Limits
Proposal.
iii. Previously Granted Exemptions--Sec. 150.3(f)
Proposed Rule: The Commission proposed in the December 2013
Position Limits Proposal that exemptions previously granted by the
Commission under Sec. 1.47 for swap risk management would not apply to
new swap positions entered into after the effective date of the final
rule. The Commission noted that the proposed rules revoke the
previously granted exemptions for risk management positions for such
new swaps. Therefore, risk management positions that offset such new
swaps would be subject to federal position limits, unless another
exemption applied. The Commission explained that these risk management
positions are inconsistent with the revised definition of bona fide
hedging contained in the December 2013 Position Limits Proposal and the
purposes of the Dodd-Frank Act amendments to the CEA.\630\
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\630\ December 2013 Position Limits Proposal, 78 FR at 75740.
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Comments Received: A number of commenters urged the Commission not
to deny risk-management exemptions for financial intermediaries who
utilize referenced contracts to offset the risks arising from the
provision of diversified commodity-based returns to the intermediaries'
clients.\631\
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\631\ CL-FIA-59595 at 5, 34-35; CL-AMG-59709 at 2, 12-15; CL-
CME-59718 at 67-69.
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In contrast, other commenters noted that the proposed rules
``properly refrain'' from providing a general exemption to financial
firms seeking to hedge their financial risks from the sale of
commodity-related instruments such as index swaps, ETFs, and ETNs
because such instruments are ``inherently speculative'' and may
overwhelm the price discovery function of the derivative market.\632\
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\632\ CL-Sen. Levin-59637 at 8; CL-Better Markets-60325 at 2.
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Commission Reproposal: As discussed above in the clarifications to
the bona fide hedging position definition, the Commission now proposes
to expand the relief in Sec. 150.3(f) by: (1) Clarifying that such
previously granted exemptions may apply to pre-existing financial
instruments that are within the scope of existing Sec. 1.47
exemptions, rather than only to pre-existing swaps; and (2) recognizing
exchange-granted non-enumerated exemptions in non-legacy commodity
derivatives outside of the spot month (consistent with the Commission's
recognition of risk management exemptions outside of the spot month),
and provided such exemptions are granted prior to the compliance date
of the final rule, and apply only to pre-existing financial instruments
as of the effective date of the final rule. These two changes are
intended to reduce the potential for market disruption by forced
liquidations, since a market intermediary would continue to be able to
offset risks of pre-effective-date financial instruments, pursuant to
previously-granted federal or exchange risk management exemptions.
iv. Non-Enumerated Hedging Positions--Sec. 150.3(e)
Proposed Rule: In the December 2013 Position Limits Proposal, the
Commission noted that it previously permitted a person to file an
application seeking approval for a non-enumerated position to be
recognized as a bona fide hedging position under Sec. 1.47. The
Commission proposed to delete Sec. 1.47 for several reasons described
in the December 2013 Position Limits Proposal.\633\
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\633\ December 2013 Position Limits Proposal, 78 FR at 75738-9.
---------------------------------------------------------------------------
Proposed Sec. 150.3 provided that a person that engages in risk-
reducing practices commonly used in the market, that the person
believes may not be included in the list of enumerated bona fide
hedging positions, may apply to the Commission for an exemption from
position limits. As previously proposed, market participants would be
guided in Sec. 150.3(e) first to consult proposed Appendix C to part
150 to see whether their practices fell within a non-exhaustive list of
examples of bona fide hedging positions as defined under proposed Sec.
150.1.
A person engaged in risk-reducing practices that are not enumerated
in the revised definition of bona fide hedging position in previously
proposed Sec. 150.1 may use two different avenues to apply to the
Commission for relief from federal position limits: The person may
request an interpretative letter from Commission staff pursuant to
Sec. 140.99 \634\ concerning the applicability
[[Page 96776]]
of the bona fide hedging position exemption, or the person may seek
exemptive relief from the Commission under CEA section 4a(a)(7).\635\
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\634\ 17 CFR 140.99 defines three types of staff letters--
exemptive letters, no-action letters, and interpretative letters--
that differ in scope and effect. An interpretative letter is written
advice or guidance by the staff of a division of the Commission or
its Office of the General Counsel. It binds only the staff of the
division that issued it (or the Office of the General Counsel, as
the case may be), and third-parties may rely upon it as the
interpretation of that staff. See description of CFTC Staff Letters,
available at http://www.cftc.gov/lawregulation/cftcstaffletters/index.htm.
\635\ See supra discussion of CEA section 4a(a)(7).
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In the 2016 Supplemental Position Limits Proposal, the Commission
proposed Sec. Sec. 150.9, 150.10, and 150.11 which provided
alternative processes that would permit eligible DCMs and SEFs to
provide relief for non-enumerated bona fide hedging positions, certain
spread positions, and anticipatory bona fide hedging positions,
respectively.\636\ However, the Commission did not propose to alter or
delete Sec. 150.3 because the Commission determined to provide
multiple avenues for persons seeking exemptive relief.
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\636\ See infra discussion of these alternative processes in
Sec. 150.9, Sec. 150.10, and Sec. 150.11.
---------------------------------------------------------------------------
Comments Received: One commenter requested that the Commission
provide a spread exemption from federal position limits for certain
soft commodities, reasoning that there was a ``lack of fungibility of
certain soft commodities . . . [because] inventories of various
categories vary widely in terms of marketability over time.'' The
commenter also stated that such a spread exemption would allow for
effective competition for the ownership of certified inventories that
in turn helps to maintain a close relationship between the cash and
futures markets.\637\ Another commenter recommended the Commission
recognize calendar spread netting, and not place any limits on the
same, because speculators provide liquidity in deferred months to
hedgers and offset, in part, that exposure with shorter dated
contracts.\638\
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\637\ CL-CMC-59718 at 15.
\638\ CL-Citadel-59717 at 8-9.
---------------------------------------------------------------------------
Commission Reproposal: Both of these comments were submitted in
response to the December 2013 Position Limits Proposal, well in advance
of the 2016 Supplemental Position Limits Proposal. Spread exemptions
such as those described by the commenters are addressed in Sec.
150.10, discussed below. The Commission is reproposing Sec. 150.3(e)
as previously proposed in the December 2013 Position Limits Proposal.
d. Proposed Conditional Spot Month Limit Exemption--Sec. 150.3(c)
Conditional spot month limit exemptions to exchange-set spot-month
position limits for natural gas contracts were adopted in 2009, after
the ICE submitted such an exemption as part of its certification of
compliance with core principles required of exempt commercial markets
(``ECMs'') on which significant price discovery contracts (``SPDCs'')
were traded.\639\
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\639\ CFTC Reauthorization Act of 2008 (``Farm Bill'',
incorporated as Title XIII of the Food, Conservation and Energy Act
of 2008, Public Law 110-246, 112 Stat. 1624 (June 18, 2008))
expanded the Commission's authority with respect to ECMs by creating
a new regulatory category: ECMs on which significant price discovery
contracts (``SPDCs'') were traded. The Farm Bill authorized the
Commission to designate an ECM contract as a SPDC if the Commission
determined, under criteria established in the Act, that the contract
performed a significant price discovery function. When the
Commission made such a determination, the ECM on which the SPDC was
traded would be required to assume, with respect to that contract,
all the responsibilities and obligations of a registered entity
under the Commission's regulations and the Act. This process was
invalidated and deleted by changes to the Act made under the Dodd-
Frank Act of 2010.
---------------------------------------------------------------------------
As ICE developed its rules in order to comply with the ECM SPDC
requirements,\640\ ICE expressed concerns regarding the impact of
position limits on the open interest in its LD1 contract. ICE
demonstrated that as the open interest declines in the physical-
delivery New York Mercantile Exchange Inc. (``NYMEX'') Henry Hub
Natural Gas Futures (``NYMEX NG'') contract approaching expiration,
open interest increases rapidly in the cash-settled ICE NG LD1
contract, and suggested that the ICE NG LD1 contract served an
important function for hedgers and speculators who wished to recreate
or hedge the NYMEX NG contract price without being required to make or
take delivery. ICE stated that it believed there are ``significant and
material distinctions between the design and use of'' the NYMEX NG
contract and the ICE NG LD1 contract, and those distinctions were most
pronounced at expiration. Further, ICE stated that, due to the size of
some positions in the cash-settled ICE NG LD1 contract, the impact to
the market of an equivalent limit could impair the ability for market
participants to adjust their positions in an orderly fashion to come
into compliance. For these reasons, ICE requested that the Commission
consider an alternative to the Commission's acceptable practice that
spot month position limits for the NG LD1 contract should be equivalent
to the spot month position limits in the NYMEX NG contract.\641\
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\640\ On March 16, 2009, the Commission adopted final rules
implementing the provisions of the Farm Bill. 74 FR 12179 (March 23,
2009). These regulations became effective on April 22, 2009. Among
other things, the rules established procedures by which the
Commission would make and announce its determination as to whether a
particular contract served a significant price discovery function.
On July 24, 2009, the Commission issued an order finding that ICE's
Henry Financial LD1 Fixed Price contract (``NG LD1 contract'')
performed a significant price discovery function and, thus, that ICE
was a registered entity with respect to the NG LD1 contract, subject
to all provisions of the Act applicable to registered entities,
including compliance with certain core principles. 74 FR 37988 (July
30, 2009).
As required after the designation of the NG LD1 contract as a
SPDC, ICE submitted a demonstration of their compliance with the
required core principles. One of the core principles with which ICE
was required to comply under the Farm Bill ECM SPDC rules concerned
position limits and position accountability rules for the
contract(s) designated as SPDC(s). See Section 13201(C)(ii)(IV) of
the Farm Bill (implemented in Section 2(h)(7) of the Act).
\641\ See 17 CFR part 36, App. B, Core Principle IV(c)(3)
(2010). 74 FR 12177 (April 22, 2009).
---------------------------------------------------------------------------
After discussion with both the Commission's Division of Market
Oversight and NYMEX, ICE submitted and certified rule amendments
implementing position limits and position accountability rules for the
ICE NG LD1 contract. Specifically, ICE imposed a spot-month position
limit and non-spot-month position accountability levels equal to those
of the economically equivalent NYMEX NG contract. ICE also adopted a
rule for a larger conditional position limit for traders who: (1)
Agreed not to maintain a position in the NYMEX NG futures contract
during the last three trading days, and (2) agreed to show ICE their
complete book of Henry Hub related positions.\642\
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\642\ ICE also imposed related aggregation, bona fide hedging,
and other exemption rules for the ICE NG LD1 contract.
---------------------------------------------------------------------------
In June 2009, the Commission also received self-certified rule
amendments from CME Group, Inc. (``CME'') regarding position limits and
position accountability levels for the cash-settled NYMEX Henry Hub
Financial Last Day Futures (HH) contract and related cash-settled
contracts.\643\ The rules, as amended, established spot month position
limits for the NYMEX HH contract as well as certain related cash-
settled contracts so as to be consistent with the requirements for the
SPDC contract on ICE. In the rule certification documents, CME stated
that it was amending its position limits rules for the HH contract in
anticipation of ICE's new rules. In February 2010, the conditional spot
month limit exemptions on NYMEX and ICE went into effect.
---------------------------------------------------------------------------
\643\ New York Mercantile Exchange, Inc. Submission #09.103
(June 2, 2009): Notification of Amendments to NYMEX Rules 9A.27 and
9A.27A to Establish Hard Expiration Position Limits for Certain
Natural Gas Financially Settled Contracts. Previously, NYMEX did not
have spot-month limits on its HH contract and related cash-settled
contracts.
---------------------------------------------------------------------------
Proposed Rules: In the December 2013 Position Limits Proposal, the
[[Page 96777]]
Commission proposed a conditional spot month limit exemption for all
commodities subject to federal limits under proposed Sec. 150.2. That
proposed rule was identical to the rule proposed in the Part 151
Proposal, with the exception that the December 2013 Position Limits
Proposal did not include any restriction on trading in the cash
market.\644\ In proposing the conditional spot month limit exemption in
proposed Sec. 150.3(c), the Commission stated its preliminary belief
that the current exemption in natural gas markets has served ``to
further the purposes Congress articulated for position limits'' and
that the exemption ``would not encourage price discovery to migrate to
the cash-settled contracts in a way that would make the physical-
delivery contract more susceptible to sudden price movements near
expiration.'' \645\ In addition, the Commission noted that it has
observed repeatedly that open interest levels in physical-delivery
contracts ``naturally decline leading up to and during the spot month,
as the contract approaches expiration'' because ``both hedgers and
speculators exit the physical-delivery contract in order to, for
example, roll their positions to the next contract month or avoid
delivery obligations.'' \646\ The Commission also stated its
preliminary belief that ``it is unlikely that the factors keeping
traders in the spot month physical-delivery contract will change due
solely to the introduction of a higher cash-settled limit,'' as traders
participating in the physical-delivery contract in the spot month are
``understood to have a commercial reason or need to stay in the spot
month.'' \647\
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\644\ See December 2013 Position Limits Proposal, 78 FR at
75736-38.
\645\ Id. at 75737.
\646\ Id. at 75770.
\647\ Id. at 75770, n. 782.
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Comments Received: The Commission received many comments regarding
the conditional spot month limit exemption. These comments revealed
little to no consensus among market participants, exchanges, and
industry groups regarding spot-month position limits in cash-settled
contracts.
Several commenters supported the higher spot-month limit (or no
limit at all) for cash-settled contracts, but opposed the restriction
on holding a position in the physical-delivery referenced contract to
obtain the higher limit for various reasons, including: The view that
there is no discernible reason for the restriction in the first place;
the belief that it provides a negative impact on liquidity in the
physical delivery contract; and the view that it prevents commercials
from taking advantage of the higher limit given their need to have some
exposure in a physical delivery referenced contract during the spot
month.\648\
---------------------------------------------------------------------------
\648\ E.g., CL-FIA-59595 at 3 and 11; CL-EEI-EPSA-59602 at 9-10;
CL-MFA-59606 at 5 and 19-20; CL-AIMA-59618 at 2; CL-ISDA/SIFMA-59611
at 31; CL-BG Group-59656 at 7; CL-BG Group-59937 at 5-6; CL-COPE-
59662 at 23; CL-NGSA-59673 at 38-39; CL-NGSA-59941 at 3-4; CL-
IECAssn-59957 at 9.
---------------------------------------------------------------------------
One commenter said that the conditional spot month position limit
exemption for gold is not supported by sufficient research, could
decouple the cash-settled contract from the physical-delivery contract,
and could lead to lower liquidity in the physical-delivery contract and
higher price volatility.\649\ Several commenters opposed a spot-month
position limit for cash-settled contracts that is higher than the limit
for physical-delivery contracts for various reasons including: The
higher limit does not address the problem of excessive speculation; the
higher limit would reduce liquidity in the physical-delivery contract;
and the conditional limit is not restrictive enough and should include
a restriction on holdings of the physical commodity as had been
proposed in vacated part 151.\650\
---------------------------------------------------------------------------
\649\ CL-WGC-59558 at 4.
\650\ E.g., CL-Sen. Levin-59637 at 7; CL-AFR-59711 at 2; CL-A4A-
59714 at 3; CL-Working Group-59693 at 59-60; CL-IECA-59713 at 3-4;
CL-Better Markets-60401 at 17-18; CL-CME-59971 at 3; CL-CME-60307 at
4-5; CL-CME-60406 at 2; CL-CMOC-59720 at 3-6; CL-APGA-59722 at 8;
CL-OSEC-59972 at 7; CL-RF-60372 at 3; CL-IATP-59701 at 5; CL-IATP-
59704 at 6; CL-IATP-60394 at 2; CL-NGFA-59681 at 6.
---------------------------------------------------------------------------
Several commenters expressed the view that a market participant
holding a trade option position, which presumably would be considered a
physical delivery referenced contract, should not be precluded from
using the conditional spot-month limit exemption because trade options
are functionally equivalent to a forward contract and the conditional
exemption does not restrict holding forwards.\651\
---------------------------------------------------------------------------
\651\ E.g., CL-FIA-59595 at 20; CL-COPE-59662 at 23; CL-EEI-
EPSA-60926 at 7, CL-EEI-Sup-60386 at 3-4; CL-Working Group-59693 at
59-60.
---------------------------------------------------------------------------
One commenter supported the conditional spot month limit exemption
provided that the Commission modifies its proposal to allow
independently-operated subsidiaries to hold positions in physical-
delivery contracts if the subsidiary engages in separate and
independent trading activities, shares no employees, and is not jointly
directed in its trading activity with other subsidiaries by the parent
company.\652\
---------------------------------------------------------------------------
\652\ CL-SEMP-59926 at 4-6; CL-SEMP-60384 at 5-6.
---------------------------------------------------------------------------
Some commenters supported the continuation of the practice of DCMs
separately establishing and maintaining their own conditional spot
month limits and not aggregating cash-settled limits across exchanges
and the OTC market, arguing that the resultant aggregated limit will be
unnecessarily restrictive and result in lower liquidity and increased
volatility.\653\
---------------------------------------------------------------------------
\653\ E.g., CL-IECAssn-59713 at 30-31; CL-ICE-59966 at 4-5; CL-
ICE-59962 at 4-7.
---------------------------------------------------------------------------
Some commenters expressed the view that the filing of daily Form
504 reports to satisfy the conditional spot month limit exemption was
burdensome, and recommended less frequent reporting such as monthly
reports \654\ or no reporting at all.\655\
---------------------------------------------------------------------------
\654\ CL-EEI-EPSA-59602 at 10; CL-ICE-59669 at 7.
\655\ CL-COPE-59662 at 24.
---------------------------------------------------------------------------
Two exchanges which currently permit a conditional spot month limit
exemption, CME and ICE, have each submitted several comments regarding
the exemption, some in direct response to the other exchange's
comments. This back-and-forth nature of the disagreement surrounding
the conditional spot month limit exemption has been significant and, on
many aspects of the previously proposed exemption, the comments have
been in direct opposition to each other. CME submitted a comment letter
in response to the 2016 Supplemental Position Limits Proposal that
reiterated its belief that the conditional limit would drain liquidity
from the physical-delivery contract; \656\ ICE responded that nothing
in the natural gas market has suggested that the physical-delivery
contract has been harmed.\657\ ICE noted that CME's current conditional
limit benefits CME's own cash-settled natural gas contracts; \658\ CME
responded that it opposes any conditional limit framework even though
such opposition could work ``to the detriment of CME Group's commercial
interests in certain of its cash-settled markets.'' \659\ CME stated
its belief that the CEA necessitates ``one-to-one limit treatment and
similar exemptions'' for both physical-delivery and cash-settled
contracts within a particular commodity; \660\ ICE suggested that
removing or reducing the conditional limit would ``disrupt present
market practice.'' \661\
---------------------------------------------------------------------------
\656\ CL-CME-60926 at 4.
\657\ CL-ICE-61009 at 1.
\658\ Id.
\659\ CL-CME-61008 at 2.
\660\ Id. at 3.
\661\ CL-ICE-61009 at 2.
---------------------------------------------------------------------------
ICE also submitted a series of charts, using CFTC Commitment of
Traders
[[Page 96778]]
Report data, illustrating the opposite: That spot-month open interest
and volume in the physical-delivery contract (the NYMEX NG) have
actually increased since the introduction of the conditional spot month
limit.\662\
---------------------------------------------------------------------------
\662\ Id. at 3-6.
---------------------------------------------------------------------------
CME stated its opposition to the conditional limits ``as a matter
of statutory law,'' opining that CEA section 4(b) does not allow the
imposition of the conditional limit.\663\ CME believes that the
conditional limit contained in the December 2013 Position Limits
Proposal ``contravenes Congress's intent behind the statutory
`comparability' requirement'' in multiple ways, and that neither ICE
nor the Commission has ``addressed these aspects of [CEA section
4(b)].'' \664\
---------------------------------------------------------------------------
\663\ CL-CME-61008 at 2-3. CEA section 4(b)(1)(B)(ii)(1) imposes
requirements on a foreign board of trade (``FBOT'') as a condition
of providing U.S. persons direct access to the electronic trading
and order-matching systems of the FBOT with respect to a contract
that settles against any price of one or more contracts listed for
trading on a registered entity. Such FBOT must adopt position limits
for contract(s) that are ``comparable'' to the position limits
adopted by the registered entity for the contract(s) against which
the FBOT contract settles. 7 U.S.C. 6(b)(1)(B)(ii)(1), codified in
17 CFR 48.8(c)(1)(ii)(A).
\664\ CL-CME-61008 at 3.
---------------------------------------------------------------------------
ICE replied that the Commission ``has no basis to modify the
current conditional limit level'' because the markets ``have functioned
efficiently and effectively'' and the Commission should not ``change
the status quo.'' \665\ ICE continued that the conditional limit of
five times the physical-delivery contract's spot-month limit ``appears
to be arbitrary and likely insufficient'' and opined that the
Commission has not indicated how it arrived at that figure or how such
a level ``strikes the right balance between supporting liquidity and
diminishing undue burdens.'' \666\ ICE concluded that the conditional
exemption ``must be maintained at no less than the current levels.''
\667\
---------------------------------------------------------------------------
\665\ CL-ICE-61022 at 2.
\666\ Id.
\667\ Id.
---------------------------------------------------------------------------
Commission Reproposal: After taking into consideration all the
comments it received regarding the conditional spot-month limit
exemption, the Commission is reproposing the conditional spot-month
limit exemption in natural gas markets only. The Commission believes
the volume of comments regarding the conditional spot-month limit
exemption indicates the importance of careful and thoughtful analysis
prior to finalizing policy with respect to conditional spot-month limit
exemptions in other cash-settled referenced contracts. In particular,
the considerations may vary, and should be considered in relation to
the particular commodity at issue. As such, the Commission believes it
is prudent to proceed cautiously in expanding the conditional spot-
month limit exemption beyond the natural gas markets where it is
currently employed. The Commission encourages exchanges and/or market
participants who believe that the Commission should extend the
conditional spot-month limit exemption to additional commodities to
petition the Commission to issue a rule pursuant to Sec. 13.2 of the
Commission's regulations.\668\
---------------------------------------------------------------------------
\668\ 17 CFR 13.2.
---------------------------------------------------------------------------
With respect to natural gas cash-settled referenced contracts, the
reproposed rules allow market participants to exceed the position limit
provided that such positions do not exceed 10,000 contracts and the
person holding or controlling such positions does not hold or control
positions in the spot-month natural gas physical-delivery referenced
contract (NYMEX NG). Persons relying upon this exemption must file Form
504 during the spot month.\669\
---------------------------------------------------------------------------
\669\ See infra discussion of part 19 and Form 504, below.
---------------------------------------------------------------------------
The Commission observes that the conditional exemption level of
10,000 contracts is equal to five times the federal natural gas spot-
month position limit level of 2,000 contracts. The conditional
exemption level is also equal to the sum of the current conditional
exemption levels for each of the NYMEX HH contract and the ICE NG LD1
contract. The Commission believes the level of 10,000 contracts
provides relief for market participants who currently may hold or
control 5,000 contracts in each of these two cash-settled natural gas
futures contracts and an unlimited number of cash-settled swaps, while
still furthering the purposes of the Dodd-Frank Act's amendments to CEA
section 4a.
The Commission is proposing the fixed figure of 10,000 contracts,
rather than the variable figure of five times the spot-month position
limit level, in order to avoid confusion in the event NYMEX were to set
its spot-month limit in the physical-delivery NYMEX NG contract at a
level below 2,000 contracts.
The Commission provides, for informational purposes, summary
statistical information that it considered in declining to extend the
conditional spot-month limit exemption beyond the natural gas
referenced contract. The four tables below present the number of unique
persons that held positions in commodity derivative contracts greater
than or equal to the specified levels, as reported to the Commission
under the large trader reporting systems for futures and swaps, for the
period July 1, 2014 to June 30, 2016. The table also presents counts of
unique reportable persons, whether reportable under part 17 (futures
and future option contracts) or under part 20 (swap contracts). The
method the Commission used to analyze this large trader data is
discussed above, under Sec. 150.2.
The four tables group commodities only for convenience of
presentation. In each table, the term ``25% DS'' means 25 percent of
the deliverable supply as estimated by the exchange listing the core
referenced futures contract and verified as reasonable by the
Commission. Similarly, ``15% DS'' means 15 percent of estimated
deliverable supply. An asterisk (``*'') means that fewer than four
unique persons were reported. ``CME proposal'' means the level
recommended by the CME Group for the spot-month limit. MGEX submitted a
recommended spot-month limit level that is slightly less than 25
percent of estimated deliverable supply but did not affect the reported
number of unique persons; no other exchange recommended a spot-month
level of less than 25 percent of estimated deliverable supply.
For the first group of commodities, there was no unique person in
the cash-settled referenced contracts whose position would have
exceeded 25 percent of the exchange's estimated deliverable supply.
Moreover, no unique person held a position in the cash-settled
referenced contracts that would have exceeded the reproposed spot-month
limits discussed under Sec. 150.2, above, that are lower than 25
percent of the exchange's estimated deliverable supply.
[[Page 96779]]
Table III-B-21--CME Group and MGEX Agricultural Contracts
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of unique persons >= Number of reportable persons
level in market
Position limit ---------------------------------------------------------------
Core-referenced futures contract Basis of spot-month level level Spot month
Spot month physical Spot month All months
cash settled delivery only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Corn...................................... CME proposal................ 600 0 36 1,050 2,606
(CBOT current limit 600).................. 25% DS...................... 900 0 20 .............. ..............
