2016-29483

[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).

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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)).

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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.

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\64\ S. Rep. No. 97-384, at 44 (1982).

\65\ Id.

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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.

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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\

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\71\ E.g., CL-A4A-59714 at 3.

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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.

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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.

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\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.

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\81\ E.g., CL-ISDA/SIFMA-59611 at 9; and CL-AMG-59709 at 4, n.8.

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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\

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\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\

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\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. . . .'').

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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.

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\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.

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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).

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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.

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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\

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\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.

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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.

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\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\

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\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[.]'')

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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.

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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'').

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\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\

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\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.

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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.

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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.

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\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'').

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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\

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\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.

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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'').

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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\

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\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.

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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.

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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\

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\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\

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\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).

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[[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).

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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\

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\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).

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[[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).

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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.''

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\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.''

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\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\

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\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\

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\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.

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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).

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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.

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\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.

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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.

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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.

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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\

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\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.

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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\

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\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.

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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 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.

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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.

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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\

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\292\ See, e.g., CL-ISDA/SIFMA-59611 at 3 and 33, CL-Working

Group-59693 at 66-7.

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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.

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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\

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\295\ CEA section 1a(19); 7 U.S.C. 1a(19).

\296\ CEA section 4a(2)(A); 7 U.S.C. 6a(2)(A).

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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.

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\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.

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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\

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\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.

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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.

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\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).

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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.

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\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.

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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\

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\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.

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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\

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\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.

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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.

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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).

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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.

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\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.

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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.

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\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.

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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.

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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 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\

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\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.

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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.

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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\

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\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.

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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.

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\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.

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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\

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\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.

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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.

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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.

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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.''

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\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.

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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\

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\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\

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\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.''

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\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.

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\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\

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\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).

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\383\ 46 FR 50938 at 50945 (Oct. 16, 1981).

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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\

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\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.

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\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).

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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.

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\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).

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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.

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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.

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\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.

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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.

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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\

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\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.

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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.

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\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.

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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.

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\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.

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

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\

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\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\

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\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.

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\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.

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\470\ 2016 Supplemental Position Limits Proposal, 81 FR at

38479.

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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).

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\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\

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\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.

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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.

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\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\

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\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.

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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).

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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.

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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\

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\493\ CL-FIA-59595 at 35, CL-FIA-59566 at 3-7, citing December

2013 Position Limits Proposal, 78 FR at 75837.

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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\

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\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.

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[[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\

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\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.

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

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\

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

\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.

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

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.

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

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).

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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.

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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\

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\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\

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\673\ CL-O SEC-59972 at 5.

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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.

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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.

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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\

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\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.

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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.

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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.

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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).

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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.

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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\

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\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.

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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.

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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.

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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. [footnotes omitted]. The Commission notes that CME

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.

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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.

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\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.

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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\

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\919\ CL-NFP-60393 at 15-16.

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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.

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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.

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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.

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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.

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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.

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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\

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\926\ CL-ASR-60933 at 4.

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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\

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\927\ CL-FIA-59595 at 37.

\928\ CL-ASR-60933 at 4.

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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.

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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\

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\930\ CL-Working Group-60947 at 17-18.

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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\

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\932\ CL-ASR-60933 at 5.

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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\

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\933\ See CL-Working Group-60396 at 17.

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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.

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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\

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\937\ CL-Sen. Levin-59637 at 8.

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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.

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\938\ See supra discussion of the exclusion of certain source

commodities, products, and byproducts of the cash commodity hedged

when reporting on Form 204.

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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 part