Oats...................................... CME proposal................ 600 0 0 33 173
(CBOT current limit 600).................. 25% DS...................... 900 0 0 .............. ..............
Soybeans.................................. CME proposal................ 600 0 22 929 2,503
(CBOT current limit 600).................. 25% DS...................... 1,200 0 14 .............. ..............
Soybean Meal.............................. CME proposal................ 720 0 14 381 978
(CBOT current limit 720).................. 25% DS...................... 2,000 0 (*) .............. ..............
Soybean Oil............................... CME proposal................ 540 0 21 397 1,034
(CBOT current limit 540).................. 25% DS...................... 3,400 0 0 .............. ..............
Wheat (CBOT).............................. CME proposal................ 600 0 11 444 1,867
(CBOT current limit 600).................. 25% DS...................... 1,000 0 6 .............. ..............
Wheat (MGEX).............................. Parity w/CME proposal....... 600 0 (*) 102 342
(MGEX current limit 600).................. Approx. 25% DS.............. 1,000 0 (*) .............. ..............
Wheat (KCBT).............................. CME proposal................ 600 0 4 250 718
(KCBT current limit 600).................. 25% CBOT DS................. 1,000 0 (*) .............. ..............
25% DS...................... 3,000 0 (*) .............. ..............
Rough Rice................................ CME proposal................ 600 0 0 91 281
(CBOT current limit 600).................. 25% DS...................... 2,300 0 0 .............. ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
For the second group of commodities, there was no unique person in
the cash-settled referenced contracts whose position would have
exceeded 25 percent of the exchange's estimated deliverable supply or,
in the case of Live Cattle, the current exchange limit level of 450
contracts. Moreover, other than in the Sugar No. 11 contract, no unique
person held a position in the cash-settled referenced contracts that
would have exceeded 15 percent of the exchange's estimated deliverable
supply. For informational purposes, the table also shows for Live
Cattle that no unique person held a position in the cash-settled
referenced contracts that would have exceeded 60 percent of the
exchange's current spot-month limit of 450 contracts.\670\
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\670\ The Commission notes that 60 percent of the 450 contract
spot-month limit is analogous to the counts presented for 15 percent
of estimated deliverable supply. That is, 60 percent of 25 percent
equals 15 percent.
Table III-B-22--Other Agricultural Contracts and ICE Futures U.S. Softs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of unique persons >= Number of unique persons in
level market
Position limit ---------------------------------------------------------------
Core-referenced futures contract Basis of spot-month level level Spot month
Spot month physical Spot month All months
cash settled delivery only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cotton No. 2.............................. 15% DS...................... 960 0 (*) 122 1,000
(ICE current limit 300)................... 25% DS...................... 1,600 0 0 .............. ..............
Cocoa..................................... 15% DS...................... 3,300 0 0 164 682
(ICE current limit 1,000)................. 25% DS...................... 5,500 0 0 .............. ..............
Coffee.................................... 15% DS...................... 1,440 0 (*) 336 1,175
(ICE current limit 500)................... 25% DS...................... 2,400 0 (*) .............. ..............
Orange Juice.............................. 15% DS...................... 1,680 0 0 38 242
(ICE current limit 300)................... 25% DS...................... 2,800 0 0 .............. ..............
Live Cattle............................... 60% Current Limit........... 225 0 33 616 1,436
(CME current limit 450)................... Current limit *............. 450 0 0 .............. ..............
Sugar No. 11.............................. 15% DS...................... 13,980 (*) 10 443 874
(ICE current limit 5,000)................. 25% DS...................... 23,300 0 (*) .............. ..............
Sugar No. 16.............................. 15% DS...................... 4,200 0 0 12 22
(ICE current limit 1,000)................. 25% DS...................... 7,000 0 0 .............. ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
For the third group of energy commodities, there were a number of
unique persons in the cash-settled referenced contracts whose position
would have exceeded 25 percent of the exchange's estimated deliverable
supply. For energy commodities other than natural gas, there were fewer
than 20 unique persons that had cash-settled positions in excess of the
reproposed spot-month limit levels, each based on 25 percent of
deliverable supply, as discussed above under Sec. 150.2. However, for
natural gas referenced contracts, 131 unique persons had cash-settled
positions in excess of the reproposed spot-month limit level of 2,000
contracts. As can be observed in the table below, only 20 unique
persons had cash-settled referenced contract positions that would have
exceeded the
[[Page 96780]]
reproposed natural gas conditional spot-month limit level of 10,000
contracts. Thus, a conditional spot-month limit exemption in natural
gas referenced contracts potentially would provide relief to a
substantial number of market participants, each of whom did not have a
position that was extraordinarily large in relation to other traders'
positions in cash-settled referenced contracts.
Table III-B-23--Energy Contracts
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nunber of unique persons >= Number of unique persons in
level market
Position limit ---------------------------------------------------------------
Core-referenced futures contract Basis of spot-month level level Spot month
Spot month physical Spot month All months
cash settled delivery only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Crude Oil, Light Sweet (WTI).............. CME proposal *.............. 6,000 19 8 1,773 2,673
(NYMEX current limit...................... 25% DS...................... 10,400 16 (*) .............. ..............
3,000 contracts).......................... 50% DS...................... 20,800 (*) 0 .............. ..............
Gasoline Blendstock (RBOB)................ CME proposal................ 2,000 23 14 463 837
(NYMEX current limit...................... 25% DS...................... 6,800 (*) 0 .............. ..............
1,000 contracts).......................... 50% DS...................... 13,600 0 0 .............. ..............
Natural Gas............................... 25% DS...................... 2,000 131 16 1,400 1,846
(NYMEX current limit...................... 50% DS...................... 4,000 77 (*) .............. ..............
1,000 contracts).......................... Current single exchange 5,000 65 (*) .............. ..............
conditional spot-month
limit exemption.
Conditional spot-month limit 10,000 20 0 .............. ..............
exemption.
ULSD (HO)................................. CME proposal................ 2,000 24 11 470 760
(NYMEX current limit...................... 25% DS...................... 2,900 15 5 .............. ..............
1,000 contracts).......................... 50% DS...................... 5,800 5 0 .............. ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For WTI, CME Group recommended a step-down spot-month limit of 6,000/5,000/4,000 contracts in the last three days of trading.
For the fourth group of metal commodities, there were a few unique
persons in the cash-settled referenced contracts whose position would
have exceeded the reproposed levels of the spot-month limits, based on
the CME Group's recommended levels, as discussed above under Sec.
150.2. However, there were fewer than 20 unique persons that had cash-
settled positions in excess of the reproposed spot-month limit levels
for metal commodities; this is in marked contrast to the 131 unique
persons who had cash-settled positions in excess of the reproposed
spot-month limit for natural gas contracts. The Commission, in
consideration of the distribution of unique persons holding positions
in cash-settled metal commodity contracts across the 24 calendar months
of its analysis, particularly in platinum,\671\ is of the view that the
spot-month limit level, as discussed above under Sec. 150.2, and
without a conditional spot-month limit exemption, is within the range
of acceptable limit levels that, to the maximum extent practicable, may
achieve the statutory policy objectives in CEA section 4a(a)(3)(B).
---------------------------------------------------------------------------
\671\ As can be observed in the open interest table discussed
under Sec. 150.2, above, the Commission notes that open interest in
cash-settled platinum contracts was markedly lower in the second 12-
month review period (year 2), than in the first 12-month review
period (year 1).
Table III-B-24--Metal Contracts (COMEX Division of NYMEX)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of unique persons >= Number of unique persons in
level market
Position limit ---------------------------------------------------------------
Core-referenced futures contract Basis of spot-month level level Spot month
Spot month physical Spot month All months
cash settled delivery only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Copper.................................... CME proposal................ 1,000 0 (*) 493 1,457
(current limit 1,000)..................... 25% DS...................... 1,100 0 (*) .............. ..............
Gold...................................... CME proposal................ 6,000 (*) (*) 518 1,557
(current limit 3,000)..................... 25% DS...................... 11,200 0 0 .............. ..............
Palladium................................. CME proposal................ 100 6 14 164 580
(current limit 100)....................... 25% DS...................... 900 0 0 .............. ..............
Platinum.................................. CME proposal................ 500 13 (*) 235 842
(current limit 500)....................... 25% DS...................... 900 10 (*) .............. ..............
50% DS...................... 1,800 (*) 0 .............. ..............
Silver.................................... CME proposal................ 3,000 0 0 311 1,023
(current limit 1,500)..................... 25% DS...................... 5,600 0 0 .............. ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 96781]]
e. Proposed Recordkeeping and Special Call Requirements--Sec. 150.3(g)
and Sec. 150.3(h)
Proposed Rules: As proposed in the December 2013 Position Limits
Proposal, Sec. 150.3(g) specifies recordkeeping requirements for
persons who claim any exemption set forth in Sec. 150.3. Persons
claiming exemptions under previously proposed Sec. 150.3 must 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 previously proposed Sec. 150.3(h),
which would preserve the ``special call'' rule set forth in current
Sec. 150.3(b). This ``special call'' rule would have required that any
person claiming an exemption under Sec. 150.3 must, upon request,
provide to the Commission such information as specified in the call
relating to the positions owned or controlled by that person; trading
done pursuant to the claimed exemption; the commodity derivative
contracts or cash market positions which support the claim of
exemption; and the relevant business relationships supporting a claim
of exemption.
The Commission noted that the previously proposed rules concerning
detailed recordkeeping and special calls are designed to help ensure
that any person who claims any exemption set forth in Sec. 150.3 can
demonstrate a legitimate purpose for doing so.\672\
---------------------------------------------------------------------------
\672\ December 2013 Position Limits Proposal, 78 FR at 75741.
---------------------------------------------------------------------------
Comments Received: The Commission did not receive any comments on
the recordkeeping provisions in Sec. 150.3(g) as proposed in the
December 2013 Position Limits Proposal. With respect to previously
proposed Sec. 150.3(h), one commenter opposed the ``special call''
provision because, in the commenter's opinion, it is ``too passive.''
The commenter advocated, instead, a revision requiring persons claiming
an exemption to maintain books and records on an ongoing basis and
provide information to the Commission on a periodic and automatic
basis, because even if the Commission lacked staff and resources to
review the submitted material in real-time, Commission staff would have
detailed historical data for use in compliance audits. This commenter
stated that since required records are likely to be kept in an
electronic format, the more frequent reporting requirement would not be
considered burdensome.\673\
---------------------------------------------------------------------------
\673\ CL-O SEC-59972 at 5.
---------------------------------------------------------------------------
Commission Reproposal: The Commission believes the previously
proposed recordkeeping and ``special call'' provisions in Sec.
150.3(g) and Sec. 150.3(h), respectively, are sufficient to limit
abuse of exemptions without causing undue burdens on market
participants. The Commission is reproposing these sections generally as
proposed in the December 2013 Position Limits Proposal. The Commission
is clarifying, in reproposed Sec. 150.3(g)(2), that the bona fides of
the pass-through swap counterparty may be determined at the time of the
transaction or, alternatively, at such later time that the counterparty
can show the swap position to be a bona fide hedging position. As
previously proposed, such bona fides could only be determined at the
time of the transaction, as opposed to at a later time.
D. Sec. 150.5--Exchange-Set Speculative Position Limits and Parts 37
and 38
1. Background
As discussed above, the Commission currently sets and enforces
position limits pursuant to its broad authority under CEA section
4a,\674\ and does so only with respect to certain enumerated
agricultural products.\675\ As the Commission explained above and in
the December 2013 Position Limits Proposal,\676\ section 735 of the
Dodd-Frank Act amended section 5(d)(1) of the CEA to explicitly provide
that the Commission may mandate the manner in which DCMs must comply
with the core principles.\677\ However, Congress limited the exercise
of reasonable discretion by DCMs only where the Commission has acted by
regulation.\678\
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\674\ CEA section 4a, as amended by the Dodd-Frank Act, provides
the Commission with broad authority to set position limits,
including an extension of its position limits authority to swaps
positions. 7 U.S.C. 6a. See supra discussion of CEA section 4a.
\675\ The position limits on these agricultural contracts are
referred to as ``legacy'' limits, and the listed commodities are
referred to as the ``enumerated'' agricultural commodities. This
list of enumerated agricultural contracts includes Corn (and Mini-
Corn), Oats, Soybeans (and Mini-Soybeans), Wheat (and Mini-wheat),
Soybean Oil, Soybean Meal, Hard Red Spring Wheat, Hard Winter Wheat,
and Cotton No. 2. See 17 CFR 150.2.
\676\ See December 2013 Position Limits Proposal, 78 FR at
75748.
\677\ Specifically, the Dodd-Frank Act amended DCM core
principle 1 to include the condition that ``[u]nless otherwise
determined by the Commission by rule or regulation,'' boards of
trade shall have reasonable discretion in establishing the manner in
which they comply with the core principles. See CEA section
5(d)(1)(B); 7 U.S.C. 7(d)(1)(B).
\678\ See December 2013 Position Limits Proposal, 78 FR at
75748.
---------------------------------------------------------------------------
The Dodd-Frank Act also amended DCM core principle 5. As amended,
DCM core principle 5 requires that, for any contract that is subject to
a position limitation established by the Commission pursuant to CEA
section 4a(a), the DCM ``shall set the position limitation of the board
of trade at a level not higher than the position limitation established
by the Commission.'' \679\ Moreover, the Dodd-Frank Act added CEA
section 5h to provide a regulatory framework for Commission oversight
of SEFs.\680\ Under SEF core principle 6, which parallels DCM core
principle 5, Congress required that SEFs that are trading facilities
adopt for each swap, as is necessary and appropriate, position limits
or position accountability.\681\ Furthermore, Congress required that,
for any contract that is subject to a Federal position limit under CEA
section 4a(a), the SEF shall set its position limits at a level no
higher than the position limitation established by the Commission.\682\
---------------------------------------------------------------------------
\679\ See CEA section 5(d)(5)(B) (amended 2010), 7 U.S.C.
7(d)(5)(B).
\680\ See CEA section 5h, 7 U.S.C. 7b-3.
\681\ CEA section 5h(f)(6), 7 U.S.C. 7b-3(f)(6); see also
December 2013 Position Limits Proposal, 78 FR at 75748.
\682\ Id.
---------------------------------------------------------------------------
2. Summary
As explained in the December 2013 Position Limits Proposal,\683\ to
implement the authority provided by section 735 of the Dodd-Frank Act
amendments to CEA sections 5(d)(1) and 5h(f)(1), the Commission
evaluated its pre-Dodd-Frank Act regulations and approach to oversight
of DCMs, which had consisted largely of published guidance and
acceptable practices, with the aim of updating them to conform to the
new Dodd-Frank Act regulatory framework. Based on that review, and
pursuant to the authority given to the Commission in amended sections
5(d)(1) and 5h(f)(1) of the CEA, which permit the Commission to
determine, by rule or regulation, the manner in which boards of trade
and SEFs, respectively, must comply with the core principles,\684\ the
Commission in its December 2013 Position Limit Proposal, proposed
several updates to Sec. 150.5 to promote compliance with DCM core
principle 5 and SEF core principle 6 governing position limitations or
accountability.\685\
---------------------------------------------------------------------------
\683\ December 2013 Position Limits Proposal, 78 FR at 75754.
\684\ See CEA sections 5(d)(1)(B) and 5h(f)(1)(B); 7 U.S.C.
7(d)(1)(B) and 7b-3(f)(1)(B).
\685\ December 2013 Position Limits Proposal, 78 FR at 75754.
---------------------------------------------------------------------------
First, the Commission proposed amendments to the provisions of
Sec. 150.5 to include SEFs and swaps. Second, the Commission proposed
to codify rules and revise acceptable practices for
[[Page 96782]]
compliance with DCM core principle 5 and SEF core principle 6 within
amended Sec. 150.5(a) for contracts subject to the federal position
limits set forth in Sec. 150.2. Third, the Commission proposed to
codify rules and revise guidance and acceptable practices for
compliance with DCM core principle 5 and SEF core principle 6 within
amended Sec. 150.5(b) for contracts not subject to the federal
position limits set forth in Sec. 150.2. Fourth, the Commission
proposed to amend Sec. 150.5 to implement uniform requirements for
DCMs and SEFs that are trading facilities relating to hedging
exemptions across all types of contracts, including those that are
subject to federal limits. Fifth, the Commission proposed to require
DCMs and SEFs that are trading facilities to have aggregation policies
that mirror the federal aggregation provisions.\686\
---------------------------------------------------------------------------
\686\ Id. Aggregation exemptions can be used, in effect, as a
way for a trader to acquire a larger speculative position. As noted
in the December 2013 Position Limits Proposal, the Commission
believes that it is important that the aggregation rules set out, to
the extent feasible, ``bright line'' standards that are capable of
easy application by a wide variety of market participants while not
being susceptible to circumvention. December 2013 Position Limits
Proposal, 78 FR at 75754, n. 660.
---------------------------------------------------------------------------
In addition to the changes to the provisions of Sec. 150.5
proposed in the December 2013 Position Limits Proposal, the Commission
also noted that it had, in response to the Dodd-Frank Act, previously
published several earlier rulemakings that pertained to position
limits, including in a notice of proposed rulemaking to amend part 38
to establish regulatory obligations that each DCM must meet in order to
comply with section 5 of the CEA, as amended by the Dodd-Frank
Act.\687\ In addition, as noted above, the Commission had published a
proposal to replace part 150 with a proposed part 151, which was later
finalized before being vacated.\688\ In the December 2013 Position
Limits Proposal, the Commission pointed out that as it was originally
proposed, Sec. 38.301 would require each DCM to comply with the
requirements of part 151 as a condition of its compliance with DCM core
principle 5.\689\ When the Commission finalized Dodd-Frank updates to
part 38 in 2012, it adopted a revised version of Sec. 38.301 with an
additional clause that requires DCMs to continue to meet the
requirements of part 150 of the Commission's regulations--the current
position limit regulations--until such time that compliance would be
required under part 151.\690\ At that time, the Commission explained
that this clarification would ensure that DCMs were in compliance with
the Commission's regulations under part 150 during the interim period
until the compliance date for the new position limits regulations of
part 151 would take effect.\691\ The Commission further explained that
its new regulation, Sec. 38.301, was based on the Dodd-Frank
amendments to the DCM core principles regime, which collectively would
provide that DCM discretion in setting position limits or position
accountability levels was limited by Commission regulations setting
position limits.\692\
---------------------------------------------------------------------------
\687\ See December 2013 Position Limits Proposal, 78 FR at
75753; see also Core Principles and Other Requirements for
Designated Contract Markets, 75 FR 80572 (Dec. 22, 2010) (``2010
Part 38 Proposed Rule'').
\688\ See supra discussion under Part I.B (discussing the
Commission's adoption of part 151,subsequently vacated).
\689\ 2010 Part 38 Proposed Rule at 80585.
\690\ Core Principles and Other Requirements for Designated
Contract Markets, 77 FR 36611, 36639 (Jun. 19, 2012) (``Final Part
38 Rule''). The Commission mandated in final Sec. 38.301 that, in
order to comply with DCM core principle 5, a DCM must ``meet the
requirements of parts 150 and 151 of this chapter, as applicable.''
See also 17 CFR 38.301.
\691\ Final Part 38 Rule at 36639.
\692\ Id. (discussing the Dodd-Frank amendments to the DCM core
principles); see also CEA sections 5(d)(1) and 5(d)(5), as amended
by the Dodd-Frank Act.
---------------------------------------------------------------------------
Similarly, as the Commission noted in the December 2013 Position
Limits Proposal,\693\ when in 2010 the Commission proposed to adopt a
regulatory scheme applicable to SEFs, it proposed to require that SEFs
establish position limits in accordance with the requirements set forth
in part 151 of the Commission's regulations under proposed Sec.
37.601.\694\ The Commission pointed out that it had revised Sec.
37.601 in the SEF final rulemaking, to state that until such time that
compliance was required under part 151, a SEF may refer to the guidance
and/or acceptable practices in Appendix B of part 37 to demonstrate to
the Commission compliance with the requirements of SEF core principle
6.\695\
---------------------------------------------------------------------------
\693\ December 2013 Position Limits Proposal, 78 FR at 75753.
\694\ Core Principles and Other Requirements for Swap Execution
Facilities, 76 FR 1214 (Jan. 7, 2011) (``SEF final rulemaking'').
Current Sec. 37.601 provides requirements for SEFs that are trading
facilities to comply with SEF core principle 6 (Position Limits or
Accountability), while the guidance to SEF core principle 6
(Position Limits or Accountability) in Appendix B to part 37, cites
to part 151.
\695\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33476 (June 4, 2013). Current Sec. 37.601
provides requirements for SEFs that are trading facilities to comply
with SEF core principle 6 (Position Limits or Accountability).
---------------------------------------------------------------------------
In the December 2013 Position Limits Proposal, the Commission noted
that in light of the District Court vacatur of part 151, the Commission
proposed to amend Sec. 37.601 to delete the reference to vacated part
151. The amendment would have instead required that SEFs that are
trading facilities meet the requirements of part 150, which would be
comparable to the DCM requirement, since, as proposed in the December
2013 Position Limits Proposal, Sec. 150.5 would apply to commodity
derivative contracts, whether listed on a DCM or on a SEF that is a
trading facility. At the same time, the Commission would have amended
Appendix B to part 37, which provides guidance on complying with core
principles, both initially and on an ongoing basis, to maintain SEF
registration.\696\ Since the December 2013 Position Limits Proposal
required that SEFs that are trading facilities meet the requirements of
part 150, the proposed amendments to the guidance regarding SEF core
principle 6 reiterated that requirement. The Commission noted that for
SEFs that are not trading facilities, to whom core principle 6 would
not be applicable under the statutory language, part 150 should have
been considered as guidance.\697\
---------------------------------------------------------------------------
\696\ Appendix B to Part 37--Guidance on, and Acceptable
Practices in, Compliance with Core Principles.
\697\ December 2013 Position Limits Proposal, 78 FR at 75753.
---------------------------------------------------------------------------
More recently, the Commission issued the 2016 Supplemental Position
Limits Proposal to revise and amend certain parts of the December 2013
Position Limits Proposal based on comments received on the December
2013 Position Limits Proposal,\698\ viewpoints expressed during a
Roundtable on Position Limits,\699\ several Commission advisory
committee meetings that each provided a focused forum for participants
to discuss some aspects of the December 2013 Position Limits
Proposal,\700\ and information obtained in the course of ongoing
Commission
[[Page 96783]]
review of SEF registration applications.\701\
---------------------------------------------------------------------------
\698\ 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.
\699\ 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.
\700\ 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.
\701\ 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.
---------------------------------------------------------------------------
In the 2016 Supplemental Position Limits Proposal, the Commission
proposed to delay for exchanges that lack access to sufficient swap
position information the requirement to establish and monitor position
limits on swaps at this time 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 that corresponds to that
proposed guidance regarding Sec. 150.5.\702\ In addition, the
Commission in the 2016 Supplemental Position Limits Proposal proposed
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.\703\ Moreover, the Commission
proposed that DCMs and SEFs could recognize and exempt from exchange
position limits certain non-enumerated bona fide hedging positions,
enumerated anticipatory bona fide hedges, and certain spread
positions.\704\ To effectuate the latter proposals, the Commission
proposed amendments to Sec. 150.3 and new Sec. 150.9, 150.10, and
150.11, as well as corresponding amendments to Sec. 150.5(a)(2) and
150.5(b)(5).\705\
---------------------------------------------------------------------------
\702\ See 2016 Supplemental Position Limits Proposal, 81 FR at
38459-62. See also DCM Core Principle 5, Position Limitations or
Accountability (contained in CEA section 5(d)(5), 7 U.S.C. 7(d)(5))
and SEF Core Principle 6, Position Limits or Accountability
(contained in CEA section 5h(f)(6), 7 U.S.C. 7b-3(f)(6)).
\703\ See 2016 Supplemental Position Limits Proposal, 81 FR at
38467-76 (providing for recognition of certain positions in
commodity derivative contracts as non-enumerated bona fide hedges),
at 38480-81 (providing for recognition of certain positions in
commodity derivatives contracts as enumerated anticipatory bona fide
hedges); and at 38476-80 (providing for exemptions from federal
position limits for certain spread positions).
\704\ See 2016 Supplemental Position Limits Proposal, 81 FR at
38482.
\705\ See 2016 Supplemental Position Limits Proposal, 81 FR at
38504-13. The 2016 Supplemental Position Limits Proposal did not
address the changes to Sec. Sec. 37.601 or 38.301 proposed in the
December 2013 Position Limits Proposal.
---------------------------------------------------------------------------
3. Discussion
As discussed in greater detail below, the Commission has determined
to repropose Sec. 150.5 largely as proposed in the December 2013
Position Limit Proposal and as revised in the 2016 Supplemental
Position Limits Proposal. In addition, the Commission has determined to
repropose the previously proposed amendments to Sec. 37.601 and Sec.
38.301.\706\
---------------------------------------------------------------------------
\706\ The Commission did not receive any comments regarding the
proposed changes to Sec. 37.601 and Sec. 38.301.
---------------------------------------------------------------------------
Some changes were made to Sec. 150.5 in response to concerns
raised by commenters; other changes to the reproposed regulation are to
conform to changes made in other sections. For example, in reproposing
Sec. 150.5(b)(1) and (2), the Commission has determined to make
certain changes to the acceptable practices for establishing the levels
of individual non-spot or all-months combined position limits for
futures and future option contracts that are not subject to federal
limits. The changes to reproposed Sec. 150.5(b)(1) and (2) correspond
to changes to reproposed Sec. 150.2(e)(4)(iv) discussed above, for
establishing the levels of individual non-spot or all-months combined
positions limits for futures and future option contracts that are
subject to federal limits. Moreover, several non-substantive changes
were made in response to commenter requests to provide greater
clarity.\707\
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\707\ See the removal of the provisions regarding excluded
commodities from Sec. 150.5(b) and their placement in a new section
(c), which addresses only excluded commodities. In addition to the
reorganization of the excluded commodity provisions, changes were
made to those provisions to track changes made in other sections or
paragraphs and to address concerns raised by commenters and
confusion that became apparent in the comment letters.
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The essential features of the changes to reproposed Sec. 150.5 are
discussed below.
a. Treatment of Swaps on SEFs and DCMs
i. December 2013 Position Limits Proposal. As explained above, CEA
section 4a(a)(5), as amended by the Dodd-Frank Act, 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).\708\ The CEA also requires in SEF Core Principle
6 that a SEF that is a trading facility: (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.\709\ Similarly, for all contracts subject to a federal position
limit, including swaps, DCMs, under DCM Core Principle 5, must set a
position limit no higher than the federal limit.\710\
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\708\ See December 2013 Position Limits Proposal, 78 FR at
75681-5 (the Commission interpret the statute to mandate that the
Commission impose limits on futures, options, and swaps, in
agricultural and exempt commodities).
\709\ CEA section 5h(f)(6)(B), 7 U.S.C. 7b-3(f)(6) (SEF Core
Principle 6B). The Commission codified SEF Core Principle 6, 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, 33533-34 (June 4, 2013).
\710\ CEA section 5(d)(5), 7 U.S.C. 7(d)(5) (DCM Core Principle
5). The Commission codified DCM Core Principle 5, as amended by the
Dodd-Frank Act, in Sec. 38.300 of its regulations, 17 CFR 38.300.
See 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,\711\ whether
futures or swaps, regardless of where the futures or swaps positions
are established.\712\ Consistent with DCM Core Principle 5 and SEF Core
Principle 6, the Commission at Sec. 150.5(a)(1) previously proposed
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.'' \713\
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\711\ 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.
\712\ See December 2013 Position Limits Proposal, 78 FR at 75826
(previously proposed Sec. 150.2).
\713\ See December 2013 Position Limits Proposal, 78 FR at
75754-8.
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ii. Comments Received to December 2013 Position Limits Proposal
Several comment letters on previously proposed Sec. 150.5
recommended that the Commission not require SEFs to establish position
limits.\714\ 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.\715\ Further, during the ongoing SEF
registration process,\716\ a number of
[[Page 96784]]
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.\717\ As the Commission
observed in the 2016 Supplemental Position Limits Proposal, this
information gap would also be a concern for DCMs in respect of
swaps.\718\
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\714\ CL-CMC-59634 at 14-15, CL-FIA-60392 at 10. One comment
letter 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. CL-ISDA/
SIFMA-59611 at 35.
\715\ CL-CMC-59634 at 14-15, CL-FIA-60392 at 10.
\716\ 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). A SEF must comply with core
principles, including Core Principle 6 regarding position limits, as
a condition of registration. CEA section 5h(f)(1), 7 U.S.C. 7b-
3(f)(1).
\717\ 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 source.'' BGC Derivative Markets, L.P., Rule Submission
2015-09 (Oct. 6, 2015).
\718\ 2016 Supplemental Position Limits Proposal, 81 FR at
38460.
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iii. 2016 Supplemental Position Limits Proposal
As explained above, in the 2016 Supplemental Position Limits
Proposal, the Commission proposed to temporarily delay for DCMs and
SEFs that are trading facilities, which 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 that corresponds to that guidance
regarding Sec. 150.5.\719\ At that time, the Commission acknowledged
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, and expressed its belief that
most exchanges do not have access to sufficient swap position
information to effectively monitor swap position limits.\720\
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\719\ See 2016 Supplemental Position Limits Proposal, 81 FR at
38459-62.
\720\ Id. at 38460. The Commission acknowledged that 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. 2016 Supplemental Position Limits Proposal, 81 FR at
38459; see also 38460, n. 32.
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In this regard, the Commission expressed its belief 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 in large volumes of speculative trading
activity, including through knowledge gained in surveillance of heavy
trading activity, that would cause reasonable surveillance personnel at
an exchange to inquire further about a market participant's intentions
\721\ or total open swap positions.\722\
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\721\ Id. at 38460-61. For instance, heavy trading activity
might cause an 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.
\722\ Id. at 38461. See 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,
respectively. The Commission also observed that, unlike futures
contracts, which are proprietary to a particular DCM and typically
clear 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, OTC. Further, under the
Commission regulations, data with respect to a particular swap
transaction may be reported to any swap data repository (``SDR'').
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The Commission noted that 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.\723\ 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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\723\ 2016 Supplemental Position Limits Proposal, 81 FR at
38461. The Commission observed, moreover, by way of example, that
part 20 swaps data is a source that identifies a market
participant's reported open swap positions from the prior trading
day. So an exchange with access to part 20 swaps date 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. Nonetheless, that market participant may
have conducted other swap transactions in the same commodity, away
from a particular exchange, that reduced its swap position. Id.
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The Commission expressed its belief that although this indication
would not include the market participant's activity transacted away
from that particular exchange, such monitoring would comply with CEA
section 5h(f)(6)(B)(ii). However, the Commission observed 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. 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.\724\
---------------------------------------------------------------------------
\724\ Id. The Commission also noted that 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. The Commission observed, however, that it is unlikely that
a single exchange would unilaterally impose a swaps reporting regime
on market participants. Id. at 38461, n. 36. The Commission
abandoned the approach of requiring market participants to report
futures positions directly to the Commission many years ago. Id.;
see also 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 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). 2016
Supplemental Position Limits Proposal, 81 FR at 38461, n. 36.
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The Commission also acknowledged in the 2016 Supplemental Position
Limits Proposal that it has neither
[[Page 96785]]
required any DCO \725\ or SDR \726\ to provide such swap data to
exchanges,\727\ nor provided any exchange with access to swaps data
collected under part 20 of the Commission's regulations.\728\
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\725\ Core principle M for DCOs addresses information sharing
for risk management purposes, but does not address information
sharing with exchanges for other purposes. 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).
\726\ 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, n. 141 (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). For purposes of
comparison, the Securities and Exchange Commission (``SEC'') noted
with regard to security-based swaps when it finalized its rules
implementing its similar provision (which it described as a
``statutory requirement that security-based SDRs conditionally
provide data to certain regulators and other authorities''), ``that
one or more self-regulatory organizations potentially may seek such
access under this provision.'' Access to Data Obtained by Security-
Based Swap Data Repositories, 81 FR 60585, 50588 (Sept. 2, 2016).
The SEC estimated that ``up to 30 domestic entities potentially
might enter into such MOUs or other arrangements, reflecting the
nine entities specifically identified by statute or the final rules,
and up to 21 additional domestic governmental entities or self-
regulatory organizations that may seek access to such data.'' Id. at
60593.
\727\ As the Commission noted in the 2016 Supplemental Position
Limits Proposal, 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. 2016 Supplemental Position
Limits Proposal, 81 FR at 38461. See also December 2013 Positions
Limits Proposal, 78 FR at 78 FR75825 (describing the proposed
definition of futures-equivalent); 2016 Supplemental Position Limits
Proposal at 38461 (describing amendments to that proposed
definition).
\728\ 2016 Supplemental Position Limits Proposal, 81 FR at
38461. The part 20 swaps data is reported in futures equivalents,
but does not include data specifying where reportable positions in
swaps were established.
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.
However, as the Commission noted in the 2016 Supplemental
Position Limits Proposal, the quality of part 20 swaps data does
appear to have improved somewhat since the December 2013 Position
Limits Proposal, although some reports continue to have significant
errors. The Commission stated that it is possible that it will be
able to rely on swap open positions 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 higher initial levels of non-spot month limits in a
final rule. 2016 Supplemental Position Limits Proposal, 81 FR at
38461.
Moreover, the quality of the data regarding reportable positions
in swaps may have improved enough for the Commission to be able to
rely on it when monitoring market participants' compliance with the
proposed federal position limits.
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The Commission stated that in light of the foregoing, it was
proposing a delay in implementation of exchange-set limits for swaps
only, and only for exchanges without sufficient swap position
information.\729\ 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,\730\ the 2016 Supplemental Position Limits Proposal amended 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. According to the 2016 Supplemental Position Limits
Proposal, the revised guidance clarified 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.\731\ For clarity, the 2016 Supplemental Position Limits
Proposal included 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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\729\ Id.
\730\ 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.
\731\ 2016 Supplemental Position Limits Proposal, 81 FR at
38461. The Commission stated that 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 also noted that, for the same reasons regarding swap
position data discussed above in respect of CEA section 5h(f)(6)(B),
the guidance proposed in the 2016 Supplemental Position Limits
Proposal would temporarily relieve SEFs of their statutory
obligation under CEA section 5h(f)(6)(A). Id.
---------------------------------------------------------------------------
Although the Commission proposed to temporarily relieve exchanges
that do not now have access to sufficient swap position information
from having to set position limits on swaps, it also noted that nothing
in the 2016 Supplemental Position Limits Proposal would prevent an
exchange from nevertheless establishing position limits on swaps, while
stating that it does seem unlikely that an exchange would implement
position limits before acquiring sufficient swap position information
because of the ensuing difficulty of enforcing such a limit. The
Commission expressed its belief that providing delay for those
exchanges that need it both preserved flexibility for subsequent
Commission rulemaking and allowed for phased implementation of
limitations on swaps by exchanges, as practicable.\732\
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\732\ As the Commission noted above, although the 2016
Supplemental Position Limits Proposal proposed position limits
relief to SEFs and to DCMs in regards to swaps, it did not propose
any alteration to the definition of referenced contract (including
economically equivalent swaps) that was proposed in December 2013.
See also December 2013 Position Limits Proposal, 78 FR at 75825.
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Additionally, the Commission observed that courts have authorized
relieving regulated entities of their statutory obligations where
compliance is impossible or impracticable,\733\ and noted its view 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.\734\ The Commission expressed its
belief that, accordingly, it was reasonable to delay implementation of
this discrete aspect of position limits, only with respect to swaps
position limits, and only for exchanges that lacked access to
sufficient swap position information. This approach, the Commission
believed, would further the policy objectives of the Dodd-Frank Act
regulatory regime, including the facilitation of trade processing of
swaps
[[Page 96786]]
and the promotion of trading swaps on SEFs. Finally, the Commission
noted that while this approach would delay the requirement for certain
exchanges to establish and monitor exchange-set limits on swaps, 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.\735\
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\733\ 2016 Supplemental Position Limits Proposal, 81 FR at
38462. See also id. at n. 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.' '')).
The Commission noted, moreover, that ``it is axiomatic that courts
will avoid reading statutes to reach absurd or unreasonable
consequences'' (citing, as an example, Griffin v. Oceanic
Contractors, Inc., 458 U.S. 564 (1982)), and pointed out that to
require an exchange to monitor position limits on swaps, when it
currently has extremely limited visibility into a market
participant's swap position, was, arguably, absurd and certainly
appeared unreasonable. 2016 Supplemental Position Limits Proposal,
81 FR at 38462, n. 44.
\734\ Id. at 38462.
\735\ Id.
---------------------------------------------------------------------------
iv. Comments Received to 2016 Supplemental Position Limits Proposal
Several commenters addressed the Commission's proposed guidance on
exchange-set limits on swaps.\736\
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\736\ E.g., CL-FIA-60937 at 1,6; CL-WMBA-60945 at 1-2; CL-AFR-
60953 at 2; CL-RER2-60962 at 1; CL-Better Markets-60928 at 6.
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Regarding insufficient swap data, four commenters agreed that SEFs
and DCMs lack access to sufficient swap position data to set exchange
limits on swaps, and as such, the commenters support the Commission's
decision to delay the position limit monitoring requirements for SEFs
that are trading facilities and DCMs.\737\ In addition, one commenter
recommended that the Commission provide notice for public comments
prior to implementing any determination that a DCM or SEF has access to
sufficient swap position data to set exchange limits on swaps.\738\
Further, two commenters recommended that the Commission identify a
plan, to address the insufficient data issues, that goes beyond
``simply exempting affected exchanges.'' \739\
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\737\ CL-FIA-60937 at 2, 5-6; CL-WMBA-60945 at 1-2; CL-AFR-60953
at 2; CL-RER2-60962 at 1.
\738\ CL-FIA-60937 at 2, 5-6.
\739\ CL-AFR-60953 at 2; CL-RER2-60962 at 1.
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On the other hand, one commenter asserted that there should be no
delay in implementing position limits for swaps because, according to
the commenter, the Commission has access to sufficient swap data it
needs to implement position limits.\740\
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\740\ CL-Better Markets-60928 at 6.
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v. Commission Determination
The Commission has determined to repropose the treatment of swaps
and SEFs as previously proposed in the 2016 Supplemental Position
Limits Proposal for the reasons given above.\741\
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\741\ For purposes of clarity, the Commission is reproposing the
guidance to provide for a temporarily delay for DCMs and SEFs that
are trading facilities that lack access to sufficient swap position
information the requirement to establish and monitor position limits
on swaps by reproposing as proposed in the 2016 Supplemental
Position Limits Proposal: (i) Appendix E to Part 150 to provide
guidance regarding reproposed Sec. 150.5; and (ii) guidance on DCM
Core Principle 5 and SEF Core Principle 6 that corresponds to that
reproposed guidance regarding Sec. 150.5.
---------------------------------------------------------------------------
Regarding the comments recommending that the Commission identify a
plan to address the insufficient data issues that goes beyond ``simply
exempting affected exchanges,'' the Commission may consider granting
DCMs and SEFs, as self-regulatory organizations, access to part 20 data
or SDR data at a later time.
In addition, regarding the comment that the Commission already has
access to sufficient swap data in order to implement position limits,
the Commission points out that it proposes to adopt a phased approach
to updating its position limits regime.\742\ In conjunction with this
phased approach, the Commission believes that at this time it should
limit its implementation of position limits for swaps to those that are
referenced contracts.
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\742\ As the Commission noted in the December 2013 Position
Limits Proposal, ``a phased approach will (i) reduce the potential
administrative burden by not immediately imposing position limits on
all commodity derivative contracts in physical commodities at once,
and (ii) facilitate adoption of monitoring policies, procedures and
systems by persons not currently subject to positions limits (such
as traders in swaps that are not significant price discovery
contracts).'' 78 FR 75680.
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b. Sec. 150.5(a)--Requirements and Acceptable Practices for Commodity
Derivative Contracts That Are Subject to Federal Position Limits
i. December 2013 Position Limits Proposal
Several requirements were added to Sec. 150.5(a) in the December
2013 Position Limits Proposal to which a DCM or SEF that is a trading
facility must adhere when setting position limits for contracts that
are subject to the federal position limits listed in Sec. 150.2.\743\
Previously proposed Sec. 150.5(a)(1) specified that a DCM or SEF that
lists a contract on a commodity that is subject to federal position
limits must adopt position limits for that contract at a level that is
no higher than the federal position limit.\744\ Exchanges with cash-
settled contracts price-linked to contracts subject to federal limits
would also be required to adopt those limit levels.
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\743\ As discussed above, 17 CFR 150.2 provides limits for
specified agricultural contracts in the spot month, individual non-
spot months, and all-months-combined.
\744\ As previously proposed, Sec. 150.5(a)(1) is in keeping
with the mandate in core principle 5 as amended by the Dodd-Frank
Act. See CEA section 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B). SEF core
principle 6 parallels DCM core principle 5. Compare CEA section
5h(f)(5), 7 U.S.C. 7b-3(f)(5) with CEA section 5(d)(5), 7 U.S.C.
7(d)(5).
---------------------------------------------------------------------------
Previously proposed Sec. 150.5(a)(3) would have required a DCM or
SEF that is a trading facility to exempt from speculative position
limits established under Sec. 150.2 a swap position acquired in good
faith in any pre-enactment and transition period swaps, in either case
as defined in Sec. 150.1.\745\ However, previously proposed Sec.
150.5(a)(3) would allow a person to net such a pre-existing swap with
post-effective date commodity derivative contracts for the purpose of
complying with any non-spot-month speculative position limit. Under
previously proposed Sec. 150.5(a)(4)(i), a DCM or SEF that is a
trading facility must require compliance with spot month speculative
position limits for pre-existing positions in commodity derivatives
contracts other than pre-enactment or transition period swaps, while
previously proposed Sec. 150.5(a)(4)(ii) provides that a non-spot-
month speculative position limit established under Sec. 150.2 would
not apply to any commodity derivative contract acquired in good faith
prior to the effective date of such limit.\746\ As proposed in the
December 2013 Position Limits Proposal, however, such a pre-existing
commodity derivative contract position must be attributed to the person
if the person's position is increased after the effective date of such
limit.\747\
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\745\ The Commission previously proposed to exercise its
authority under CEA section 4a(a)(7) to exempt pre-Dodd-Frank and
transition period swaps from speculative position limits (unless the
trader elected to include such a position to net with post-effective
date commodity derivative contracts). Such a pre-existing swap
position would be exempt from initial spot month speculative
position limits. December 2013 Position Limits Proposal, 78 FR at
75756, n. 674.
\746\ See previously proposed 150.5(a)(4)(ii). See also CEA
section 22(a)(5)(B), added by section 739 of the Dodd-Frank Act.
\747\ See previously proposed 150.5(a)(4)(ii). Notwithstanding
any pre-existing exemption adopted by a DCM or SEF that applied to
speculative position limits in non-spot months, under the December
2013 Position Limits Proposal, a person holding pre-existing
commodity derivative contracts (except for pre-existing swaps as
described above) would be required to comply with spot month
speculative position limits. However, nothing in previously proposed
Sec. 150.5(a)(4) would override the exclusion of pre-Dodd-Frank and
transition period swaps from speculative position limits. December
2013 Position Limits Proposal, 78 FR at 75756, n. 675.
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Under the December 2013 Position Limits Proposal, the Commission
had proposed to require DCMs and SEFs that are trading facilities to
have aggregation polices that mirror the federal aggregation
provisions.\748\ Therefore,
[[Page 96787]]
previously proposed Sec. 150.5(a)(5) required DCMs and SEFs that are
trading facilities to have aggregation rules that conformed to the
uniform standards listed in Sec. 150.4.\749\ As noted in the December
2013 Position Limits Proposal, aggregation policies that vary from
exchange to exchange would increase the administrative burden on a
trader active on multiple exchanges, as well as increase the
administrative burden on the Commission in monitoring and enforcing
exchange-set position limits.\750\
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\748\ December 2013 Position Limits Proposal, 78 FR at 75754,
75756. As noted above, aggregation exemptions can be used, in
effect, as a way for a trader to acquire a larger speculative
position, and the Commission believes that it is important that the
aggregation rules set out, to the extent feasible, ``bright line''
standards that are capable of easy application by a wide variety of
market participants while not being susceptible to circumvention.
The December 2013 Position Limits Proposal also noted that ``. . .
position aggregation exemptions, if not uniform with the
Commission's requirements, may serve to permit a person to obtain a
larger position on a particular DCM or SEF than would be permitted
under the federal limits. For example, if an exchange were to grant
an aggregation position to a corporate person with aggregate
positions above federal limits, that exchange may permit such person
to be treated as two or more persons. The person would avoid
violating exchange limits, but may be in violation of the federal
limits. The Commission believes that a DCM or SEF, consistent with
its responsibilities under applicable core principles, may serve an
important role in ensuring compliance with federal positions limits
and thereby protect the price discovery function of its market and
guard against excessive speculation or manipulation. In the absence
of uniform . . . position aggregation exemptions, DCMs or SEFs may
not serve that role. December 2013 Position Limits Proposal, 78 FR
at 75754. See also 2016 Final Aggregation Rule (regarding amendments
to 150.4, which were approved by the Commission in a separate
release concurrently with this reproposed rulemaking).
\749\ Under the December 2013 Position Limits Proposal, 17 CFR
150.5(g) would be replaced with previously proposed Sec.
150.5(a)(5) which referenced 17 CFR 150.4 as the regulation
governing aggregation for contracts subject to federal position
limits.
\750\ December 2013 Position Limits Proposal, 78 FR at 75755.
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A DCM or SEF that is a trading facility would have continued to be
free to enforce position limits that are more stringent that the
federal limits. The Commission clarified in the December 2013 Position
Limits Proposal that federal spot month position limits do not to apply
to physical-delivery contracts after delivery obligations are
established.\751\ Exchanges generally prohibit transfer or offset of
positions once long and short position holders have been assigned
delivery obligations. Previously proposed Sec. 150.5(a)(6) clarified
acceptable practices for a DCM or SEF that is a trading facility to
enforce spot month limits against the combination of, for example, long
positions that have not been stopped, stopped positions, and deliveries
taken in the current spot month.\752\
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\751\ December 2013 Position Limits Proposal, 78 FR at 75756.
The Commission stated that, therefore, federal spot month position
limits do not apply to positions in physical-delivery contracts on
which notices of intention to deliver have been issued, stopped long
positions, delivery obligations established by the clearing
organization, or deliveries taken. Id. at 75756, n. 678.
\752\ Id. at 75756. The December 2013 Position Limits Proposal
noted, for example, that an exchange might restrict a speculative
long position holder that otherwise would obtain a large long
position, take delivery, and seek to re-establish a large long
position in an attempt to corner a significant portion of the
deliverable supply or to squeeze shorts. Previously proposed Sec.
150.5(b)(9) set forth the same acceptable practices for contracts
not subject to federal limits. Id. at 75756, n. 679.
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ii. Comments Received to December 2013 Position Limits Proposal
Regarding Proposed Sec. 150.5(a)
One commenter recommended that exchanges be required to withdraw
their position accountability and position limit regimes in deference
to any federal limits and to conform their position limits to the
federal limits so that a single regime will apply across
exchanges.\753\
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\753\ CL-DBCS-59569 at 4.
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Two commenters recommended that the Commission clarify that basis
contracts would be excluded from exchange-set limits in order to
provide consistency since such contracts are excluded from the
Commission's definition of referenced contract and thus are not subject
to Federal limits.\754\
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\754\ CL-FIA-59595 at 41; CL-Nodal-59695 at 3.
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One commenter recommended that DCMs and SEFs that are trading
facilities be given more discretion, particularly with respect to non-
referenced contracts, over aggregation requirements.\755\
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\755\ CL-AMG-59709 at 2, 10-11.
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iii. 2016 Supplemental Position Limits Proposal
In the 2016 Supplemental Position Limits Proposal, the Commission
proposed to amend Sec. 150.5(a)(2) as it was proposed in the December
2013 Position Limits Proposal.\756\ The amendments would permit
exchanges to recognize non-enumerated bona fide hedging positions under
Sec. 150.9, to grant spread exemptions from federal limits under Sec.
150.10, and to recognize certain enumerated anticipatory bona fide
hedging positions under Sec. 150.11, each as contained in the 2016
Supplemental Position Limits Proposal. In conjunction with those
amendments, the Commission proposed corresponding changes to Sec.
150.3 and Sec. 150.5(a)(2).
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\756\ As noted above, 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. See also 2016
Supplemental Position Limits Proposal, 81 FR at 38482.
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For example, Sec. 150.5(a)(2)(i), as proposed in the December 2013
Position Limits Proposal, required that any exchange rules providing
for hedge exemptions for commodity derivatives contracts subject to
federal position limits conform to the definition of bona fide hedging
position as defined in the amendments to Sec. 150.1 contained in the
December 2013 Position Limits Proposal. But because the 2016
Supplemental Position Limits Proposal incorporated the bona fide
hedging position definition and provided for spread exemptions in
150.3(a)(1)(i), the 2016 Supplemental Position Limits Proposal proposed
instead to cite to Sec. 150.3 in Sec. 150.5(a)(2).\757\ Similarly,
the application process provided for in Sec. 150.5(a)(2) was amended
to conform to the requirement in proposed Sec. 150.10 and Sec. 150.11
that exchange rules providing for exemptions for commodity derivatives
contracts subject to federal position limits require that traders
reapply on at least an annual basis. In addition, the changes to Sec.
150.5(a)(2) clarified that exchanges may deny an application, or limit,
condition, or revoke any exemption granted at any time.
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\757\ As proposed in the 2016 Supplemental Position Limits
Proposal, Sec. 150.5(a)(2)(i) provides that a DCM or SEF 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.''
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Similarly, the 2016 Supplemental Position Limits Proposal amended
previously proposed Sec. 150.5(b) to require that exchange rules
provide for recognition of a non-enumerated bona fide hedge ``in a
manner consistent with the process described in Sec. 150.9(a).''
Addressing the granting of spread exemptions for contracts not subject
to federal position limits, the 2016 Supplemental Position Limits
Proposal integrates in the standards of CEA section 4a(a)(3), providing
that exchanges should take into account those standards when
considering whether to grant spread exemptions. Finally, the 2016
Supplemental Position Limits Proposal clarified that for excluded
commodities, the exchange can grant certain exemptions provided under
paragraphs Sec. 150.5(b)(5)(i) and (b)(5)(ii) in addition to the risk
management exemption previously proposed in the December 2013 Position
Limits Proposal.\758\
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\758\ See Sec. 150.5(b)(5)(D) (stating that for excluded
commodities, a DCM or SEF may grant, pursuant to rules submitted to
the Commission, ``the exemptions under paragraphs (b)(5)(i) and
(b)(5)(ii)(A) through (C)''). While the December 2013 Position
Limits Proposal numbered the provisions applicable to excluded
commodities as Sec. 150.5(b)(5)(ii)(E), the 2016 Supplemental
Position Limits Proposal renumbered the provision as Sec.
150.5(b)(5)(ii)(D).
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[[Page 96788]]
iv. Comments Received on the 2016 Supplemental Position Limits Proposal
Regarding Sec. 150.5(a)
While comments were submitted on the 2016 Supplemental Position
Limits Proposal that addressed the proposed changes to the definitions
under Sec. 150.1, as well as to the proposed exchange processes for
recognition of non-enumerated bona fide hedges and anticipatory hedges,
and for granting spreads exemptions under proposed Sec. Sec. 150.9,
150.11, and 150.10, respectively, all of which indirectly affect Sec.
150.5(a), very few comments specifically addressed Sec. 150.5(a).
Comments received on the 2016 Supplemental Position Limits Proposal
regarding the other sections are addressed in the discussions of those
sections.\759\
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\759\ One example of an issue raised by several commenters
concerns the application procedures in Sec. Sec. 150.9(a)(4),
150.10(a)(4), and 150.11(a)(3), which requires market participants
to apply for recognition or an exemption in advance of exceeding the
limit. See, e.g., CL-FIA-60937 at 4, 13; CL-CME-60926 at 12; CL-ICE-
60929 at 11, 20-21; CL-NCGA-NGSA-60919 at 10-11; CL-EEI-EPSA-60925
at 4; CL-ISDA-60931 at 13; and CL-CMC-60950 at 3. For example, ICE
requested the insertion of a provision for exchanges to recognize
exemptions retroactively due to ``unforeseen hedging needs,'' and
also stated that certain exchanges currently utilize a similar rule
and it is ``critical in reflecting commercial hedging needs that
cannot always be predicted in advance.'' CL-ICE-60929 at 11.
---------------------------------------------------------------------------
One commenter urged the Commission to allow exchanges to maintain
their current authority to set speculative limits for both spot month
and all-months combined limits below federal limits to ensure that
convergence continues to occur.\760\
---------------------------------------------------------------------------
\760\ CL-NGFA-60941 at 2.
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While the Commission's retention of what is often referred to as
the five-day rule \761\ was included only in the revised definition of
bona fide hedging position under Sec. 150.1,\762\ several commenters
addressed the five-day rule in the context of Sec. 150.5 as proposed
in the 2016 Supplemental Position Limits Proposal.\763\ According to
the commenters, the decision of whether to apply the five-day rule to a
particular contract should be delegated to the exchanges because the
exchanges are in the best position to evaluate facts and circumstances,
and different markets have different dynamics and needs.\764\ In
addition, one commenter requested that the Commission specifically
authorize exchanges to grant bona fide hedging position and spread
exemptions during the last five days of trading or less.\765\ Two
commenters suggested, as an alternative approach if the five-day rule
remains, that the Commission instead rely on tools available to
exchanges to address concerns, such as exchanges requiring gradual
reduction of the position (``step down'' requirements) or revoking
exemptions to protect the price discovery process in core referenced
futures contracts approaching expiration.\766\ Another commenter argued
that in spite of any five-day rule that is adopted, exchanges should be
allowed to recognize non-enumerated bona fide hedging exemptions during
the last five trading days for enumerated strategies that are otherwise
subject to the five-day rule and the discretion to grant exemptions for
hedging strategies that would otherwise be subject to the five-day
rule.\767\
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\761\ The Commission's current definition of ``bona fide hedging
transactions and positions,'' under Sec. 1.3(z), applies the
``five-day rule'' in Sec. 1.3(z)(2) subsections (i)(B), (ii)(C),
(iii), and (iv). Under those sections of the ``five-day rule,'' no
such positions and transactions were maintained in the five last
days of trading. See Sec. 1.3(z).
\762\ As noted in the December 2013 Position Limits Proposal
(which did not change in the 2016 Supplemental Position Limits
Proposal), the Commission previously proposed to delete Sec. 1.3(z)
and replace it with a new definition in Sec. 150.1 of ``bona fide
hedging position.'' And, as noted above, the December 2013 Position
Limits Proposal retained the five-day rule. The previously proposed
definition was built on the Commission's history and was grounded
for physical commodities in the new requirements of CEA section
4a(c)(2) as amended by the Dodd-Frank Act. December 2013 Position
Limits Proposal, 78 FR at 75706.
\763\ E.g., CL-NCGA-ASA-60917 at 1-2; CL-CME-60926 at 14-15; CL-
ICE-60929 at 7-8; CL-ISDA-60931 at 11; CL-CCI-60935 at 3; CL-MGEX-
60936 at 4; CL-Working Group-60947 at 5, 7-9; CL-IECAssn-60949 at 7-
9; CL-CMC-60950 at 9-14; CL-NCC-ACSA-60972 at 2. No comments on the
December 2013 Position Limits Proposal specifically addressed the
``five-day rule'' in the context of Sec. 150.5.
\764\ See, e.g, CL-ISDA-60931 at 10; CL-CCI-60935 at 3; CL-MGEX-
60936 at 11; CL-Working Group-60947 at 7-9.
\765\ CL-CMC-60950 at 11-12.
\766\ CL-Working Group-60947 at 8; CL-IECAssn-60949 at 7-9.
\767\ CL-CME-60926 at 6, 8.
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One issue raised by several commenters \768\ that did not directly
address Sec. 150.5 concerns the application procedures in Sec. Sec.
150.9(a)(4), 150.10(a)(4), and 150.11(a)(3), which require market
participants to apply for recognition or an exemption in advance of
exceeding the limit.\769\ For example, one commenter requested the
insertion of a provision permitting exchanges to recognize exemptions
retroactively due to ``unforeseen hedging needs''; this commenter also
stated that certain exchanges currently utilize a similar rule and it
is ``critical in reflecting commercial hedging needs that cannot always
be predicted in advance.'' \770\ Another commenter requested that the
Commission allow exchanges to recognize a bona fide hedge exemption for
up to a five-day retroactive period in circumstances where market
participants need to exceed limits to address a sudden and unforeseen
hedging need.\771\ That commenter stated that CME and ICE currently
provide mechanisms for such recognition, which are used infrequently
but are nonetheless important. According to that commenter, ``[t]o
ensure that such allowances will not diminish the overall integrity of
the process, two effective safeguards under the current exchange-
administered processes could continue to be required. First, the
exchange rules could continue to require market participants making use
of the retroactive application to demonstrate that the applied-for
hedge was required to address a sudden and unforeseen hedging need. . .
. Second, if the emergency hedge recognition is not granted, the
exchange rules could continue to require the applicant to immediately
unwind its position and also deem the applicant to have been in
violation for any period in which its position exceeded the applicable
limits.\772\ While these comments address other sections, the
Commission will respond to these comments in explaining its reproposal
of Sec. 150.5.
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\768\ CL-FIA-60937 at 4, 13; CL-CME-60926 at 12; CL-ICE-60929 at
11, 20-21; CL-NCGA-NGSA-60919 at 10-11; CL-EEI-EPSA-60925 at 4; CL-
ISDA-60931 at 13; and CL-CMC-60950 at 3.
\769\ See 150.9(a)(4) (requiring each person intending to exceed
position limits to, among other things, ``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.'')
\770\ CL-ICE-60929 at 11.
\771\ CL-NCGA-NGSA-60919 at 10-11.
\772\ Id. at 11 (footnote omitted).
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v. Commission Determination Regarding Sec. 150.5(a)
The Commission has determined to repropose Sec. 150.5(a) as
proposed in the 2016 Supplemental Position Limits Proposal for the
reasons provided above with some changes, as detailed below.\773\
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\773\ For example, the Commission is reproposing the following
sections as previously proposed without change for the reasons
provided above: Sec. 150.5(a)(1); Sec. 150.5(a)(3) (Pre-enactment
and transition period swap positions), Sec. 150.5(a)(4) (Pre-
existing positions), and Sec. 150.5(a)(6) (Additional acceptable
practices); no substantive comments were received regarding those
sections.
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[[Page 96789]]
Although the Commission is reproposing Sec. 150.5(a)(1), in
response to the comment that the exchanges should conform their
position limits to the federal limits so that a single position limit
and accountability regime apply across exchanges,\774\ the Commission
believes that exchanges may find it prudent in the course of monitoring
position limits to impose lower (that is, more restrictive) limit
levels. The flexibility for exchanges to set more restrictive limits is
granted in CEA section 4a(e), which provides that if an exchange
establishes limits on a contract, those limits shall be set at a level
no higher than the level of any limits set by the Commission. This
expressly permits an exchange to set lower limit levels than federal
limit levels. The reproposed rules track this statutory provision.
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\774\ But see CL-NGFA-60941 at 2 (urging the Commission to allow
exchanges to maintain their current authority to set speculative
limits for both spot month and all-months combined limits below
federal limits).
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For purposes of clarification in response to comments on the
treatment of basis contracts, the reproposed rules provide a singular
definition of ``referenced contract'' which, as stated by the
commenters, excludes ``basis contracts.'' For commodities subject to
federal limits under reproposed Sec. 150.2, the definition of
referenced contract remains the same for federal and exchange-set
limits and may not be amended by exchanges. An exchange could, but is
not required to, impose limits on any basis contract independently of
the federal limit for the commodity in question, but a position in a
basis contract with an independent, exchange-set limit would not count
for the purposes of the federal limit.\775\
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\775\ The Commission notes that its singular definition of
``referenced contract'' that excludes ``basis contracts'' applies
not only to Sec. 150.5(a), but also to Sec. 150.5(b). Separately,
the Commission notes that in the future, it may determine to subject
basis contracts to a separate class limit in order to discourage
potential manipulation of the outright price legs of the basis
contract.
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After consideration of comments regarding Sec. 150.5(a)(2)(i)
(Grant of exemption),\776\ as proposed in the 2016 Supplemental
Position Limits Proposal, the Commission is reproposing it with
modifications. Reproposed Sec. 150.5(a)(2)(i) provides that any
exchange may grant exemptions from any speculative position limits it
sets under paragraph Sec. 150.5(a)(1), provided that such exemptions
conform to the requirements specified in Sec. 150.3, and provided
further that any exemptions to exchange-set limits not conforming to
Sec. 150.3 are capped at the level of the applicable federal limit in
Sec. 150.2.
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\776\ See, e.g., CL-ICE-60929 at 2-4, 7-8; CL-Working Group-
60947 at 14.
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The Commission notes that under the 2013 Position Limits Proposal,
exchanges could adopt position accountability at a level lower than the
federal limit (along with a position limit at the same level as the
federal limit); in such cases, the exchange would not need to grant
exemptions for positions no greater than the level of the federal
limit. Under the Reproposal, exchanges could choose, instead, to adopt
a limit lower than the federal limit; in such a case, the Commission
would permit the exchange to grant an exemption to the exchange's lower
limit, where such exemption does not conform to Sec. 150.3, provided
that such exemption to an exchange-set limit is capped at the level of
the federal limit. Such a capped exemption would basically have the
same effect as if the exchange set its speculative position limit at
the level of the federal limit, as required under DCM core principle
5(B) and SEF core principle 6(B)(1).\777\
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\777\ 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b-3(f)(6).
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In regards to the five-day rule, the Commission notes that the
reproposed rule does not apply the prudential condition of the five-day
rule to non-enumerated hedging positions. The Commission considered the
recommendations that the Commission: Allow exchanges to recognize a
bona fide hedge exemption for up to a five-day retroactive period in
circumstances where market participants need to exceed limits to
address a sudden and unforeseen hedging need; specifically authorize
exchanges to grant bona fide hedge and spread exemptions during the
last five days of trading or less, and/or delegate to the exchanges for
their consideration the decision of whether to apply the five-day rule
to a particular contract after their evaluation of the particular facts
and circumstances. As reproposed, and as discussed in connection with
the definition of bona fide hedging position,\778\ the five-day rule
would only apply to certain positions (pass-through swap offsets,
anticipatory and cross-commodity hedges).\779\ However, in regards to
exchange processes under Sec. 150.9, Sec. 150.10, and Sec. 150.11,
the Commission would allow exchanges to waive the five-day rule on a
case-by-case basis.
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\778\ See the discussion regarding the five-day rule in
connection with the definition of bona fide hedging position in the
discussion of Sec. 150.9 (Process for recognition of positions as
non-enumerated bona fide hedges).
\779\ See Sec. 150.1, definition of bona fide hedging position
sections (2)(ii)(A), (3)(iii), (4), and (5) (Other enumerated
hedging position). To provide greater clarity as to which bona fide
hedge positions the five-day rule applies, the reproposed rules
reorganize the definition.
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In addition, the Commission proposes to amend Sec. 150.5(a)(2)(ii)
(Application for exemption). The reproposed rule would permit exchanges
to adopt rules that allow a trader to file an application for an
enumerated bona fide hedging exemption within five business days after
the trader assumed the position that exceeded a position limit.\780\
The Commission expects that exchanges will carefully consider whether
allowing such retroactive recognition of an enumerated bona fide
hedging exemption would, as noted by one commenter, diminish the
overall integrity of the process.\781\ In addition, the Commission
cautions exchanges to carefully consider whether to adopt in those
rules the two safeguards recommended by that commenter: (i) Requiring
market participants making use of the retroactive application to
demonstrate that the applied-for hedge was required to address a sudden
and unforeseen hedging need; and (ii) providing that if the emergency
hedge recognition was not granted, exchange rules would continue to
require the applicant to unwind its position in an orderly manner and
also would deem the applicant to have been in violation for any period
in which its position exceeded the applicable limits.\782\
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\780\ The Reproposal includes a similar modification to Sec.
150.5(b)(5)(i).
\781\ CL-NCGA-NGSA-60919 at 10-11.
\782\ Id.
---------------------------------------------------------------------------
Concerning the comment recommending greater discretion be given
DCMs and SEFs that are trading facilities with respect to aggregation
requirements, the Commission reiterates its belief in the benefits of
requiring exchanges to conform to the federal standards on aggregation,
including lower burden and less confusion for traders active on
multiple exchanges,\783\ efficiencies in administration for both
exchanges and the Commission, and the prevention of a ``race-to-the-
bottom'' wherein exchanges compete over lower standards. The Commission
notes that the provision regarding aggregation in reproposed Sec.
150.5(a)(5) incorporates by reference Sec. 150.4 and thus would, on a
continuing basis, reflect any changes made to the aggregation standard
provided in the section.
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\783\ The Commission's belief is supported by requests from
multiple traders for industry-wide, standard aggregation
requirements.
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[[Page 96790]]
c. Sec. 150.5(b)--Requirements and Acceptable Practices for Commodity
Derivative Contracts That Are Not Subject to Federal Position Limits
i. December 2013 Position Limits Proposal
The Commission set forth in Sec. 150.5(b), as proposed in the
December 2013 Position Limits Proposal, requirements and acceptable
practices that would generally update and reorganize the set of
acceptable practices listed in current Sec. 150.5 as they relate to
contracts that are not subject to the federal position limits,
including physical and excluded commodities.\784\ As discussed above,
the Commission also proposed to revise Sec. 150.5 to implement uniform
requirements for DCMs and SEFs that are trading facilities relating to
hedging exemptions across all types of commodity derivative contracts,
including those that are not subject to federal position limits. The
Commission further proposed to require DCMs and SEFs that are trading
facilities to have uniform aggregation polices that mirrored the
federal aggregation provisions for all types of commodity derivative
contracts, including for contracts that were not subject to federal
position limits.\785\
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\784\ For position limits purposes, Sec. 150.1(k), as proposed
in the December 2013 Position Limits Proposal, would define
``physical commodity'' to mean any agricultural commodity, as
defined in 17 CFR 1.3, or any exempt commodity, as defined in
section 1a(20) of the Act. Excluded commodity is defined in section
1a(19) of the Act.
\785\ As Commission noted at that time, hedging exemptions and
aggregation policies that vary from exchange to exchange would
increase the administrative burden on a trader active on multiple
exchanges, as well as increase the administrative burden on the
Commission in monitoring and enforcing exchange-set position limits.
December 2013 Position Limits Proposal, 78 FR at 75756.
---------------------------------------------------------------------------
The previously proposed revisions to DCM and SEF acceptable
practices generally concerned how to: (1) Set spot-month position
limits; (2) set individual non-spot month and all-months-combined
position limits; (3) set position limits for cash-settled contracts
that use a referenced contract as a price source; (4) adjust position
limit levels after a contract has been listed for trading; and (5)
adopt position accountability in lieu of speculative position
limits.\786\
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\786\ See December 2013 Position Limits Proposal, 78 FR at
75757.
---------------------------------------------------------------------------
For spot months under the December 2013 Position Limits Proposal,
for a derivative contract that was based on a commodity with a
measurable deliverable supply, previously proposed Sec.
150.5(b)(1)(i)(A) updated the acceptable practice in current Sec.
150.5(b)(1) whereby spot month position limits should be set at a level
no greater than one-quarter of the estimated deliverable supply of the
underlying commodity.\787\ Previously proposed Sec. 150.5(b)(1)(i)(A)
clarified that this acceptable practice for setting spot month position
limits would apply to any commodity derivative contract, whether
physical-delivery or cash-settled, that has a measurable deliverable
supply.\788\
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\787\ As proposed in the December 2013 Position Limits Proposal,
Sec. 150.5(b)(1)(i)(A) was consistent with the Commission's
longstanding policy regarding the appropriate level of spot-month
limits for physical delivery contracts. These position limits would
be set at a level no greater than 25 percent of estimated
deliverable supply. The spot-month limits would be reviewed at least
every 24 months thereafter. The 25 percent formula narrowly targeted
the trading that may be most susceptible to, or likely to
facilitate, price disruptions. The goal for the formula, as noted in
the December 2013 Position Limits Proposal release, was to minimize
the potential for corners and squeezes by facilitating the orderly
liquidation of positions as the market approaches the end of trading
and by restricting swap positions that may be used to influence the
price of referenced contracts that are executed centrally. December
2013 Position Limits Proposal, 78 FR at 75756, n. 686.
\788\ The Commission noted in the December 2013 Position Limits
Proposal that, in general, the term ``deliverable supply'' means the
quantity of the commodity meeting a derivative contract's delivery
specifications that can reasonably be expected to be readily
available to short traders and saleable to long traders at its
market value in normal cash marketing channels at the derivative
contract's delivery points during the specified delivery period,
barring abnormal movement in interstate commerce. Previously
proposed Sec. 150.1 would define commodity derivative contract to
mean any futures, option, or swap contract in a commodity (other
than a security futures product as defined in CEA section 1a(45)).
December 2013 Position Limits Proposal, 78 FR at 75756, n. 687.
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For a derivative contract that was based on a commodity without a
measurable deliverable supply, the December 2013 Position Limits
Proposal proposed for spot months, in Sec. 150.5(b)(1)(i)(B), to
codify as guidance that the spot month limit level should be no greater
than necessary and appropriate to reduce the potential threat of market
manipulation or price distortion of the contract's or the underlying
commodity's price.\789\
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\789\ December 2013 Position Limits Proposal, 78 FR at 75757.
The Commission noted that this descriptive standard is largely based
on the language of DCM core principle 5 and SEF core principle 6.
The Commission does not suggest that an excluded commodity
derivative contract that is based on a commodity without a
measurable supply should adhere to a numeric formula in setting spot
month position limits. Id. at 75757, n. 688.
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Under previously proposed Sec. 150.5(b)(1)(ii)(A), the December
2013 Position Limits Proposal preserved the existing acceptable
practice in current Sec. 150.5(b)(2) whereby individual non-spot or
all-months-combined levels for agricultural commodity derivative
contracts that are not subject to the federal limits should be no
greater than 1,000 contracts at initial listing. As then proposed, the
rule would also codify as guidance that the 1,000 contract limit should
be taken into account when the notional quantity per contract is no
larger than a typical cash market transaction in the underlying
commodity, or reduced if the notional quantity per contract is larger
than a typical cash market transaction. Additionally, the December 2013
Position Limits Proposal proposed in Sec. 150.5(b)(1)(ii)(A), to
codify for individual non-spot or all-months-combined, that if the
commodity derivative contract was substantially the same as a pre-
existing DCM or SEF commodity derivative contract, then it would be an
acceptable practice for the DCM or SEF that is a trading facility to
adopt the same limit as applies to that pre-existing commodity
derivative contract.\790\
---------------------------------------------------------------------------
\790\ The Commission noted that ``in this context,
`substantially the same' means a close economic substitute. For
example, a position in Eurodollar futures can be a close economic
substitute for a fixed-for-floating interest rate swap.'' December
2013 Position Limits Proposal, 78 FR at 75757.
---------------------------------------------------------------------------
In Sec. 150.5(b)(1)(ii)(B), the December 2013 Position Limits
Proposal preserved the existing acceptable practice for individual non-
spot or all-months-combined in exempt and excluded commodity derivative
contracts, set forth in current Sec. 150.5(b)(3), for DCMs to set
individual non-spot or all-months-combined limits at levels no greater
than 5,000 contracts at initial listing.\791\ Previously proposed Sec.
150.5(b)(1)(ii)(B) would codify as guidance for exempt and excluded
commodity derivative contracts that the 5,000 contract limit should be
applicable when the notional quantity per contract was no larger than a
typical cash market transaction in the underlying commodity, or should
be reduced if the notional quantity per contract was larger than a
typical cash market transaction. Additionally, previously proposed
Sec. 150.5(b)(1)(ii)(B) would codify a new acceptable practice for a
DCM or SEF that is a trading facility to adopt the same limit as
applied to the pre-existing contract if the new commodity contract was
substantially the same as an existing contract.\792\
---------------------------------------------------------------------------
\791\ In contrast, 17 CFR 150.5(b)(3) lists this as an
acceptable practice for contracts for ``energy products and non-
tangible commodities.'' Excluded commodity is defined in CEA section
1a(19), and exempt commodity is defined CEA section 1a(20).
\792\ December 2013 Position Limits Proposal, 78 FR at 75757.
---------------------------------------------------------------------------
The December 2013 Position Limits Proposal provided in Sec.
150.5(b)(1)(iii)
[[Page 96791]]
that if a commodity derivative contract was cash-settled by referencing
a daily settlement price of an existing contract listed on a DCM or
SEF, then it would be an acceptable practice for a DCM or SEF to adopt
the same position limits as the original referenced contract, assuming
the contract sizes are the same. Based on its enforcement experience,
the Commission expressed the belief that limiting a trader's position
in cash-settled contracts in this way would diminish the incentive to
exert market power to manipulate the cash-settlement price or index to
advantage a trader's position in the cash-settled contract.\793\
---------------------------------------------------------------------------
\793\ December 2013 Position Limits Proposal, 78 FR at 75757. As
the Commission noted with respect to cash-settled contracts where
the underlying product is a physical commodity with limited
supplies, thus enabling a trader to exert market power (including
agricultural and exempt commodities), the Commission has viewed the
specification of speculative position limits to be an essential term
and condition of such contracts in order to ensure that they are not
readily susceptible to manipulation, which is the DCM core principle
3 requirement. Id. at 75757, n. 692.
---------------------------------------------------------------------------
In previously proposed Sec. 150.5(b)(2)(i)(A), the Commission was
updating the acceptable practices in current Sec. 150.5(c) for
adjusting limit levels for the spot month.\794\ For a derivative
contract that was based on a commodity with a measurable deliverable
supply, previously proposed Sec. 150.5(b)(2)(i)(A) maintained the
acceptable practice in current Sec. 150.5(c) to adjust spot month
position limits to a level no greater than one-quarter of the estimated
deliverable supply of the underlying commodity, but would apply this
acceptable practice to any commodity derivative contract, whether
physical-delivery or cash-settled, that has a measurable deliverable
supply. For a derivative contract that was based on a commodity without
a measurable deliverable supply, previously proposed Sec.
150.5(b)(2)(i)(B) would codify as guidance that the spot month limit
level should not be adjusted to levels greater than necessary and
appropriate to reduce the potential threat of market manipulation or
price distortion of the contract's or the underlying commodity's price.
In addition, the December 2013 Position Limit Proposal would have
codified in Sec. 150.5(b)(2)(i)(A) a new acceptable practice that spot
month limit levels be reviewed no less than once every two years.\795\
---------------------------------------------------------------------------
\794\ Id. at 75757.
\795\ Id. at 75757-58.
---------------------------------------------------------------------------
The December 2013 Position Limits Proposal explained that then
proposed Sec. 150.5(b)(2)(ii) maintained as an acceptable practice the
basic formula set forth in current Sec. 150.5(c)(2) for adjusting non-
spot-month limits at levels of no more than 10% of the average combined
futures and delta-adjusted option month-end open interest for the most
recent calendar year up to 25,000 contracts, with a marginal increase
of 2.5% of the remaining open interest thereafter.\796\ Previously
proposed Sec. 150.5(b)(2)(ii) would also maintain as an alternative
acceptable practice the adjustment of non-spot-month limits to levels
based on position sizes customarily held by speculative traders in the
contract.\797\ Previously proposed Sec. 150.5(b)(3) generally updated
and reorganized the existing acceptable practices in current Sec.
150.5(e) for a DCM or SEF that is a trading facility to adopt position
accountability rules in lieu of position limits, under certain
circumstances, for contracts that are not subject to federal position
limits. As noted in the December 2013 Position Limits Proposal, this
section would reiterate the DCM's authority, with conforming changes
for SEFs, to require traders to provide information regarding their
position when requested by the exchange.\798\ In addition, previously
proposed Sec. 150.5(b)(3) would codify a new acceptable practice for a
DCM or SEF to require traders to consent to not increase their position
in a contract if so ordered, as well as a new acceptable practice for a
DCM or SEF to require traders to reduce their position in an orderly
manner.\799\
---------------------------------------------------------------------------
\796\ Id. at 75758.
\797\ Id.
\798\ Id. Cf. 17 CFR 150.5(e)(2)-(3).
\799\ December 2013 Position Limits Proposal, 78 FR at 75758.
---------------------------------------------------------------------------
The December 2013 Position Limits Proposal would maintain under
Sec. 150.5(b)(3)(i) the acceptable practice for a DCM or SEF to adopt
position accountability rules outside the spot month, in lieu of
position limits, for an agricultural or exempt commodity derivative
contract that: (1) Had an average month-end open interest of 50,000 or
more contracts and an average daily volume of 5,000 or more contracts
during the most recent calendar year; (2) had a liquid cash market; and
(3) was not subject to federal limits in Sec. 150.2--provided,
however, that such DCM or SEF that is a trading facility should adopt a
spot month speculative position limit with a level no greater than one-
quarter of the estimated spot month deliverable supply.\800\
---------------------------------------------------------------------------
\800\ The December 2013 Position Limits Proposal noted that 17
CFR 150.5(e)(3) applies this acceptable practice to a ``tangible
commodity, including, but not limited to metals, energy products, or
international soft agricultural products.'' Id. at 75758. It also
cited to the comparison of the ``minimum open interest and volume
test'' in proposed Sec. 150.5(b)(3)(A) to that in current Sec.
150.5(e)(3). Id.
---------------------------------------------------------------------------
The December 2013 Position Limits Proposal would maintain in Sec.
150.5(b)(3)(ii)(A) the acceptable practice for a DCM or SEF to adopt
position accountability rules in the spot month in lieu of position
limits for an excluded commodity derivative contract that had a highly
liquid cash market and no legal impediment to delivery.\801\ For an
excluded commodity derivative contract without a measurable deliverable
supply, previously proposed Sec. 150.5(b)(3)(ii)(A) would codify an
acceptable practice for a DCM or SEF to adopt position accountability
rules in the spot month in lieu of position limits because there was
not a deliverable supply that was subject to manipulation. However, for
an excluded commodity derivative contract that had a measurable
deliverable supply, but that may not be highly liquid and/or was
subject to some legal impediment to delivery, previously proposed Sec.
150.5(b)(3)(ii)(A) set forth an acceptable practice for a DCM or SEF to
adopt a spot-month position limit equal to no more than one-quarter of
the estimated deliverable supply for that commodity, because the
estimated deliverable supply may be susceptible to manipulation.\802\
Furthermore, the December 2013 Position Limits Proposal in Sec.
150.5(b)(3)(ii) would remove the ``minimum open interest and volume''
test for excluded commodity derivative contracts generally.\803\
Finally, the December 2013 Position Limits Proposal would codify in
Sec. 150.5(b)(3)(ii)(B) an acceptable practice for a DCM or SEF to
adopt position accountability levels for an excluded commodity
derivative contract in lieu of position limits in the individual non-
spot month or all-months-combined.
---------------------------------------------------------------------------
\801\ Id.
\802\ Id.
\803\ Id. The December 2013 Position Limits Proposal pointed out
that the ``minimum open interest and volume'' test, as presented in
17 CFR 150.5(e)(1)-(2), need not be used to determine whether an
excluded commodity derivative contract should be eligible for
position accountability rules in lieu of position limits in the spot
month. Id.
---------------------------------------------------------------------------
The December 2013 Position Limits Proposal added in Sec.
150.5(b)(3)(iii) a new acceptable practice for an exchange to list a
new contract with position accountability levels in lieu of position
limits if that new contract was substantially the same as an existing
contract that was currently listed for trading on an exchange that had
already
[[Page 96792]]
adopted position accountability levels in lieu of position limits.\804\
---------------------------------------------------------------------------
\804\ See supra discussion of what is meant by ``substantially
the same'' in this context. See also December 2013 Position Limits
Proposal, 78 FR at 75757, n. 690.
---------------------------------------------------------------------------
As previously proposed, Sec. 150.5(b)(4) would maintain the
acceptable practice that for contracts not subject to federal position
limits, DCMs and SEFs should calculate trading volume and open interest
in the manner established in current Sec. 150.5(e)(4).\805\ The
Commission stated in the December 2013 Position Limits Proposal that
then proposed Sec. 150.5(b)(4) would build upon these standards by
accounting for swaps in referenced contracts on a futures-equivalent
basis.\806\
---------------------------------------------------------------------------
\805\ As noted in the December 2013 Position Limits Proposal,
for SEFs, trading volume and open interest for swaptions should be
calculated on a delta-adjusted basis. See id. at 75758, n. 697.
\806\ See id. at 75698-99 (defining ``Futures-equivalent'' in
Sec. 150.1 to account for swaps in referenced contracts).
---------------------------------------------------------------------------
As noted above, under the December 2013 Position Limits proposal,
the Commission proposed to require DCMs and SEFs to have uniform
hedging exemptions and aggregation polices that mirror the federal
aggregation provisions for all types of commodity derivative contracts,
including for contracts that are not subject to federal position
limits. The Commission explained that hedging exemptions and
aggregation policies that vary from exchange to exchange would increase
the administrative burden on a trader active on multiple exchanges, as
well as increase the administrative burden on the Commission in
monitoring and enforcing exchange-set position limits.\807\ Therefore,
the December 2013 Position Limits Proposal in Sec. 150.5(b)(5)(i)
would require any hedge exemption rules adopted by a designated
contract market or a swap execution facility that is a trading facility
to conform to the definition of bona fide hedging position in
previously proposed Sec. 150.1.\808\
---------------------------------------------------------------------------
\807\ See December 2013 Position Limits Proposal, 78 FR at
75756. See also supra regarding Sec. 150.5(a)(5).
\808\ The requirement proposed in Sec. 150.5(b)(8) that DCMs
and SEFs have uniform aggregation polices that mirror the federal
aggregation provisions is addressed below.
---------------------------------------------------------------------------
The December 2013 Position Limits Proposal also set forth in Sec.
150.5(b)(5)(ii) acceptable practices for DCMs and SEFs to grant
exemptions from position limits for positions, other than bona fide
hedging positions, in contracts not subject to federal limits. The
exemptions in Sec. 150.5(b)(5)(ii) under the December 2013 Position
Limits Proposal generally tracked the exemptions then proposed in Sec.
150.3; acceptable practices were suggested based on the same logic that
underpinned those exemptions.\809\ The acceptable practices
contemplated that a DCM or SEF might grant exemptions under certain
circumstances for financial distress, intramarket and intermarket
spread positions (discussed above), and qualifying cash-settled
contract positions in the spot month.\810\ Previously proposed Sec.
150.5(b)(5)(ii)(E) also set forth an acceptable practice for a DCM or
SEF to grant for contracts on excluded commodities, a limited risk
management exemption pursuant to rules submitted to the Commission, and
consistent with the guidance in new Appendix A to part 150.\811\
---------------------------------------------------------------------------
\809\ See December 2013 Position Limits Proposal, 78 FR at
75735-41, 75827-28. See also supra discussion of the Sec. 150.3
exemptions.
\810\ See id.
\811\ As the Commission noted, previously proposed Appendix A to
part 150 ``is intended to capture the essence of the Commission's
1987 interpretation of its definition of bona fide hedge
transactions to permit exchanges to grant hedge exemptions for
various risk management transactions. See Risk Management Exemptions
From Speculative Position Limits Approved Under Commission
Regulation 1.61, 52 FR 34633, Sep. 14, 1987.'' The Commission also
specified that such exemptions be granted on a case-by-case basis,
subject to a demonstrated need for the exemption, required that
applicants for these exemptions be typically engaged in the buying,
selling, or holding of cash market instruments, and required the
exchanges to monitor the exemptions they granted to ensure that any
positions held under the exemption did not result in any large
positions that could disrupt the market. Id. See also December 2013
Position Limits Proposal, 78 FR at 75756, n. 683.
---------------------------------------------------------------------------
The December 2013 Position Limits Proposal provided in Sec.
150.5(b)(6)-(7) acceptable practices relating to pre-enactment and
transition period swap positions (as those terms were defined in
previously proposed Sec. 150.1),\812\ as well as to commodity
derivative contract positions acquired in good faith prior to the
effective date of mandatory federal speculative position limits.\813\
---------------------------------------------------------------------------
\812\ See supra discussion of pre-enactment and transition
period swap positions.
\813\ December 2013 Position Limits Proposal, 78 FR at 75756,
75831.
---------------------------------------------------------------------------
Additionally, for any contract that is not subject to federal
position limits, previously proposed Sec. 150.5(b)(8) required the DCM
or SEF that is a trading facility to conform to the uniform federal
aggregation provisions.\814\ As noted above, aggregation policies that
vary from exchange to exchange would increase the administrative burden
on a trader active on multiple exchanges, as well as increase the
administrative burden on the Commission in monitoring and enforcing
exchange-set position limits. The requirement generally mirrored the
requirement in Sec. 150.5(a)(5) for contracts that are subject to
federal position limits by requiring the DCM or SEF that is a trading
facility to have aggregation rules that conform to previously proposed
Sec. 150.4.\815\
---------------------------------------------------------------------------
\814\ Proposed Sec. 150.5(b)(7) would replace 17 CFR 150.5(g)
as it relates to contracts that are not subject to federal position
limits.
\815\ Id. at 75756.
---------------------------------------------------------------------------
ii. Comments Received to December 2013 Position Limits Proposal
Regarding Sec. 150.5(b)
Three commenters on previously proposed regulation Sec. 150.5
recommended that the Commission not require SEFs to establish position
limits.\816\ 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.\817\ Further, during the ongoing SEF
registration process,\818\ a number of entities applying to become
registered as SEFs told the Commission that they lacked access to
information that would enable them to knowledgeably establish position
limits or monitor positions.\819\ The Commission observes that this
[[Page 96793]]
information gap would also be a concern for DCMs in respect of swaps.
---------------------------------------------------------------------------
\816\ CL-CMC-59634 at 14-15; CL-FIA-60392 at 10; and CL-ISDA/
SIFMA-59611 at 35. 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. CL-ISDA/SIFMA-59611 at 35.
\817\ CL-CMC-59634 at 14-15; and CL-FIA-60392 at 10.
\818\ 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). A SEF must comply with core
principles, including Core Principle 6 regarding position limits, as
a condition of registration. CEA section 5h(f)(1), 7 U.S.C. 7b-
3(f)(1).
\819\ 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).
---------------------------------------------------------------------------
One commenter expressed the view that deliverable supply
calculations used to establish spot month limits should be based on
commodity specific actual physical transport/transmission, generation
and production.\820\
---------------------------------------------------------------------------
\820\ CL-EDF-60398 at 6-7.
---------------------------------------------------------------------------
One commenter urged the Commission to allow the listing exchange to
set non-spot month limits at least as high as the spot-month position
limit, rather than base the non-spot month limit strictly on the open
interest formula.\821\ Another commenter recommended that the
Commission remove from Sec. 150.5(b)(1)(ii)(B) the provision setting a
5,000 contract limit for non-spot-month or all-months-combined
accountability levels for exempt commodities, because that level may
not be appropriate for all markets; instead, the Commission should rely
on the exchanges to set accountability levels for exempt commodity
markets.\822\
---------------------------------------------------------------------------
\821\ CL-ICE-59962 at 7.
\822\ CL-Nodal-59695 at 3.
---------------------------------------------------------------------------
One commenter recommended that DCMs be permitted to establish
position accountability levels in lieu of position limits outside of
the spot month.\823\ The commenter recommended that the administration
of position accountability should be coordinated with the Commission
and other DCMs to the extent that a market participant holds positions
on more than one DCM.\824\
---------------------------------------------------------------------------
\823\ CL-FIA-59595 at 5, 39 and 41; see also CL-FIA-60303 at 3-
4.
\824\ CL-FIA-60392 at 9.
---------------------------------------------------------------------------
iii. 2016 Supplemental Position Limits Proposal
In the 2016 Supplemental Position Limits Proposal, the Commission
proposed to revise Sec. 150.5(b)(5) from what was proposed in the
December 2013 Position Limits Proposal; proposed Sec. 150.5(b)
establishes requirements and acceptable practices that pertain to
commodity derivative contracts not subject to federal position
limits.\825\ The proposed revisions to Sec. 150.5(b)(5) would, under
the 2016 Supplemental Position Limits Proposal, permit exchanges, in
regards to commodity derivative contracts not subject to federal
position limits, to recognize non-enumerated bona fide hedging
positions, as well as spreads. Moreover, the exchanges would no longer
be prohibited from recognizing spreads during the spot month.\826\
Instead, as the Commission noted in the 2016 Supplemental Position
Limits Proposal, what it was proposing would, in part, maintain the
status quo: Exchanges that currently recognize spreads in the spot
month under current Sec. 150.5(a) would be able to continue to do so.
Rather than a prohibition, the exchanges would be responsible for
determining whether recognizing spreads, including spreads in the spot
month, would further the policy objectives in section 4a(a)(3) of the
Act.\827\
---------------------------------------------------------------------------
\825\ 2016 Supplemental Position Limits Proposal, 81 FR at
38482.
\826\ Id. at 38482, 38506-7. Compare December 2013 Position
Limits Proposal, 78 FR at 75830.
\827\ 2016 Supplemental Position Limits Proposal, 81 FR at
38482, 38506-07.
---------------------------------------------------------------------------
iv. Comments Received to 2016 Supplemental Position Limits Proposal
Regarding Sec. 150.5(b)
Exchange-Administered Exemptions Under Sec. 150.5(b)
Several commenters requested clarification as to the application of
exchange-administered exemption requests to non-referenced contracts
generally under Sec. 150.5(b).\828\ In addition, several commenters
raised concerns with the requirement in Sec. 150.5(b)(5)(i) that the
exchanges provide exemptions ``in a manner consistent with the process
described in Sec. 150.9(a).'' \829\ Similarly, according to one
commenter, the exchanges should not be bound to the same exemption
process provided under proposed CFTC Regulation 150.9 when
administering exemptions from exchange-set limits. Rather, the
commenter recommended that the Commission: ``(i) not adopt proposed
CFTC Regulation 150.5(b)(5)(i) in any final rule issued in this
proceeding or (ii) clarify that the phrase `in a manner consistent with
the process described in [proposed CFTC Regulation] 150.5(b)(5)(i)'
does not mean that the Exchanges must apply the virtually identical
process for recognizing non-enumerated bona fide hedging positions
under proposed CFTC Regulation 150.9(a) to their exemption process for
exchange-set speculative position limits.'' \830\
---------------------------------------------------------------------------
\828\ CMC, for example, requested that the Commission clarify
that exchange-granted hedge exemption procedures would be
``applicable if, and to the extent that, the exchange granted
exemption exceeds federally established speculative position limits
and not otherwise.'' CL-CMC-60950 at 14. According to CME, on the
other hand, proposed section 150.5(b) was unclear and ambiguous and
so should be reproposed. For example, CME stated that the proposal
was ``riddled with ambiguities and potential oversights,'' and, in
connection with non-referenced contracts under section 150.5(b), CME
also stated ``the scope of exchange discretion under proposed
section 150.9(a) is unclear. Thus, exchanges could be bound by the
five-day rule in recognizing as NEBFH positions certain enumerated
hedge strategies for non-referenced contracts, despite the same
five-day rule limitation not applying in similar scenarios today.''
CL-CME-60926 at 14-15.
\829\ CL-CME-60926 at 14-15; CL-Working Group-60947 at 14; and
CL-ICE-60929 at 8. For example, CME stated that requiring exchanges
to recognize non-enumerated bona fide hedge positions for non-
referenced contracts ``in a manner consistent with the process
described in Sec. 150.9(a)'' appears to ``break with historical
practice in administering NEBFHs for non-referenced contracts,'' and
``would appear to impose new burdensome and unnecessary compliance
obligations on market participants that do not exist today.'' CL-
CME-60926 at 14-15.
\830\ CL-Working Group-60947 at 14.
---------------------------------------------------------------------------
Another commenter stated that the Commission should remove the
requirements of Sec. 150.5(b) that apply the exemption procedures of
Sec. 150.9 to exemptions granted for contracts in excluded commodities
and physical commodities that are not subject to federal position
limits. In support of this request, the commenter maintained that
exchange exemption programs have been operating successfully without
the need for such rules, and exchanges do not require additional
guidance from the Commission on how to assess recognitions under the
2016 Supplemental Position Limits Proposal and that rule enforcement
reviews are adequate.\831\
---------------------------------------------------------------------------
\831\ CL-ICE-60929 at 8.
---------------------------------------------------------------------------
Treatment of Spread and Anticipatory Hedge Exemptions Under Sec.
150.5(b)
Several commenters requested that the Commission clarify that
spread and anticipatory hedge exemptions are unnecessary for excluded
commodities and other products not subject to federal limits. For
example, one commenter seeks clarity regarding the application of Sec.
150.5(b) to spread exemption and anticipatory hedge exemption requests,
stating that ``[p]roposed section 150.5(b) is silent with respect to
anticipatory hedges contemplated under the process in proposed section
150.11, and makes no reference in proposed section 150.5(b)(5)(ii)(C)
to the process in proposed section 150.10 when describing spread
exemptions an exchange may recognize. The Commission must clarify
whether it intends that market participants and exchanges may avail
themselves of such processes in applying for and recognizing exemptions
from exchange limits for non-referenced contracts.'' \832\ On the other
hand, in the associated footnote, the same commenter observes
``[h]owever, in its cost-benefit analysis, the Commission notes that
proposed section 150.11 `works in concert with' `proposed Sec.
150.5(b)(5), with the effect that recognized anticipatory enumerated
[[Page 96794]]
bona fide hedging positions may exceed exchange-set position limits for
contracts not subject to federal position limits.' '' \833\
---------------------------------------------------------------------------
\832\ CL-CME-60926 at 15.
\833\ Id.
---------------------------------------------------------------------------
Another commenter urges the Commission to clarify that spread and
anticipatory hedge exemptions are unnecessary for excluded commodities
and other products not subject to federal limits. In this regard, the
commenter seeks the removal of requirements found in Sec.
150.5(b).\834\ A third commenter states that extending the requirements
for exchange hedge exemption rules to contracts on excluded commodities
is ``clearly an error'' that needs to be rectified, stating that there
was no discussion of this expansion in the preamble to the
Supplemental. According to the commenter, ``there is no basis in the
Dodd-Frank amendments to the CEA for this extension of the Commission's
authority over exchange position limits on excluded commodities. To the
contrary, that authority is clearly limited to position limits on
contracts on physical commodities.'' \835\
---------------------------------------------------------------------------
\834\ CL-CMC-60950 at 14.
\835\ CL-ISDA-60931 at 11.
---------------------------------------------------------------------------
Reporting Requirements Under Sec. 150.5(b)
According to one commenter, the 2016 Supplemental Position Limits
Proposal does not provide any explanation regarding the Commission's
need to receive from the exchanges the same exemption reports for non-
referenced contracts that it would receive for referenced contracts.
The commenter states that the 2016 Supplemental Position Limits
Proposal characterizes exchange submissions of exemption recipient
reports to the CFTC as ``support[ing] the Commission's surveillance
program, by facilitating the tracking of non-enumerated bona fide
hedging positions 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.'' \836\ While
acknowledging that the Commission has a surveillance obligation with
respect to federal limits, the commenter maintains that, ``the same
obligation has never before existed with respect to exchange-set limits
for non-referenced contracts, and does not exist today.'' \837\ The
commenter also states that the Commission has misinterpreted its
mandate and therefore should drop this unnecessary reporting
requirement and related procedures with respect to non-referenced
contracts.''
---------------------------------------------------------------------------
\836\ CL-CME-60926 at 15, quoting the 2016 Supplemental Position
Limits Proposal, 81 FR at 38475.
\837\ Id.
---------------------------------------------------------------------------
Five-Day Rule Under Sec. 150.5(b)
As noted above, several commenters \838\ addressed the five-day
rule, suggesting that the decision whether to apply the five-day rule
to a particular contract should be delegated to the exchanges as the
exchanges are in the best position to evaluate facts and circumstances,
and different markets have different dynamics and needs.\839\ And,
specifically in connection with non-referenced contracts under Sec.
150.5(b), one commenter states that, as it believes that the scope of
exchange discretion under proposed section 150.9(a) is unclear,
``exchanges could be bound by the five-day rule in recognizing as non-
enumerated bona fide hedging positions certain enumerated hedge
strategies for non-referenced contracts, despite the same five-day rule
limitation not applying in similar scenarios today.'' \840\
---------------------------------------------------------------------------
\838\ E.g., CL-NCGA-ASA-60917 at 1-2; CL-CME-60926 at 14-15; CL-
ICE-60929 at 7-8; CL-ISDA-60931 at 11; CL-CCI-60935 at 3; CL-MGEX-
60936 at 4; CL-Working Group-60947 at 5, 7-9; CL-IECAssn-60949 at 7-
9; CL-CMC-60950 at 9-14; CL-NCC-ACSA-60972 at 2.
\839\ See, e.g, CL-ISDA-60931 at 10; CL-CCI-60935 at 3; CL-MGEX-
60936 at 11; CL-Working Group-60947 at 7-9.
\840\ CL-CME-60926 at 14-15.
---------------------------------------------------------------------------
Comment Letter Received After the Close of the Comment Period for the
2016 Supplemental Position Limits Proposal Regarding Limit Levels Under
Sec. 150.5(b)
One commenter noted that when the CEA addresses ``linked
contracts'' in CEA section 4(b)(1)(B)(ii)(I), in relation to FBOTS, it
provides that the Commission may not permit an FBOT to provide direct
access to participants located in the United States unless the
Commission determines that the FBOT (or the foreign authority
overseeing the FBOT) adopts position limits that are comparable to the
position limits adopted by the registered entity for the contract(s)
against which the FBOT contract settles.\841\ According to the
commenter, CEA section 4(b), which was added by the Dodd-Frank Act,
``contains an explicit Congressional endorsement of `comparable' ''
limits for cash-settled contracts in relation to the physically-
delivered contracts to which they are linked.\842\ The statutory
definition of ``linked contract,'' the commenter stated, ``mirrors the
definition of `referenced contract' in the Commission's 2013 position
limits proposal: Both definitions capture cash-settled contracts that
are `linked' to the price of a physically-delivered contract traded on
a DCM (referred to as a `core referenced futures contract' in the
proposal).'' \843\ That commenter stated that the only place in the CEA
which addresses how to treat a cash-settled contract and its
physically-delivered benchmark contract for position limit purposes is
in CEA section 4(b), claiming that ``Congress unmistakably wanted the
two trading instruments to be treated `comparably.' '' \844\
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\841\ See CL-CME-61007 at 2-4; CL-CME-61008 at 2-3.
\842\ See CL-CME-61007 at 2.
\843\ Id. at 3. CME claims that the underlying Congressional
intent is clear, stating that whether a cash-settled contract is
called a ``linked contract'' or a ``referenced contract,'' ``the
limit levels and hedge exemptions for that contract and the related
physically-delivered contract must be `comparable.'' Id.
\844\ Id.
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In addition, according to the commenter, when the Commission, in
response to the Dodd-Frank Act provisions regarding FBOTs in amended
CEA section 4(b), adopted final Sec. 48.8(c)(1)(ii)(A), ``it
acknowledged that a linked contract and its physically-delivered
benchmark contract `create a single market' capable of being affected
through trading in either of the linked or physically-delivered
markets,'' and further noted that the Commission ``observed that the
price discovery process would be protected by `ensuring that [ ] linked
contracts have position limits and accountability provisions that are
comparable to the corresponding [DCM] contracts [to which they are
linked].' '' \845\
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\845\ Id.
incorrectly attributed preamble language as pertaining to Sec.
48.8(c)(1)(ii)(A), which addresses statutory requirements, when it
stated that the Commission ``acknowledged that a linked contract and
its physically-delivered benchmark contract `create a single market'
capable of being affected through trading in either of the linked or
physically-delivered markets'' as this discussion actually addressed
the Commission's adoption of its second set of conditions for linked
contracts, found in Sec. 48.8(c)(2) (Other Conditions on Linked
Contracts).
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iv. Commission Determination Regarding Sec. 150.5(b)
The Commission has determined to repropose Sec. 150.5(b) generally
as proposed in the the 2016 Supplemental Position Limits Proposal, for
the reasons stated above, with specific exceptions discussed
below.\846\ An overall non-substantive change has been made in
reproposing Sec. 150.5 pertaining to excluded commodities. To provide
[[Page 96795]]
greater clarity regarding which provisions concern excluded
commodities, the Commission proposes to move all provisions applying to
excluded commodities from Sec. 150.5(b) into Sec. 150.5(c). As the
Commission observed in the December 2013 Position Limits Proposal,
``CEA section 4a(a) only mandates position limits with respect to
physical commodity derivatives (i.e., agricultural commodities and
exempt commodities).
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\846\ The Commission is reproposing the following sections
without further discussion, for the reasons provided above, since no
substantive comments were received: Sec. 150.5(b)(6)(Pre-enactment
and transition period swap positions), Sec. 150.5(b)(7) (Pre-
existing positions), and Sec. 150.5(b)(9) (Additional acceptable
practices).
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Additionally, the Commission proposes to make some substantive
revisions specific to excluded commodities in what was previously Sec.
150.5 (b), addressed in the discussion of Sec. 150.5(c).
Limit Levels for Commodity Derivative Contracts in a Physical Commodity
Not Subject to Federal Limits
In response to the comment regarding the method for calculating
deliverable supply, the Commission notes that guidance for calculating
deliverable supply can be found in Appendix C to part 38. Amendments to
part 38 are beyond the scope of this rulemaking. However, that guidance
already provides that deliverable supply calculations are estimates
based on what ``reasonably can be expected to be readily available'' on
a monthly basis based on a number of types of data from the physical
marketing channels, as suggested by the commenter, and these
calculations are done for each month and each commodity separately.
Furthermore, much of Sec. 150.5(b) reiterates longstanding guidance
and acceptable practices for DCMs, rather than proposing new concepts
for administering limits on contracts that are not subject to federal
limits under Sec. 150.2.
The Commission agrees with the commenter urging the Commission to
allow exchanges to set non-spot month limits at least as high as the
spot-month position limit, in the event the open interest formula would
result in a limit level lower than the spot month. Accordingly,
consistent with the recommended revisions to the initial limit level
listings for contracts subject to federal limits found in Sec.
150.2(e)(4)(iv), the Commission proposes to revise Sec.
150.5(b)(2)(ii) to allow exchanges to set non-spot month limit levels
at the maximum of the spot month limit level, the level derived from
the 10/2.5% formula, or 5,000 contracts. To conform with those
revisions, the Commission also proposes to revise Sec.
150.5(b)(1)(ii)(A)-(B) to remove the distinction between agricultural
and exempt commodities.
Regarding the commenter who expressed concern regarding
requirements for accountability levels for exempt commodities, the
Commission notes that the provisions set forth guidance and acceptable
practices for exchanges in setting position limit levels and
accountability levels and, as guidance and acceptable practices, are
not binding regulations. Under the Commission's guidance, an initial
non-spot month limit level of no more than 5,000 is viewed as suitable.
Similarly, in response to the commenter who recommended that DCMs
be permitted to establish position accountability levels in lieu of
position limits outside the spot month and coordinate the
administration of such levels with the Commission and other DCMs, the
Commission agrees that position accountability may be permitted for
certain physical commodity derivative contracts. Reproposed Sec.
150.5(b)(3), therefore, provides guidance and acceptable practices
concerning exchange adoption of position accountability outside the
spot month for contracts having an average month-end open interest of
50,000 contracts and an average daily volume of 5,000 or more contracts
during the most recent calendar year and a liquid cash market. The
Commission again notes that guidance and acceptable practices do not
establish mandatory means of compliance. As such, in regards to meeting
the specified volume and open interest thresholds in Sec. 150.5(b)(3),
the Commission notes that the guidance in Sec. 150.5(b)(3)(i) may not
be the only circumstances under which sufficiently high liquidity may
be shown to exist for the establishment of position accountability
levels in lieu of position limits.
The December 2013 Position Limits Proposal provided in Sec.
150.5(b)(1)(iii) that if a commodity derivative contract was cash-
settled by referencing a daily settlement price of an existing contract
listed on a DCM or SEF, then it would be an acceptable practice for a
DCM or SEF to adopt the same position limits as the original referenced
contract, assuming the contract sizes are the same.\847\ However, the
Commission is reproposing Sec. 150.5(b)(1)(iii) with a modification:
While the previously proposed guidance in Sec. 150.5(b)(1)(iii)
provided that the exchange should adopt the ``same'' spot-month,
individual non-spot month, and all-months combined limit levels as the
original price referenced contract, the Commission is reproposing Sec.
150.5(c)(1)(iii) to provide that the limit levels should, instead, be
``comparable.''
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\847\ The Commission expressed the belief that, based on its
enforcement experience, limiting a trader's position in cash-settled
contracts in this way would diminish the incentive to exert market
power to manipulate the cash-settlement price or index to advantage
a trader's position in the cash-settled contract. See December 2013
Position Limits Proposal, 78 FR at 75757. As the Commission noted
with respect to cash-settled contracts where the underlying product
is a physical commodity with limited supplies, thus enabling a
trader to exert market power (including agricultural and exempt
commodities), the Commission has viewed the specification of
speculative position limits to be an essential term and condition of
such contracts in order to ensure that they are not readily
susceptible to manipulation, which is the DCM core principle 3
requirement. Id. at 75757, n. 692.
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As pointed out by one commenter,\848\ the CEA establishes a
comparability standard for linked FBOT contracts in CEA section
4(b)(1)(B)(ii)(I), when it provides that the Commission may not permit
an FBOT to provide direct access to participants located in the United
States unless the Commission determines that the FBOT (or the foreign
authority overseeing the FBOT) adopts position limits that are
``comparable to'' the position limits adopted by the registered entity
for the contract(s) against which the FBOT contract settles.\849\ In
addition, as noted by the commenter, the Commission, in adopting Sec.
48.8(c)(2), recognized that the comparability standard and its
associated requirements would protect the price discovery process by
ensuring that the linked contracts and the U.S. contracts to which they
are linked ``have position limits and accountability provisions that
are comparable to the corresponding [DCM] contracts [to which they are
linked].' '' \850\ The Commission notes that this change will better
align Sec. 150.5(b)(1)(iii) with the statute and with the standard
provided in Sec. 48.8(c).\851\ Moreover, use of
[[Page 96796]]
``comparable'' rather than ``same'' limit levels provides exchanges
with a more flexible standard based on statutory language.\852\ This
change also provides a standard that is consistent with existing
practice for domestic contracts that are linked to the price of a
physical-delivery contract.\853\
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\848\ See, e.g., CL-CME-61007 at 2-4; CL-CME-61008 at 2-3.
\849\ CL-CME-61007 at 2. ``Registered entities'' are defined in
CEA section 1a(40) as DCMs, DCOs, SEFs, SDRs, notice-registered DCMs
under CEA section 5f, and any electronic trading facility upon which
a contract is executed or traded which the Commission has determined
is a significant price discovery contract. According to CME, CEA
Section 4(b) ``contains an explicit Congressional endorsement of
`comparable' '' limits for cash-settled contracts in relation to the
physically-delivered contracts to which they are linked. See CL-CME-
61007 at 2.
\850\ CL-CME-61007 at 3. See 76 FR 80674, 80685, 80697 (Dec. 23,
2011). See also Sec. 48.8(c)(1)(ii)(A).
\851\ The comparability standard is also used in determinations
as to which foreign DCOs are subject to comparable, comprehensive
supervision and regulation by the appropriate government authority
in the DCO's home country. See CEA section 5b)(h). See also the
Commission's Notice of Comparability Determination for Certain
Requirements Under the European Market Infrastructure Regulation, 81
FR 15260 (Mar. 22, 2016).
\852\ As the Commission explained in preamble to final part 48
in connection with comparability determinations, ``[t]he
Commission's determination of the comparability of the foreign
regulatory regime to which the FBOT applying for registration is
subject will not be a ``line by line'' examination of the foreign
regulator's approach to supervision of the FBOTs it regulates.
Rather, it will be a principles-based review conducted in a manner
consistent with the part 48 regulations pursuant to which the
Commission will look to determine if that regime supports and
enforces regulatory objectives in the oversight of the FBOT and the
clearing organization that are substantially equivalent to the
regulatory objectives supported and enforced by the Commission in
its oversight of DCMs and DCOs.'' 76 FR 80674, 80680 (Dec. 23,
2011). See also Sec. 48.5(d)(5).
\853\ For example, both CME and ICE currently have conditional
spot-month limit exemptions for cash-settled natural gas contracts
at a level up to five times the level of the spot-month limit level
on CME's economically-equivalent NYMEX Henry Hub Natural Gas
(physical-delivery) futures contract to which they settle.
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The Commission proposes to revise Sec. 150.5(b)(4)(B) regarding
the calculation of open interest for use in setting exchange-set
speculative position limits to provide that a DCM or SEF that is a
trading facility would include swaps in their open interest calculation
only if such entities are required to administer position limits on
swap contracts of their facilities. This revision clarifies and
harmonizes Sec. 150.5(b)(4)(B) with the relief in Appendix E to part
150, as well as in appendices to parts 37 and 38, which delays for DCMs
and SEFs that are trading facilities and lack access to sufficient swap
position information the requirement to establish and monitor position
limits on swaps at this time. This approach conforms Sec. 150.5(b)
with other proposed changes regarding the treatment of swaps.\854\
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\854\ As noted above, the relief was proposed in the 2016
Supplemental Position Limits Proposal, 81 FR at 38459-62. See also
DCM Core Principle 5, Position Limitations or Accountability
(contained in CEA section 5(d)(5), 7 U.S.C. 7(d)(5)) and SEF Core
Principle 6, Position Limits or Accountability (contained in CEA
section 5h(f)(6), 7 U.S.C. 7b-3(f)(6)).
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Exchange--Administered Exemptions for Commodity Derivative Contracts in
a Physical Commodity Not Subject to Federal Limits
The Commission is reproposing Sec. 150.5(b)(5)(i) with
modifications to clarify that it is guidance rather than a regulatory
requirement. In addition, as modified, it provides that under exchange
rules allowing a trader to file an application for an enumerated bona
fide hedging exemption, the application should be filed no later than
five business days after the trader assumed the position that exceeded
a position limit.\855\ As noted above, the Commission expects that
exchanges will carefully consider whether allowing retroactive
recognition of an enumerated bona fide hedging exemption would, as
noted by one commenter, diminish the overall integrity of the process,
and should carefully consider whether to adopt in those rules the two
safeguards noted: (i) To continue to require market participants making
use of the retroactive application to demonstrate that the applied-for
hedge was required to address a sudden and unforeseen hedging need; and
(ii) providing that if the emergency hedge recognition was not granted,
exchange rules would continue to require the applicant to promptly
unwind its position and also would deem the applicant to have been in
violation for any period in which its position exceeded the applicable
limits.
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\855\ The modification made to Sec. 150.5(b)(5)(i) is similar
manner to its the Commission's modification of Sec.
150.5(a)(2)(ii), but, as mentioned, Sec. 150.5(b)(5)(i) is guidance
rather than a regulatory requirement.
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Additionally, the Commission is reproposing Sec. 150.5(b)(5)(i)
with modifications to clarify, as requested by commenters,\856\ that
the exchanges have reasonable discretion as to whether they apply to
their exemption process from exchange-set speculative position limits,
a virtually identical process as provided for recognizing non-
enumerated bona fide hedging positions under CFTC Regulation 150.9(a).
As explained in the discussion regarding the changes to the bona fide
hedging definition under Sec. 150.1, the Commission is proposes a
phased approach with respect to the definition of a bona fide hedging
position applicable to physical commodities.\857\ The Commission
recognizes that exchanges, under Sec. 150.9, may need to adapt their
current process to recognize non-enumerated bona fide hedging positions
for commodity derivative contracts that are subject to a federal
position limit under Sec. 150.2, or adopt a new one. In turn, market
participants will need to seek recognition of a non-enumerated bona
fide hedge from an exchange under that new process. In light of this
implementation issue, the Commission proposes to limit the mandatory
scope of the new definition of bona fide hedging position to contracts
that are subject to a federal position limit.\858\ This means that the
Commission would permit exchanges to maintain both their current bona
fide hedging position definition and their existing processes for
recognizing non-enumerated bona fide hedging positions for physical
commodity contracts not subject to federal limits under Sec. 150.2.
The Commission notes an exchange may, but need not, adopt for physical
commodities not subject to federal limits the new bona fide hedging
position definition and the new process to recognize non-enumerated
bona fide hedging positions.
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\856\ See CL-Working Group-60947 at 14; see also CL-ICE-60929 at
8, 32. As previously proposed, Sec. 150.5(b)(5)(i) provides, ``(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).''
\857\ See also December 2013 Position Limits Proposal, 78 FR at
75725 (stating ``[t]he Commission is proposing a phased approach to
implement the statutory mandate. The Commission is proposing in this
release to establish speculative position limits on 28 core
referenced futures contracts in physical commodities. The Commission
anticipates that it will, in subsequent releases, propose to expand
the list of core referenced futures contracts in physical
commodities. The Commission believes that a phased approach will (i)
reduce the potential administrative burden by not immediately
imposing position limits on all commodity derivative contracts in
physical commodities at once, and (ii) facilitate adoption of
monitoring policies, procedures and systems by persons not currently
subject to positions limits (such as traders in swaps that are not
significant price discovery contracts.). . . . Thus, in the first
phase, the Commission generally is proposing limits on those
contracts that it believes are likely to play a larger role in
interstate commerce than that played by other physical commodity
derivative contracts.'').
\858\ See also supra discussion under regarding the bona fide
hedging position definition.
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In addition, the Commission is proposing that, for enumerated bona
fide hedging positions, exchange rules may allow traders to file an
application for an enumerated bona fide hedging exemption within five
business days after the trader assumed the position that exceeded a
position limit.
Finally, as to Sec. 150.5(b)(5)(ii) (Other exemptions), the
Commission did not receive any comments regarding Sec.
150.5(b)(5)(ii)(A) (Financial distress), and is reproposing this
exemption without change.
Conditional Spot Month Limit Exemption for Commodity Derivative
Contracts in a Physical Commodity Not Subject to Federal Limits
While the conditional spot month limit exemption is addressed in
more detail under Sec. 150.3, after consideration of comments, the
Commission is reproposing Sec. 150.5(b)(5)(ii)(B) with a
modification.\859\ The December 2013
[[Page 96797]]
Position Limits Proposal proposed guidance that an exchange may adopt a
conditional spot month position limit exemption for cash-settled
contracts, with one of two provisos being that such positions should
not exceed five times the level of the spot-month limit specified by
the exchange that lists the physical-delivery contract to which the
cash-settled contracts were directly or indirectly linked.\860\ As
reproposed, the guidance recommends that such conditional exemptions
should not exceed two times the level of the spot-month limit specified
by the exchange that lists the applicable physical-delivery contract.
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\859\ Most comments concerning the conditional spot month limit
were submitted by CME and ICE; recent letters include: CL-CME-61007;
CL-ICE-61009; CL-CME-61008; CL-ICE-60929; CL-CME-60926.
\860\ The second proviso included in Sec. 150.5(b)(5)(ii)(B)
was that the person holding or controlling the positions should not
hold or control positions in such spot-month physical-delivery
contract.
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After review of comments and an impact analysis regarding the
federal limits, the Commission believes that a five-times conditional
exemption is too large, other than in natural gas because, in the
markets that the Commission proposes to subject to federal limits, the
Commission observed few or no market participants with positions in
cash-settled contracts in the aggregate that exceed 25 percent of
deliverable supply in the spot month. This is so even though cash-
settled contracts that are swaps are not currently subject to position
limits. A five-times conditional exemption would not ensure liquidity
for bona fide hedgers in the spot month for cash-settled contracts
because there appear to be few or no positions that large (other than
in natural gas). Consequently, and in light of the other three policy
objectives of CEA section 4a(a)(3)(B), the Commission reproposes a more
cautious approach.\861\
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\861\ As noted above, it is the Commission's responsibility
under CEA section 4a(a)(3)(B) to set limits, to the maximum extent
practicable, in its discretion, that, in addition to ensuring
sufficient market liquidity for bona fide hedgers, 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.
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Since transactions of large speculative traders may tend to cause
unwarranted price changes, exchanges should exercise caution in
determining whether such conditional exemptions are warranted; for
example, an exchange may determine that a conditional exemption is
warranted because such a speculative trader is demonstrably providing
liquidity for bona fide hedgers. Where an exchange may not have access
to data regarding a market participant's cash-settled positions away
from a particular exchange, such exchange should require, for any
conditional spot-month limit exemption it grants, that a trader report
promptly to such exchange the trader's aggregate positions in cash-
settled contracts, physical-delivery contracts, and cash market
positions.
As noted above, under reproposed Sec. 150.5(b)(5)(ii)(B), an
exchange has the choice of whether or not to adopt a conditional spot
month position limit exemption for cash-settled contracts that are not
subject to federal limits. As also discussed above regarding reproposed
Sec. 150.3(c), the Commission is not proposing a conditional spot-
month limit for agricultural contracts subject to federal limits under
reproposed Sec. 150.2. Further, the Commission notes that the current
cash-settled natural gas spot month limit rules of two commenters, CME
Group (which operates NYMEX) and ICE, both include the same spot-month
limit level and the same conditional spot-month limit exemption. In
each case the current cash-settled conditional exemption is five times
the limit for the physical-delivery contract. Such natural gas
contracts would be subject to federal limits under reproposed Sec.
150.2, so the guidance in reproposed Sec. 150.5(b) would not be
applicable to those contracts.\862\
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\862\ The Commission notes that reproposed Sec.
150.5(b)(5)(ii)(B) retains both of the recommended provisos,
although, as noted above, the guidance recommends that such
positions should not exceed two times the level of the spot-month
limit specified by the exchange that lists the applicable physical-
delivery contract, rather than five times.
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Treatment of Spread and Anticipatory Hedge Exemptions for Commodity
Derivative Contracts in a Physical Commodity Not Subject to Federal
Limits
In regards to the exemption for intramarket and intermarket spread
positions under Sec. 150.5(b)(5)(ii)(C), the comments received
concerned the exchange process for providing spread exemptions under
Sec. 150.10. The Commission addresses those comments below in its
discussion of Sec. 150.10, and is reproposing Sec. 150.5(b)(5)(ii)(C)
as proposed in the 2016 Supplemental Position Limits Proposal.
The Commission points out, however, that reproposed Sec.
150.5(b)(5)(ii)(C) would apply only to physical commodity derivative
contracts, and would not apply to any derivative contract in an
excluded commodity. Furthermore, as noted above, reproposed Sec.
150.5(b)(5)(ii)(C) provides guidance rather than rigid requirements.
Instead, under Sec. 150.5(b)(5)(ii)(C), exchanges should take into
account whether granting a spread exemption in a physical commodity
derivative would, to the maximum extent practicable, ensure sufficient
market liquidity for bona fide hedgers, and 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.\863\
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\863\ As noted in the December 2013 Position Limits Proposal,
the guidance is consistent with the statutory policy objectives for
position limits on physical commodity derivatives in CEA section
4a(a)(3)(B). See December 2013 Position Limits Proposal, 78 FR at
38464. The Commission interprets the CEA as providing it with the
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). Id. 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.
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Five-Day Rule for Commodity Derivative Contracts in a Physical
Commodity Not Subject to Federal Limits
While the Commission's determination regarding the five-day rule is
addressed elsewhere,\864\ the Commission points out that, as discussed
in connection with the definition of bona fide hedging position and in
relation to exchange processes under Sec. 150.9, Sec. 150.10, and
Sec. 150.11, and as noted above in connection with Sec. 150.5(a), the
five-day rule would only apply to certain enumerated positions (pass-
through swap offsets, anticipatory, and cross-commodity hedges),\865\
rather than when determining whether to recognize as non-enumerated
bona fide hedging positions certain non-enumerated hedge strategies for
non-referenced contracts. As reproposed, therefore, Sec. 150.5(b)
would apply the five-day rule only to pass-through swap offsets,
anticipatory, and cross-commodity hedges. However, in regards to
exchange processes under Sec. 150.9, Sec. 150.10, and Sec. 150.11,
the Commission
[[Page 96798]]
proposes to allow exchanges to waive the five-day rule on a case-by-
case basis.
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\864\ See the discussion regarding the five-day rule in
connection with the definition of bona fide hedging position and the
discussion of Sec. 150.9 (Process for recognition of positions as
non-enumerated bona fide hedges).
\865\ See Sec. 150.1 definition of bona fide hedging position,
sections (2)(ii)(A), (3)(iii), (4), and (5) (Other enumerated
hedging position). To provide greater clarity as to which bona fide
hedging positions the five-day rule applies, the reproposed rules
reorganize the definition.
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As the Commission cautioned above, exchanges should carefully
consider whether to recognize a position as a bona fide hedge or to
exempt a spread position held during the last few days of trading in
physical-delivery contracts. The Commission points to the tools that
exchanges currently use to address concerns during the spot month; as
two commenters observed, current tools include requiring gradual
reduction of the position (``step down'' requirements) or revoking
exemptions to protect the price discovery process in core referenced
futures contracts approaching expiration. Consequently, under the
reproposed rule, exchanges may recognize positions, on a case-by-case
basis in physical-delivery contracts that would otherwise be subject to
the five-day rule, as non-enumerated bona fide hedging positions, by
applying the exchanges experience and expertise in protecting its own
physical-delivery market.
Reporting Requirements for Commodity Derivative Contracts in a Physical
Commodity Not Subject to Federal Limits
In response to the comment questioning the proposed reporting
requirements by a claim that, ``while the Commission has a surveillance
obligation with respect to federal limits, the same obligation has
never before existed with respect to exchange-set limits for non-
referenced contracts, and does not exist today,'' \866\ the Commission
points out, as it did in the 2016 Supplemental Position Limits
Proposal, that the Futures Trading Act of 1982 ``gave the Commission,
under section 4a(5) [since redesignated as section 4a(e)] 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.'' \867\ And, since 2008, it has also been a violation of
the Act for any person to violate an exchange position limit rule
certified by the exchange.\868\ To address any confusion that might
have led to such a comment, the Commission reiterates, under CEA
section 4a(e), its authority to enforce violations of exchange-set
speculative position limits, whether certified or Commission-approved.
As the Commission explained in the 2016 Supplemental Position Limits
Proposal, exchanges, as SROs, do not act only as independent, private
actors.\869\ In fact, to repeat the explanation provided by the
Commission in 1981, when the Act is read as a whole, ``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
under the Act.'' \870\ The 2016 Supplemental Position Limits Proposal
pointed out that 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.'' \871\ In addition, as
the Commission observed in 2010, and reiterated in the 2016
Supplemental Position Limits Proposal, ``since 1982, the Act's
framework explicitly anticipates the concurrent application of
Commission and exchange-set speculative position limits.'' \872\ 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.'' \873\
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\866\ CL-CME-60926 at 15.
\867\ 2016 Supplemental Position Limits Proposal, 81 FR at
38466, n. 85 (quoting the Federal Speculative Position Limits for
Referenced Energy Contracts and Associated Regulations, 75 FR 4144,
4145 (Jan. 36, 2010)).
\868\ See Futures Trading Act of 1982, Public Law 97-444, 96
Stat. 2299-30 (1983) (amending CEA section 4a by including, in what
was then a new CEA section 4a(5), since been re-designated as CEA
section 4a(e) ``. . . It shall be a violation of this chapter for
any person to violate any bylaw, rule, regulation, or resolution of
any contract market, derivatives transaction execution facility, or
other board of trade licensed, designated, or registered by the
Commission or electronic trading facility with respect to a
significant price discovery contract fixing limits on the amount of
trading which may be done or positions which may be held by any
person under contracts of sale of any commodity for future delivery
or under options on such contracts or commodities, if such bylaw,
rule, regulation, or resolution has been approved by the Commission
or certified by a registered entity pursuant to section 7a-2(c)(1)
of this title: Provided, That the provisions of section 13(a)(5) of
this title shall apply only to those who knowingly violate such
limits.'').
\869\ 2016 Supplemental Position Limits Proposal, 81 FR at
38465-66.
\870\ 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.
\871\ 2016 Supplemental Position Limits Proposal, 81 FR at
38466. See also 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 re-designated as
section 4a(e) of the Act.
\872\ 2010 Position Limits for Referenced Energy Contracts at
4145; see also 2016 Supplemental Position Limits Proposal, 81 FR at
38466.
\873\ See 2010 Position Limits for Referenced Energy Contracts,
75 FR at 4145; see also 2016 Supplemental Position Limits Proposal,
81 FR at 38466.
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The Commission 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 the exchange's rules, by way of
additional examples of the Commission's continuing responsibility in
this matter under the Act.
v. Commission Determination Regarding Sec. 150.5(c)
As noted above, in an overall non-substantive change made in
reproposing Sec. 150.5, the Commission moved all provisions applying
to excluded commodities from Sec. 150.5(b) into reproposed Sec.
150.5(c) to provide greater clarity regarding which provisions concern
excluded commodities. The Commission has determined to repropose the
rule largely as proposed for excluded commodities (previously under
Sec. 150.5(b)), for the reasons noted above, with certain changes
discussed below.\874\
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\874\ The Commission is reproposing the following sections
without further discussion, for the reasons provided above, because
it received no substantive comments: Sec. 150.5(c)(6) (Pre-
enactment and transition period swap positions), Sec. 150.5(c)(7)
(Pre-existing positions), and Sec. 150.5(b)(9) (Additional
acceptable practices).
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Limit Levels for Excluded Commodities
The Commission is reproposing the provisions under Sec.
150.5(c)(1) regarding levels of limits for excluded commodities as
modified and reproposed under Sec. 150.5(b)(1),\875\ to reference
excluded commodities and to remove provisions that were solely
addressed to agricultural commodities.\876\ These provisions generally
provide guidance rather than rigid requirements; the guidance for
levels of limits remains the same for
[[Page 96799]]
excluded commodities as for all other commodity derivative contracts
that are not subject to the limits set forth in reproposed Sec. 150.2,
including derivative contracts in a physical commodity as defined in
reproposed Sec. 150.1.
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\875\ As reproposed, Sec. 150.5(c)(1)(iii), like Sec.
150.5(b)(1)(iii), provides that the spot-month, individual non-spot
month, and all-months combined limit levels should be ``comparable''
rather than the ``same.''
\876\ See supra for discussion of the modifications made to the
reproposed provisions of Sec. 150.5(b)(1) as compared to the
December 2103 Position Limits Proposal; the explanation provided
above also pertains to the inclusion of those modifications in
reproposed Sec. 150.5(c)(1).
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Similarly, as to adjustment of limit levels for excluded commodity
derivative contracts under Sec. 150.5(c)(2), the reproposed provisions
are modified to reference only excluded commodities and to remove
provisions that were solely addressed to agricultural commodities. As
reproposed, Sec. 150.5(c)(2)(i) provides guidance that the spot month
position limits for excluded commodity derivative contracts ``should be
maintained at a level that is necessary and appropriate to reduce the
potential threat of market manipulation or price distortion of the
contract's or the underlying commodity's price or index.''
The Commission did not receive comments regarding Sec.
150.5(c)(3). The guidance in Sec. 150.5(c)(3), on exchange adoption of
position accountability levels in lieu of speculative position limits,
has been reproposed as was previously proposed in Sec. 150.5(b)(3),
modified to remove provisions under Sec. 150.5(b)(3)(i), which were
solely addressed to physical commodity derivative contracts, and to
reference excluded commodities.
As to the calculation of open interest for use in setting exchange-
set speculative position limits for excluded commodities, the
Commission is reproposing, in Sec. 150.5(c)(4), the same guidance for
excluded commodities that is being reproposed under Sec. 150.5(b)(4)
as for all other commodity derivative contracts that are not subject to
the limits set forth in Sec. 150.2, including the modification to
provide that a DCM or SEF that is a trading facility would include
swaps in its open interest calculation only if such entity is required
to administer position limits on swap contracts of its facility.
Exchange--Administered Exemptions for Excluded Commodities
In regards to hedge exemptions, the Commission is reproposing in
new Sec. 150.5(c)(5)(i) for contracts in excluded commodities a
modification of what was previously proposed in Sec. 150.5(b)(5)(i)
that eliminates the guidance that exchanges ``may provide for
recognition of a non-enumerated bona fide hedge in a manner consistent
with the process described in Sec. 150.9(a).'' That provision was
intended to apply only to physical commodity contracts and not to
exemptions granted by exchanges for contracts in excluded
commodities.\877\
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\877\ In addition, as noted above, the Commission is reproposing
Sec. 150.5(b)(5)(i) with a modification that clarifies that this
provision is guidance in the case of commodity derivatives contracts
in a physical commodity not subject to federal limits.
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As noted above, in reproposing the definition of bona fide hedging
position, the Commission is clarifying that an exchange may otherwise
recognize as bona fide any position in a commodity derivative contract
in an excluded commodity, so long as such recognition is pursuant to
such exchange's rules. Although the Commission's standards in the
December 2013 Position Limits Proposal applied the incidental test and
the orderly trading requirements to all commodities, the Commission, as
previously described, proposed in the 2016 Supplemental Position Limits
Proposal to remove both those standards from the definition of bona
fide hedging position.\878\ Moreover, the reproposed definition of bona
fide hedging position would provide only that the position is either:
(i) Enumerated in the definition (in paragraphs (3), (4), or (5)) and
meets the economically appropriate test; or (ii) recognized by an
exchange under rules previously submitted to the Commission.\879\ The
Commission's standards for recognizing a position as a bona fide hedge
in an excluded commodity, therefore, would not include the additional
requirements applicable to physical commodities subject to federal
limits. Consequently, as reproposed, the exchanges would have
reasonable discretion to comply with core principles regarding position
limits on excluded commodities so long as the exchange does so pursuant
to exchange rules previously submitted to the Commission under Part 40.
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\878\ See 2016 Supplemental Position Limits Proposal, definition
of bona fide hedging position (amending the definition previously
proposed in the December 2013 Position Limits Proposal), 78 FR at
38463-64, 38505-06.
\879\ The economically appropriate test has historically been
interpreted primarily in the context of physical commodities, rather
than applied to excluded commodities.
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In addition, in conjunction with the amendments to the definition
of bona fide hedging positions in regards to excluded commodities,\880\
the Commission is reproposing Sec. 150.5(c)(5)(ii), proposed as Sec.
150.5(b)(5)(ii)(D) in the 2016 Supplemental Position Limits Proposal,
with no further modification, to afford greater flexibility for
exchanges when granting exemptions for excluded commodities. The 2016
Supplemental Position Limits Proposal provided, in addition to granting
exemptions under paragraphs (b)(5)(ii)(A), (b)(5)(ii)(B), and
(b)(5)(ii)(C) of Sec. 150.5, that exchanges may grant a ``limited''
risk management exemptions pursuant to rules consistent with the
guidance in Appendix A of part 150. As reproposed, Sec.
150.5(c)(5)(ii) eliminates the modifier ``limited'' from the risk
management exemptions, and provides merely that exchanges may grant, in
addition to the exemptions under paragraphs (b)(5)(ii)(A),
(b)(5)(ii)(B), and (b)(5)(ii)(C), risk management exemptions pursuant
to rules submitted to the Commission, ``including'' for a position that
is consistent with the guidance in Appendix A of part 150.
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\880\ In each case pursuant to rules submitted to the
Commission, consistent with the guidance in Appendix A of this part.
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In regards to the provisions addressing applications for exemptions
for positions in excluded commodities, the Commission is modifying what
was copied from Sec. 150.5(b)(5)(iii) to provide, under Sec.
150.5(c)(5)(iii), simply that an exchange may allow a person to file an
exemption application for excluded commodities after the person assumes
the position that exceeded a position limit.
Finally, in reproposing the aggregation provision for excluded
commodities under Sec. 150.5(c)(8), the Commission is not merely
mirroring the aggregation provision as previously proposed in Sec.
150.5(b)(8). As noted above, the reproposed aggregation provisions for
physical commodity derivatives contracts, whether under Sec.
150.5(a)(8) or Sec. 150.5(b)(8), provide that exchanges must have
aggregation provisions that conform to Sec. 150.4. Reproposed Sec.
150.5(c)(8), consistent with the rest of reproposed Sec. 150.5(c),
would instead provide guidance, that exchanges ``should'' have
aggregation rules for excluded commodity derivative contracts that
conform to Sec. 150.4.
E. Part 19--Reports by Persons Holding Bona Fide Hedge Positions
Pursuant to Sec. 150.1 of This Chapter and by Merchants and Dealers in
Cotton
1. Current Part 19
The market and large trader reporting rules are contained in parts
15 through 21 of the Commission's regulations.\881\ Collectively, these
reporting rules effectuate the Commission's market and financial
surveillance programs by enabling the Commission to gather information
concerning the size and composition of the commodity futures, options,
and swaps markets, thereby permitting the Commission to monitor and
enforce the speculative position
[[Page 96800]]
limits that have been established, among other regulatory goals. The
Commission's reporting rules are implemented pursuant to the authority
of CEA sections 4g and 4i, among other CEA sections. Section 4g of the
Act imposes reporting and recordkeeping obligations on registered
entities, and obligates FCMs, introducing brokers, floor brokers, and
floor traders to file such reports as the Commission may require on
proprietary and customer positions executed on any board of trade.\882\
Section 4i of the Act requires the filing of such reports as the
Commission may require when positions equal or exceed Commission-set
levels.\883\
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\881\ 17 CFR parts 15-21.
\882\ See CEA section 4g(a); 7 U.S.C. 6g(a).
\883\ See CEA section 4i; 7 U.S.C. 6i.
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Current part 19 of the Commission's regulations sets forth
reporting requirements for persons holding or controlling reportable
futures and option positions ``which constitute bona fide hedging
positions as defined in [Sec. ] 1.3(z)'' and for merchants and dealers
in cotton holding or controlling reportable positions for future
delivery in cotton.\884\ In the several markets with federal
speculative position limits--namely those for grains, the soy complex,
and cotton--hedgers that hold positions in excess of those limits must
file a monthly report pursuant to part 19 on CFTC Form 204: Statement
of Cash Positions in Grains,\885\ which includes the soy complex, and
CFTC Form 304 Report: Statement of Cash Positions in Cotton.\886\ These
monthly reports, collectively referred to as the Commission's ``series
'04 reports,'' must show the trader's positions in the cash market and
are used by the Commission to determine whether a trader has sufficient
cash positions that justify futures and option positions above the
speculative limits.\887\
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\884\ See 17 CFR part 19. Current part 19 cross-references a
provision of the definition of reportable position in 17 CFR
15.00(p)(2). As discussed below, that provision would be
incorporated into proposed Sec. 19.00(a).
\885\ Current CFTC Form 204: Statement of Cash Positions in
Grains is available at http://www.cftc.gov/idc/groups/public/@forms/documents/file/cftcform204.pdf.
\886\ Current CFTC Form 304 Report: Statement of Cash Positions
in Cotton is available at http://www.cftc.gov/idc/groups/public/@forms/documents/file/cftcform304.pdf.
\887\ In addition, in the cotton market, merchants and dealers
file a weekly CFTC Form 304 Report of their unfixed-price cash
positions, which is used to publish a weekly Cotton On-call report,
a service to the cotton industry. The Cotton On-Call Report shows
how many unfixed-price cash cotton purchases and sales are
outstanding against each cotton futures month.
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2. Amendments to Part 19
In the December 2013 Position Limits Proposal, the Commission
proposed to amend part 19 so that it would conform to the Commission's
proposed changes to part 150.\888\ First, the Commission proposed to
amend part 19 by adding new and modified cross-references to proposed
part 150, including the new definition of bona fide hedging position in
proposed Sec. 150.1. Second, the Commission proposed to amend Sec.
19.00(a) by extending reporting requirements to any person claiming any
exemption from federal position limits pursuant to proposed Sec.
150.3. The Commission proposed to add new series '04 reporting forms to
effectuate these additional reporting requirements. Third, the
Commission proposed to update the manner of part 19 reporting. Lastly,
the Commission proposed to update both the type of data that would be
required in series '04 reports as well as the timeframe for filing such
reports.
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\888\ See December 2013 Position Limits Proposal, 78 FR at
75741-75746.
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Comments Received: One commenter acknowledges concerns presented by
Commission staff at the Staff Roundtable that exemptions from position
limits be limited to prevent abuse, but does not believe that the
adoption of additional recordkeeping or reporting rules or the
development of costly infrastructure is required because statutory and
regulatory safeguards already exist or are already proposed in the
December 2013 Position Limits Proposal, noting that: (i) The series '04
forms as well as DCM exemption documents will be required of market
participants, who face significant penalties for false reporting, and
the Commission may request additional information if the information
provided is unsatisfactory; and (ii) market participants claiming a
bona fide hedging exemption are still subject to anti-disruptive
trading prohibitions in CEA section 4c(a)(5), anti-manipulation
prohibitions in CEA sections 6(c) and 9(c), the orderly trading
requirement in proposed Sec. 150.1, and DCM oversight. The commenter
stated that these requirements comprise a ``thorough and robust
regulatory structure'' that does not need to be augmented with new
recordkeeping, reporting, or other obligations to prevent misuse of
hedging exemptions.\889\ A second commenter echoed that additional
recordkeeping or reporting obligations are unnecessary and would create
unnecessary regulatory burdens.\890\
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\889\ CL-Working Group-59959 at 3-4.
\890\ CL-NFP-60393 at 15-16.
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Another commenter stated that the various forms required by the
regime, while not lengthy, represent significant data collection and
categorization that will require a non-trivial amount of work to
accurately prepare and file. The commenter claimed that a comprehensive
position limits regime could be implemented with a ``far less
burdensome'' set of filings and requested that the Commission review
the proposed forms and ensure they are ``as clear, limited, and
workable'' as possible to reduce burden. The commenter stated that it
is not aware of any software vendors that currently provide solutions
that can support a commercial firm's ability to file the proposed
forms.\891\
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\891\ CL-COPE-59662 at 24; CL-COPE-60932 at 10; CL-EEI-EPSA-
60925 at 9.
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One commenter recommended that the Commission eliminate the series
'04 reports in light of the application and reporting requirements laid
out in the 2016 Supplemental Position Limits Proposal. The commenter
asserted that the application requirements are in addition to the
series '04 forms, which the commenter claims ``only provide the
Commission with a limited surveillance benefit.'' \892\ Another
commenter raised concerns regarding forms filed under part 19 and the
data required to be filed with exchanges under Sec. Sec. 150.9-11. The
commenter stated that the 2016 Supplemental Position Limits Proposal
requires that ``those exceeding the federal limits file the proposed
forms including Form 204'' but lacks ``meaningful guidance'' regarding
the data that must be maintained ``effectively in real-time'' to
populate the forms.\893\
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\892\ CL-FIA-60937 at 17.
\893\ CL-EEI-EPSA-60925 at 9.
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Several commenters requested that the Commission create user-
friendly guidebooks for the forms so that all entities can clearly
understand any required forms and build the systems to file such forms,
including providing workshops and/or hot lines to improve the
forms.\894\
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\894\ CL-COPE-59662 at 24; CL-COPE-60932 at 10; CL-ASR-60933 at
4; CL-Working Group-60947 at 17-18; CL-EEI-EPSA-60925 at 3.
---------------------------------------------------------------------------
One commenter expressed concern for reporting requirements in
conflict with other regulatory requirements (such as FASB ASC
815).\895\
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\895\ CL-U.S. Dairy-59597 at 6.
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Finally, two commenters recommended modifying or removing the
requirement to certify series '04 reports as ``true and correct''. One
commenter suggested that the requirement be removed due to the
difficulty of making such a certification
[[Page 96801]]
and the fact that CEA section 6(c)(2) already prohibits the submission
of false or misleading information.\896\ Another noted that the
requirement to report very specific information relating to hedges and
cash market activity involves data that may change over time. The
commenter suggested the Commission adopt a good-faith standard
regarding ``best effort'' estimates of the data when verifying the
accuracy of Form 204 submissions and, assuming the estimate of physical
activity does not otherwise impact the bona fide hedge exemption (e.g.
cause the firm to lose the exemption), not penalize entities for
providing the closest approximation of the position possible.\897\
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\896\ See CL-CMC-59634 at 17.
\897\ CL-Working Group-59693 at 65.
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Commission Reproposal: The Commission responds to specific comments
regarding the content and timing of the series '04 forms and other
concerns below. The Commission agrees with the commenters that the
forms should be clear and workable, and offers several clarifications
and amendments below in response to comments about particular aspects
of the series '04 reports.
The Commission notes that the information required on the series
'04 reports represents a trader's most basic position data, including
the number of units of the cash commodity that the firm has purchased
or sold, or the size of a swap position that is being offset in the
futures market. The Commission believes this information is readily
available to traders, who routinely make trading decisions based on the
same data that is required on the series '04 reports. The Commission is
proposing to move to an entirely electronic filing system, allowing for
efficiencies in populating and submitting forms that require the same
information every month. Most traders who are required to file the
series '04 reports must do so for only one day out of the month,
further lowering the burden for filers. In short, the Commission
believes potential burdens under the Reproposal have been reduced
wherever possible while still providing adequate information for the
Commission's Surveillance program. For market participants who may
require assistance in monitoring for speculative position limits and
gathering the information required for the series '04 reports, the
Commission is aware of several software companies who, prior to the
vacation of the Part 151 Rulemaking, produced tools that could be
useful to market participants in fulfilling their compliance
obligations under the new position limits regime.
The Commission notes that the reporting obligations proposed in the
2016 Supplemental Position Limits Proposal are intended to be
complimentary to, not duplicative of, the series '04 reporting forms.
In particular, the Commission notes the distinction between Form 204
enumerated hedging reporting and exchange-based non-enumerated hedging
reporting. The 2016 Supplemental Position Limits Proposal provides
exchanges with the authority to require reporting from market
participants. That is, regarding an exchange's process for non-
enumerated bona fide hedging position recognition, the exchange has
discretion to implement any additional reporting that it may require.
The Commission declines to eliminate series '04 reporting in response
to the commenters because, as noted throughout this section, the data
provided on the forms is critical to the mission of the Commission's
Surveillance program to detect and deter manipulation and abusive
trading practices in physical commodity markets.
In response to the commenters that requested guidebooks for the
series '04 reporting forms, the Commission believes that it is less
confusing to ensure that form instructions are clear and detailed than
it is to provide generalized guidebooks that may not respond to
specific issues. The Commission has clarified the sample series `04
forms found in Appendix A to part 19, including instructions to such
forms, and invites comments in order to avoid future confusion.
Specifically, the Commission has added instructions regarding how to
fill out the trader identification section of each form; reorganized
instructions relating to individual fields on each form; edited the
examples of each form to reduce confusion and match changes to
information required as described in this section; and clarified the
authority for the certifications made on the signature/authorization
page of each form.
The Commission's longstanding experience with collecting and
reviewing Form 204 and Form 304 has shown that many questions about the
series '04 reports are specific to the circumstances and trading
strategies of an individual market participant, and do not lend
themselves to generalization that would be helpful to many market
participants.
The Commission also notes, in response to the commenter expressing
concerns about other regulatory requirements, the policy objectives and
standards for hedging under financial accounting standards differ from
the statutory policy objectives and standards for hedging under the
Act. Because of this, reporting requirements, and the associated
burdens, would also differ between the series '04 reports and
accounting statements.
Finally, the Commission is proposing to amend the certification
language found at the end of each form to clarify that the
certification requires nothing more than is already required of market
participants in section 6(c)(2) of the Act. In response to the
commenters' request for a ``best effort'' standard, the Commission
added the phrase ``to the best of my knowledge'' preceding the
certification from the authorized representative of the reporting
trader that the information on the form is true and correct. The
Commission has also added instructions to each form clarifying what is
required on the signature/authorization page of each form. The
Commission notes that, in the recent past, the Division of Market
Oversight has issued advisories and guidance on proper filing of series
'04 reports, and the Division of Enforcement has settled several cases
regarding lack of accuracy and/or timeliness in filing series '04
forms.\898\ The Commission believes the certification language is an
important reminder to reporting traders of their responsibilities to
file accurate information under several sections of the Act, including
but not limited to CEA section 6(c)(2).
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\898\ See, e.g., ``Obligation of Reportable Market Participants
to File CFTC Form 204 Reports,'' CFTC Staff Advisory 13-42, July 8,
2013; and CFTC Dockets Nos. 16-21, 15-41, 16-07, 16-20.
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a. Amended cross references
Proposed Rule: As discussed above, in the December 2013 Position
Limits Proposal, the Commission proposed to replace the definition of
bona fide hedging transaction found in Sec. 1.3(z) with a new proposed
definition of bona fide hedging position in proposed Sec. 150.1. As a
result, proposed part 19 would replace cross-references to Sec. 1.3(z)
with cross-references to the new definition of bona fide hedging
positions in proposed Sec. 150.1.
The Commission also proposed expanding Part 19 to include reporting
requirements for positions in swaps, in addition to futures and options
positions, for any part of which a person relies on an exemption. To
accomplish this, ``positions in commodity derivative contracts,'' as
defined in proposed Sec. 150.1, would replace ``futures and option
positions'' throughout amended
[[Page 96802]]
part 19 as shorthand for any futures, option, or swap contract in a
commodity (other than a security futures product as defined in CEA
section 1a(45)).\899\ This amendment was intended to harmonize the
reporting requirements of part 19 with proposed amendments to part 150
that encompass swap transactions.
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\899\ See discussion above.
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Proposed Sec. 19.00(a) would eliminate the cross-reference to the
definition of reportable position in Sec. 15.00(p)(2). The Commission
noted that the current reportable position definition essentially
identifies futures and option positions in excess of speculative
position limits. Proposed Sec. 19.00(a) would simply make clear that
the reporting requirement applies to commodity derivative contract
positions (including swaps) that exceed speculative position limits, as
discussed below.
Comments Received: The Commission received no comments on the
proposed cross-referencing amendments.
Commission Reproposal: The Commission is repurposing the amended
cross-references in part 19, as originally proposed.
b. Persons required to report--Sec. 19.00(a)
Proposed Rule: Because the reporting requirements of current part
19 apply only to persons holding bona fide hedge positions and
merchants and dealers in cotton holding or controlling reportable
positions for future delivery in cotton, the Commission proposed to
extend the reach of part 19 by requiring all persons who wish to avail
themselves of any exemption from federal position limits under proposed
Sec. 150.3 to file applicable series '04 reports.\900\ The Commission
also proposed to require that anyone exceeding a federal limit who has
received a special call related to part 150 must file a series '04
form. Collection of this information would facilitate the Commission's
surveillance program with respect to detecting and deterring trading
activity that may tend to cause sudden or unreasonable fluctuations or
unwarranted changes in the prices of the referenced contracts and their
underlying commodities. By broadening the scope of persons who must
file series '04 reports, the Commission seeks to ensure that any person
who claims any exemption from federal speculative position limits can
demonstrate a legitimate purpose for doing so.
---------------------------------------------------------------------------
\900\ See 17 CFR part 19. Current part 19 cross-references the
definition of reportable position in 17 CFR 15.00(p).
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Series '04 reports currently refers to Form 204 and Form 304, which
are listed in current Sec. 15.02.\901\ The Commission proposed to add
three new series '04 reporting forms to effectuate the expanded
reporting requirements of part 19.\902\ Proposed Form 504 would be
added for use by persons claiming the conditional spot-month limit
exemption pursuant to proposed Sec. 150.3(c).\903\ Proposed Form 604
would be added for use by persons claiming a bona fide hedge exemption
for either of two specific pass-through swap position types, as
discussed further below.\904\ Proposed Form 704 would be added for use
by persons claiming a bona fide hedge exemption for certain
anticipatory bona fide hedging positions.\905\
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\901\ 17 CFR 15.02.
\902\ As noted in the December 2013 Position Limits Proposal,
the Commission is avoiding the use of any form numbers with ``404''
to avoid confusion with the part 151 Rulemaking, which required
Forms 404, 404A, and 404S. See December 2013 Position Limits
Proposal, 78 FR at 75742.
\903\ See supra discussion of proposed Sec. 150.3(c).
\904\ Proposed Form 604 would replace Form 404S (as contemplated
in vacated part 151).
\905\ The updated definition of bona fide hedging in proposed
Sec. 150.1 incorporates several specific types of anticipatory
transactions: Unfilled anticipated requirements, unsold anticipated
production, anticipated royalties, anticipated services contract
payments or receipts, and anticipatory cross-commodity hedges. See
paragraphs (3)(iii), (4)(i), (4)(iii), (4)(iv) and (5),
respectively, of the Commission's amended definition of bona fide
hedging transactions in proposed Sec. 150.1 as discussed above.
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Comments Received: The Commission received no comments on proposed
Sec. 19.00(a) regarding who must file series '04 reports.
Commission Reproposal: The Commission is reproposing the expansion
of Sec. 19.00(a), as originally proposed.
c. Manner of reporting--Sec. 19.00(b)
i. Excluding certain source commodities, products or byproducts of the
cash commodity hedged--Sec. 19.00(b)(1)
Proposed Rule: For purposes of reporting cash market positions
under current part 19, the Commission historically has allowed a
reporting trader to ``exclude certain products or byproducts in
determining his cash positions for bona fide hedging'' if it is ``the
regular business practice of the reporting trader'' to do so.\906\ The
Commission has proposed to clarify the meaning of ``economically
appropriate'' in light of this reporting exclusion of certain cash
positions.\907\ Therefore, in the December 2013 Position Limits
Proposal, the Commission proposed in Sec. 19.00(b)(1) that a source
commodity itself can only be excluded from a calculation of a cash
position if the amount is de minimis, impractical to account for, and/
or on the opposite side of the market from the market participant's
hedging position.\908\
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\906\ See 17 CFR 19.00(b)(1) (providing that ``[i]f the regular
business practice of the reporting trader is to exclude certain
products or byproducts in determining his cash position for bona
fide hedging . . . ., the same shall be excluded in the report'').
\907\ See supra discussion of the ``economically appropriate
test'' as it relates to the definition of bona fide hedging
position. In order for a position to be economically appropriate to
the reduction of risks in the conduct and management of a commercial
enterprise, the enterprise generally should take into account all
inventory or products that the enterprise owns or controls, or has
contracted for purchase or sale at a fixed price. For example, in
line with its historical approach to the reporting exclusion, the
Commission does not believe that it would be economically
appropriate to exclude large quantities of a source commodity held
in inventory when an enterprise is calculating its value at risk to
a source commodity and it intends to establish a long derivatives
position as a hedge of unfilled anticipated requirements.
\908\ Proposed Sec. 19.00(b)(1) adds a caveat to the
alternative manner of reporting: When reporting for the cash
commodity of soybeans, soybean oil, or soybean meal, the reporting
person shall show the cash positions of soybeans, soybean oil and
soybean meal. This proposed provision for the soybean complex is
included in the current instructions for preparing Form 204.
---------------------------------------------------------------------------
The Commission explained in the December 2013 Position Limits
Proposal that the original part 19 reporting exclusion was intended to
cover only cash positions that were not capable of being delivered
under the terms of any derivative contract, an intention that
ultimately evolved to allow cross-commodity hedging of products and
byproducts of a commodity that were not necessarily deliverable under
the terms of any derivative contract. The Commission also noted that
the instructions on current Form 204 go further than current Sec.
19.00(b)(1) by allowing the exclusion of certain source commodities in
addition to products and byproducts, when it is the firm's normal
business practice to do so.
Comments Received: One commenter suggested the Commission expand
the provision in proposed Sec. 19.00(b)(1) that allows a reporting
person to exclude source commodities, products or byproducts in
determining its cash position for bona fide hedging to allow a person
to also exclude inventory and contracts of the actual commodity in the
course of his or her regular business practice. The commenter also
noted that proposed Sec. 19.00(b)(1) only permits this exclusion if
the amount is de minimis, despite there being ``many circumstances''
that make the inclusion of such source commodities irrelevant for
reporting purposes. The commenter requested that the Commission only
require a reporting person to calculate its cash positions in
accordance with its regular business practice and report the
[[Page 96803]]
cash positions that it considered in making its bona fide hedging
determinations.\909\
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\909\ See CL-Working Group-60396 at 16-17; CL-Working Group-
60947 at 15-17.
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Commission Reproposal: The Commission is reproposing Sec.
19.00(b)(1), as originally proposed, because the Commission is
concerned that adopting the commenter's request could lead to ``cherry-
picking'' a cash market position in an attempt to justify a speculative
position as a hedge. As noted in the December 2013 Position Limits
Proposal, the Commission's clarification of the Sec. 19.00(b)(1)
reporting exclusion was proposed to prevent the definition of bona fide
hedging positions in proposed Sec. 150.1 from being swallowed by this
reporting rule. The Commission stated ``. . . it would not be
economically appropriate behavior for a person who is, for example,
long derivative contracts to exclude inventory when calculating
unfilled anticipated requirements. Such behavior would call into
question whether an offset to unfilled anticipated requirements is, in
fact, a bona fide hedging position, since such inventory would fill the
requirement. As such, a trader can only underreport cash market
activities on the opposite side of the market from her hedging position
as a regular business practice, unless the unreported inventory
position is de minimis or impractical to account for.'' \910\ If a
person were only required to report cash positions that are offset by
particular derivative positions, then the form would not provide an
indication as to whether the derivative position is economically
appropriate to the reduction of risk, making the inclusion of source
commodities very relevant for reporting purposes, contrary to the
commenter's suggestion.
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\910\ See December 2013 Position Limits Proposal, 78 FR at
75743. The Commission provided an example: ``By way of example, the
alternative manner of reporting in proposed Sec. 19.00(b)(1) would
permit a person who has a cash inventory of 5 million bushels of
wheat, and is short 5 million bushels worth of commodity derivative
contracts, to underreport additional cash inventories held in small
silos in disparate locations that are administratively difficult to
count.'' This person could instead opt to calculate and report these
hard-to-count inventories and establish additional short positions
in commodity derivative contracts as a bona fide hedge against such
additional inventories.
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Because of these and other concerns, market participants have
historically been required to report cash market information in
aggregate form for the commodity as a whole, not the ``line item''
style of hedge reporting requested by the commenter (where firms report
cash trades by category, tranche, or corresponding futures position).
Further, since it is important for Surveillance purposes to receive a
snapshot of a market participant's cash market position, the series '04
forms currently require a market participant to provide relevant
inventories and fixed price contracts in the hedged (or cross-hedged)
commodity. The Commission believes it is necessary to maintain this
aggregate reporting in order for the Commission's Surveillance program
to properly monitor for position limit violations and to prevent market
manipulation.
Further, the Commission believes that firms may find reporting an
aggregate cash market position less burdensome than attempting to
identify portions of that position that most closely align with
individual hedge positions as, according to some commenters, many firms
hedge on a portfolio basis, making identifying the particular hedge
being used difficult.\911\
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\911\ See CL-Working Group-59693 at 65.
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ii. Cross-commodity Hedges, Standards and Conversion Factors--Sec.
19.00(b)(2)-(3)
Proposed Rules: In the December 2013 Position Limits Proposal, the
Commission proposed under Sec. 19.00(b)(2) instructions for reporting
a cash position in a commodity that is different from the commodity
underlying the futures contract used for hedging.\912\ The Commission
also proposed to maintain the requirement in Sec. 19.00(b)(3) that
standards and conversion factors used in computing cash positions for
reporting purposes must be made available to the Commission upon
request.\913\ The Commission clarified that such information would
include hedge ratios used to convert the actual cash commodity to the
equivalent amount of the commodity underlying the commodity derivative
contract used for hedging, and an explanation of the methodology used
for determining the hedge ratio. Finally, the Commission provided
examples of completed series '04 forms in proposed Appendix A to part
19 along with blank forms and instructions.\914\
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\912\ See December 2013 Position Limits Proposal, 78 FR at
75743. The proposed Sec. 19.00(b)(2) is consistent with provisions
in the current section, but would add the term commodity derivative
contracts (as defined in proposed Sec. 150.1). The proposed
definition of cross-commodity hedge in proposed Sec. 150.1 is
discussed above.
\913\ See December 2013 Position Limits Proposal, 78 FR at
75743.
\914\ Id.
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Comments Received: The Commission received no comments on proposed
Sec. Sec. 19.00(b)(2)-(3).
Commission Reproposal: The Commission is reproposing Sec. Sec.
19.00(b)(2)-(3), as originally proposed.
d. Information Required--Sec. 19.01(a)
i. Bona Fide Hedgers Reporting on Form 204--Sec. 19.01(a)(3)
Proposed Rule: Current Sec. 19.01(a) sets forth the data that must
be provided by bona fide hedgers (on Form 204) and by merchants and
dealers in cotton (on Form 304). The Commission proposed to continue
using Forms 204 and 304, which will feature only minor changes to the
types of data to be reported under Sec. 19.01(a)(3).\915\ These
changes include removing the modifier ``fixed price'' from ``fixed
price cash position;'' requiring cash market position information to be
submitted in both the cash market unit of measurement (e.g. barrels or
bushels) and futures equivalents; and adding a specific request for
data concerning open price contracts to accommodate open price pairs.
In addition, the monthly reporting requirements for cotton, including
the granularity of equity, certificated and non-certificated cotton
stocks, would be moved to Form 204, while weekly reporting for cotton
would be retained as a separate report made on Form 304 in order to
maintain the collection of data required by the Commission to publish
its weekly public cotton ``on call'' report.
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\915\ The list of data required for persons filing on Forms 204
and 304 has been relocated from current Sec. 19.01(a) to proposed
Sec. 19.01(a)(3).
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Comments Received: The Commission received several comments
regarding the proposed revisions to Form 204. These comments can be
grouped loosely into three categories: general comments on bona fide
hedge reporting; comments regarding the general information required on
Form 204; and comments regarding the more specific nature of the cash
market information required to be reported. The Commission responds to
each category separately below.
Comments: One commenter stated that CFTC should reduce the
complexity and compliance burden of bona fide hedging record keeping
and reporting by using a model similar to the current exchange-based
exemption process.\916\ The commenter also stated that the requirement
to keep records and file reports, in futures equivalents, regarding the
commercial entity's cash market contracts and derivative market
positions on a real-time basis globally, will be complex and impose a
significant compliance burden. The
[[Page 96804]]
commenter noted such records are not needed for commercial
purposes.\917\
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\916\ CL-ASR-59668 at 3.
\917\ CL-ASR-59668 at 7; CL-ASR-60933 at 5.
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One commenter requested that the Commission provide for a single
hedge exemption application and reporting process, and should not
require applicants to file duplicative forms at the exchange and at the
Commission. The commenter noted its support for rules that would
delegate, to the exchanges, (1) the hedge exemption application and
approval process, and (2) hedge exemption reporting (if any is
required). The commenter argued that the exchanges, rather than the
Commission, have a long history with enforcing position limits on all
of their contracts and are in a much better position than the
Commission to judge the applicant's hedging needs and set an
appropriate hedge level for the hedge being sought. Thus, the commenter
suggested, the exchanges should be the point of contact for market
participants seeking hedge exemptions.\918\
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\918\ CL-AGA-59935 at 13.
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One commenter requested that the Commission address all pending
requests for CEA 4a(a)(7) exemptions and respond to all requests for
bona fide hedging exemptions from the energy industry.\919\
---------------------------------------------------------------------------
\919\ CL-NFP-60393 at 15-16.
---------------------------------------------------------------------------
Commission Reproposal: In response to the first commenter, the
Commission notes that, while the exchange referred to by the commenter
does not have a reporting process analogous to Form 204, it does
require an application prior to the establishment of a position that
exceeds a position limit. In contrast, advance notice is not required
for most federal enumerated bona fide hedging positions.\920\ In the
Commission's experience, the series '04 reports have been useful and
beneficial to the Commission's Surveillance program and the Commission
finds no compelling reason to change the forms to conform to the
exchange's process. Further, the Commission notes that Form 204 is
filed once a month as of the close of business of the last Friday of
the month; it is not and has never been required to be filed on a real-
time basis globally. A market participant only has to file Form 204 if
it is over the limit at any point during the month, and the form
requires only cash market activity (not derivatives market positions).
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\920\ The Commission notes that advance notice is required for
recognition of anticipatory hedging positions by the Commission. See
below for more discussion of anticipatory hedging reporting
requirements.
---------------------------------------------------------------------------
The second commenter was responding to questions raised at the
Energy and Environmental Markets Advisory Council Meeting in June 2014;
the Commission notes in response to that commenter that there is no
federal exemption application process for most enumerated hedges. For
non-enumerated hedges and certain enumerated anticipatory hedges, in
response to the EEMAC meeting and other comments from market
participants, the Commission proposed a single exchange based process
for recognizing bona fide hedges for both federal and exchange limits.
Under this process, proposed in the 2016 Supplemental Position Limits
Proposal, market participants would not be required to file with both
the exchange and the Commission.\921\
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\921\ See supra the discussion of proposed Sec. Sec. 150.9 and
150.11.
---------------------------------------------------------------------------
Finally, in response to the commenter's request that the Commission
respond to pending requests for exemptions under CEA section 4a(a)(7),
the Commission notes that it responded to the outstanding section
4a(a)(7) requests in the December 2013 Position Limits Proposal. In
particular, the Commission proposed to include some of the energy
industry's requests in the definition of bona fide hedging position and
declined to include other requests.\922\
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\922\ The reasoning behind the Commission's determinations with
respect to previous requests for exemption under CEA section
4a(a)(7) is documented in the December 2013 Position Limits
Proposal, 78 FR at 75719-75722. See also the definition of bona fide
hedging position discussed supra.
---------------------------------------------------------------------------
Comments: One commenter recommended that the Commission clarify
that column three of Form 204 should permit a market participant to
identify the number of futures-equivalent referenced contracts that
hedge an identified amount of cash-market positions, but without
separately identifying the positions in each referenced contract. The
commenter stated that separate identification would add to the
financial burden, but that it does not believe that it adds any benefit
to the Commission.\923\ Two commenters also recommended the Commission
remove from Form 204 the requirement for reporting non-referenced
contracts, noting that the Commission did not explain why a market
participant should report commodity derivative contracts that are not
referenced contracts.\924\
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\923\ CL-FIA-59595 at 38.
\924\ The Commission notes that the commenters are referring to
titular language on column 3 of the example Form 204 found in
proposed Appendix A to part 19, which states ``Commodity Derivative
Contract or Referenced Contract'' as the information required in
that column. CL-FIA-59595 at 38; CL-Working Group-59693 at 65.
---------------------------------------------------------------------------
One commenter also recommended that the Commission either delete or
make optional the identification of a particular enumerated position in
column two of Section A or provide a good-faith standard. The commenter
claimed that many energy firms hedge on a portfolio basis, and would
not be able to identify a particular enumerated position that applies
to the referenced contract position needing bona fide hedging
treatment.\925\
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\925\ CL-Working Group-59693 at 65.
---------------------------------------------------------------------------
One commenter asked for clarification regarding whether Section C
of Form 204, which requires information regarding cotton stocks, is
required of market participants in all commodities or just those in
cotton markets.\926\
---------------------------------------------------------------------------
\926\ CL-ASR-60933 at 4.
---------------------------------------------------------------------------
One commenter recommended that the Commission remove the
requirement in Form 204 to submit futures-equivalent derivative
positions, stating that the Commission did not explain why it needs to
obtain data on a market participant's futures-equivalent position as
part of proposed Form 204 in light of the presumption that the
Commission already has a market participant's future-equivalent
position from large-trader reporting rules and access to SDR data.\927\
Another commenter noted that Form 204 mixes units of measurement
between futures and cash positions and requested the Commission require
market participants to use either cash units or futures units. The
commenter noted that it's an easy conversion to make but that the
``mix'' of both units is confusing.\928\
---------------------------------------------------------------------------
\927\ CL-FIA-59595 at 37.
\928\ CL-ASR-60933 at 4.
---------------------------------------------------------------------------
Commission Reproposal: With respect to the comments regarding
column three of Form 204, the Commission clarifies that Form 204 allows
filers to identify multiple referenced contracts used for hedging a
particular commodity cash position in the same line of Form 204.
Because position limits under Sec. 150.2 are to be imposed on
referenced contracts, cash positions hedged by such referenced
contracts should be reported on an aggregate basis, not separated out
by individual contract. However, the Commission declines to adopt the
commenters' recommendation to delete the phrase ``Commodity Derivative
Contract'' from the title of column three, because Sec. 19.00(a)(3)
allows the Commission to require filing of a series '04 form of anyone
holding a reportable position under Sec. 15.00(p)(1), which may
involve a commodity derivative contract that does not fit the
definition of referenced
[[Page 96805]]
contract.\929\ Further, the Commission can require a special call
respondent to file their response using the relevant series '04 form,
and the Form 204 may be filed in order to claim exemptions from
Sec. Sec. 150.3(b) or 150.3(d), exemptions which may not involve a
referenced contract. In sum, because the Commission may require the
filing of Form 204 for purposes other than bona fide hedging, the form
should include both ``Commodity Derivative Contract'' and, separately,
``Referenced Contract'' in the title of column three. To avoid further
confusion, the Commission has rephrased the wording of the column title
and amended the instructions to the form.
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\929\ The Commission notes that Form 704 has been removed from
the list of series '04 forms that could be required under a special
call. This is a non-substantive change resulting from changes made
to Sec. 150.7, discussed infra.
---------------------------------------------------------------------------
With respect to column two of Form 204, the Commission is proposing
to adopt the commenter's recommendation to delete the requirement to
identify which paragraphs of the bona fide hedging definition are
represented by the hedged position. The requirement seemed to be
confusing to commenters who found it unclear whether the column
required the identification of all bona fide hedge definition
paragraphs used for the total cash market position or the
identification of separate cash positions for each paragraph used.
While the requirement was intended to provide insight into which
enumerated provision of the bona fide hedging definition was being
relied upon in order to provide context to the cash position, the
column was never intended to prevent multiple paragraphs being cited at
once. Given the confusion, the Commission is concerned that the
information in column two may not provide the intended information
while being burdensome to implement for both market participants and
Commission staff. For these reasons, the Commission is proposing to
delete column two of Form 204, and has updated the sample forms in
Appendix A to part 19 accordingly.
In response to the commenter requesting clarification regarding
Section C of Form 204, the Commission confirms that Section C is only
required of entities which hold positions in cotton markets that must
be reported on Form 204. Further, the Commission proposes that, in
order for the Commission to effectively evaluate the legitimacy of a
claimed bona fide hedging position, filers of Section C of Form 204
will be required to differentiate between equity stock held in their
capacities as merchants, producers, and/or agents in cotton. The
Commission has updated Section C of Form 204 and Sec.
19.01(a)(3)(vi)(A) to reflect this change. The Commission does not
believe this distinction will create any significant extra burden on
cotton merchants, as the Commission understands that many entities in
cotton markets will hold equity stocks in just one of the three
capacities required on the form.
The Commission notes in response to the last commenter that Form
204 does not require the futures equivalent value of derivative
positions but rather the futures equivalent of the cash position
underlying a hedged position (e.g., 20,000,000 barrels of crude oil is
equivalent to 20,000 futures equivalents, given a 1,000 barrel unit of
trading for the futures contract). The futures equivalent of the cash
position quantity is not available from any Commission data source
because cash positions are not reported to the Commission under, for
example, large trader reporting or swap data repository regulations.
The Commission is proposing to require firms to report both the cash
market unit of measurement and the futures equivalent measurement for a
position in order to easily identify the size of the position
underlying a hedge position, and has updated Sec. 19.01(a)(3),
instructions to the sample Form 204 in Appendix A to part 19, and the
field names on the Form 204 itself to clarify this requirement. The
Commission agrees with the commenter that it is an easy conversion to
make, and does not anticipate that this requirement will create any
significant extra burden on market participants. Obtaining the futures
equivalent information directly from the market participant--as opposed
to calculating it upon receipt of the form--is necessary particularly
with respect to cross-commodity hedging where calculating the hedging
ratio may not be as clear-cut. In its experience administering and
collecting Form 204, the Commission has noted much confusion regarding
whether cash market information should be reported in futures
equivalents or in cash market units. Currently, the form requires cash
market units, but the Commission has seen both units of measurement
used (sometimes on the same form), which requires Commission staff to
contact traders in order to validate the numbers on the form. The
Commission is proposing to require both in order to avoid such
confusion.
Comment: One commenter proposed modifications to the information
required to be reported on Form 204. Specifically, the commenter
suggested that the filer should be required to report the aggregate
quantity of cash positions that underlie bona fide hedging positions in
equivalent core referenced futures contract units, excluding all or
part of the commodity that it excludes in its regular business
practice. The commenter also suggested that if the filer is cross
hedging, the filer must also report the aggregated quantity of bona
fide hedge positions it is cross hedging in terms of the actual
commodity as well as specify the futures market in which it is
hedging.\930\
---------------------------------------------------------------------------
\930\ CL-Working Group-60947 at 17-18.
---------------------------------------------------------------------------
Another commenter suggested that the information required on Form
204 is ``ambiguous'' and asked the Commission to clarify what scope of,
for example, stocks or fixed price purchase and sales agreements must
be reported as well as what level of data precision is required.\931\
---------------------------------------------------------------------------
\931\ CL-COPE-60932 at 10. The commenter made the same requests
for clarification regarding the cash market information required on
Form 504; since the information is similar, the Commission is
responding here to the comment for both forms.
---------------------------------------------------------------------------
A commenter requested that the Commission allow hedges to be
reported on a ``macro'' basis (e.g. futures positions vs. cash
positions) as opposed to requiring the matching of individual physical
market transactions to enumerated bona fide hedges. The commenter
stated that performing specific linkage of individual physical
transactions to individual hedge transactions is burdensome and does
not provide any ``managerial or economic benefit.'' \932\
---------------------------------------------------------------------------
\932\ CL-ASR-60933 at 5.
---------------------------------------------------------------------------
In contrast, another commenter suggested that the Commission tailor
the series '04 reports to require ``only the information that is
required to justify the claimed hedge exemption.'' The commenter stated
that Form 204 appears to require a market participant to list all cash
market exposures, even if the exposures are not relevant to the bona
fide hedge exemption being claimed, which it believes would provide no
value to the Commission in determining whether a hedge was bona
fide.\933\
---------------------------------------------------------------------------
\933\ See CL-Working Group-60396 at 17.
---------------------------------------------------------------------------
Another commenter stated that because the prompt (spot) month for
certain referenced contracts will no longer trade as of the last Friday
of the month, a market participant that exceeds a spot-month position
limit who no longer has that spot-month position should not be required
to report futures-equivalent positions for referenced contract on Form
204.\934\ The commenter recommended that the Commission should require
a market
[[Page 96806]]
participant with a position in excess of a spot-month position limit to
report on Form 204 only the cash-market activity related to that
particular spot-month derivative position, and not to require it to
report cash-market activity related to non-spot-month positions where
it did not exceed a non-spot-month position limit; the commenter stated
that the burden associated with such a reporting obligation would
increase significantly.\935\ Separately, another commenter claimed that
Form 204 appears to address only non-spot-month position limits and
asked the Commission to clarify how it will distinguish reporting on
Form 204 that is related to a spot-month position limit versus a non-
spot-month position limit.\936\
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\934\ CL-FIA-59595 at 37-38.
\935\ CL-FIA-59595 at 38.
\936\ CL-ASR-60933 at 4.
---------------------------------------------------------------------------
One commenter recommended that reporting rules require traders to
identify the specific risk being hedged at the time a trade is
initiated, to maintain records of termination or unwinding of a hedge
when the underlying risk has been sold or otherwise resolved, and to
create a practical audit trail for individual trades, to discourage
traders from attempting to mask speculative trades under the guise of
hedges.\937\
---------------------------------------------------------------------------
\937\ CL-Sen. Levin-59637 at 8.
---------------------------------------------------------------------------
Commission Reproposal: In response to the modifications to Form 204
proposed by the commenter, the Commission notes that no modifications
are necessary because the form, as proposed, requires the reporting of
aggregated quantity of cash positions that underlie bona fide hedging
positions in equivalent core referenced futures contract units,
excluding a de minimis portion of the commodity, products, and
byproducts that it excludes in its regular business practice.\938\
Reproposed Form 204 also requires cross-hedgers to report the
aggregated quantity of bona fide hedging positions it is cross hedging
in terms of the actual commodity as well as specify the futures market
in which it is hedging.
---------------------------------------------------------------------------
\938\ See supra discussion of the exclusion of certain source
commodities, products, and byproducts of the cash commodity hedged
when reporting on Form 204.
---------------------------------------------------------------------------
The Commission reproposes that the Form 204 requires a market
participant to report all cash market positions in any commodity in
which the participant has exceeded a spot-month or non-spot-month
position limit. Form 204 is not intended to match a firm's hedged
positions to underlying cash positions on a one-to-one basis; rather,
it is intended to provide a ``snapshot'' into the firm's cash market
position in a particular commodity as of one day during a month. The
information on this form is used for several purposes in addition to
reviewing hedged positions, including helping Surveillance analysts
understand changes in the market fundamentals in underlying commodity
markets.\939\ The Commission believes that adopting the commenters'
recommendations to require cash market information underlying a single
derivative hedge position would result in a more burdensome reporting
process for firms, particularly those who hedge on a portfolio basis.
Instead, the Commission is confirming that, as requested by the
commenter, cash market positions should be reported on an aggregated or
``macro'' basis.
---------------------------------------------------------------------------
\939\ In the December 2013 Position Limits Proposal, the
Commission highlighted the importance of the data collected on Form
204 to its Surveillance program, stating that ``[c]ollection of this
information would facilitate the Commission's surveillance program
with respect to detecting and deterring trading activity that may
tend to cause sudden or unreasonable fluctuations or unwarranted
changes in the prices of the referenced contracts and their
underlying commodities.'' See December 2013 Position Limits
Proposal, 78 FR at 75742.
---------------------------------------------------------------------------
The Commission notes that this ``snapshot'' requirement has
historically been--and is currently--required on Form 204 for the nine
legacy agricultural contracts. Further, the Commission understands that
exchange hedge application forms require similar cash position
information; firms that have applied to an exchange for hedge
exemptions in non-legacy contracts should already be familiar with
providing cash market information when they exceed a position limit or
a position accountability level.
The commenters that focus on the Form 204 as it relates to
exceeding either spot-month position limits or non-spot-month position
limits contrast each other: one believed Form 204 was to be filed in
response to exceeding only spot-month position limits and the other
that Form 204 was to be filed in response to exceeding only non-spot-
month position limits. However, the Commission has never distinguished
between spot-month limits and non-spot-month limits with respect to the
filing of Form 204. The Commission notes that, as discussed in the
December 2013 Position Limits Proposal, Form 204 is used to review
positions that exceed speculative limits in general, not just in the
spot-month.\940\ Because of this, the Commission is not adopting the
commenter's recommendation to only require Form 204 when a market
participant exceeds a spot-month limit.
---------------------------------------------------------------------------
\940\ The Commission stated that the Form 204 ``must show the
trader's positions in the cash market and are used by the Commission
to determine whether a trader has sufficient cash positions that
justify futures and option positions above the speculative limits''
because the Commission is seeking to ``ensure that any person who
claims any exemption from federal speculative position limits can
demonstrate a legitimate purpose for doing so.'' See December 2013
Position Limits Proposal, 78 FR at 75741-2.
---------------------------------------------------------------------------
In response to the commenter who suggested the Commission require a
``practical audit trail'' for bona fide hedgers, the Commission notes
that other sections of the Commission's regulations provide rules
regarding detailed individual transaction recordkeeping as suggested by
the commenter.
ii. Cotton Merchants and Dealers Reporting on Form 304--Sec. 19.02
Proposed Rule: In the December 2013 Position Limits Proposal, the
Commission proposed to continue to require the filing of Form 304,
which requires information on the quantity of call cotton bought or
sold, on a weekly basis. The Commission noted that Form 304 is required
in order for the Commission to produce its weekly cotton ``on call''
report.\941\ The Commission also proposed to relocate the list of
required information for Form 304 from current Sec. 19.01(a) to
proposed Sec. 19.01(a)(3).
---------------------------------------------------------------------------
\941\ The Commission's Weekly Cotton On-Call Report can be found
here: http://www.cftc.gov/MarketReports/CottonOnCall/index.htm.
---------------------------------------------------------------------------
Comments Received: The Commission did not receive any comments on
the proposed changes to Form 304.
Commission Reproposal: The Commission is reproposing Form 304,