2016-29582

[Federal Register Volume 81, Number 242 (Friday, December 16, 2016)]

[Rules and Regulations]

[Pages 91454-91492]

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

[FR Doc No: 2016-29582]

[[Page 91453]]

Vol. 81

Friday,

No. 242

December 16, 2016

Part V

Commodity Futures Trading Commission

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17 CFR Part 150

Aggregation of Positions; Final Rule

Federal Register / Vol. 81 , No. 242 / Friday, December 16, 2016 /

Rules and Regulations

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 150

RIN 3038-AD82

Aggregation of Positions

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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

``CFTC'') is issuing a final rule to amend part 150 of the Commission's

regulations with respect to the policy for aggregation under the

Commission's position limits regime for futures and option contracts on

nine agricultural commodities. The Commission notes that if its

proposed position limits regime for other exempt and agricultural

commodity futures and options contracts and the physical commodity

swaps that are economically equivalent to such contracts are finalized,

these amended regulations would also apply to the position limits

regime for those contracts and swaps.

DATES: The effective date for this final rule is February 14, 2017.

FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist,

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

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

(202) 418-5494, [email protected]; or Mark Fajfar, Assistant General

Counsel, Office of General Counsel, (202) 418-6636, [email protected];

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

Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Final Rules

A. Aggregation on the Basis of Ownership or Control of Positions

in Rule 150.4(a)(1) and Related Exemption From Aggregation in Rule

150.4(b)(2)

B. Criteria for Aggregation Relief in Rule 150.4(b)(2)(i)

C. Notice Filing Requirement in Rule 150.4(c)

D. Other Issues Related to Aggregation on the Basis of Ownership

E. Exemption for Certain Accounts Held by FCMs in Rule

150.4(b)(3)

F. Exemptions From Aggregation for Underwriting and Broker-

Dealer Activities in Rules 150.4(b)(5) and (b)(6)

G. Exemption From Aggregation Where Information Sharing Would

Violate Law in Rule 150.4(b)(7)

H. Aggregation Requirement for Substantially Identical Trading

in Rule 150.4(a)(2)

I. Exemption for Ownership by Limited Partners, Shareholders or

Other Pool Participants in Rule 150.4(b)(1)

J. Exemption for Accounts Carried by an Independent Account

Controller in Rule 150.4(b)(4) and Conforming Change in Rule 150.1

K. Revisions To Clarify Regulations

III. Related Matters

A. Considerations of Costs and Benefits

B. Regulatory Flexibility Act

C. Paperwork Reduction Act

I. Background

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 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 on certain

enumerated agricultural contracts; the listed commodities are

referred to as enumerated agricultural commodities. The Commission

has proposed to amend its position limits to also encompass other

exempt and agricultural commodity futures and options contracts and

the physical commodity swaps that are economically equivalent to

such contracts. See Position Limits for Derivatives, 78 FR 75680

(Dec. 12, 2013).

\3\ See 17 CFR 150.2.

\4\ See 17 CFR 150.3.

\5\ See 17 CFR 150.4.

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The Commission's existing aggregation policy under regulation 150.4

generally requires that unless a particular exemption applies, a person

must aggregate all positions and accounts for which that person

controls the trading decisions with all positions and accounts in which

that person has a 10 percent or greater ownership interest, and with

the positions of any other persons with which the person is acting

pursuant to an express or implied agreement or understanding.\6\ The

scope of exemptions from aggregation include the ownership interests of

limited partners in pooled accounts,\7\ discretionary accounts and

customer trading programs of futures commission merchants (``FCM''),\8\

and eligible entities with independent account controllers (``IAC'')

that manage customer positions.\9\ Market participants claiming one of

the exemptions from aggregation are subject to a call by the Commission

for information demonstrating compliance with the conditions applicable

to the claimed exemption.\10\

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\6\ See 17 CFR 150.4(a) and (b).

\7\ See 17 CFR 150.4(c).

\8\ See 17 CFR 150.4(d).

\9\ See 17 CFR 150.3(a)(4).

\10\ See 17 CFR 150.3(b) and 150.4(e).

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The Commission adopted aggregation rules in 2011, as part of its

adoption of part 151 of its regulations, that were largely similar to

the existing aggregation policy under regulation 150.4.\11\ In 2012,

the Commission proposed to amend the aggregation rules in part 151.\12\

Prior to finalization of the 2012 amendments, however, part 151 of the

Commission's regulations was vacated by court order.\13\

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\11\ See Position Limits for Futures and Swaps, 76 FR 71626

(Nov. 18, 2011). With regard to determining which accounts and

positions a person must aggregate, regulation 151.7 (now vacated,

see footnote 13, below) implemented the Commission's existing

aggregation policy under regulation 150.4 and also provided

additional exemptions for underwriters of securities, and for where

the sharing of information between persons would cause either person

to violate federal law or regulations adopted thereunder. With the

exception of the exemption for underwriters, vacated regulation

151.7 required market participants to file a notice with the

Commission demonstrating compliance with the conditions applicable

to each exemption.

\12\ See Aggregation, Position Limits for Futures and Swaps, 77

FR 31767 (May 30, 2012).

\13\ See International Swaps and Derivatives Association v.

United States Commodity Futures Trading Commission, 887 F. Supp. 2d

259 (D.D.C. 2012). The revised position limit levels in amended

section 150.2 were not vacated.

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In November 2013, the Commission proposed to amend the existing

aggregation rules in regulation 150.4, and certain related regulations,

to modify rules to determine which accounts and positions a person must

aggregate.\14\ This proposal and the related notice of proposed

rulemaking are referred to herein as the ``Proposed Rule.'' The

Proposed Rule was substantially similar to the aggregation rules that

had been adopted in part 151 of the Commission's regulations in 2011,

as they were proposed to be amended in May 2012.\15\ After reviewing

public comments on the Proposed Rule, the Commission supplemented it

with a limited revision in September 2015 that would permit the

disaggregation of positions of owned entities in expanded

circumstances.\16\ This supplement to the proposal and the

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related supplemental notice of proposed rulemaking are referred to

herein as the ``Supplemental Notice.''

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\14\ See Aggregation of Positions; Proposed Rule, 78 FR 68946

(Nov. 15, 2013).

\15\ See Proposed Rule, 78 FR at 68947-48.

\16\ See Aggregation of Positions: Supplemental notice of

proposed rulemaking, 80 FR 58365 (Sept. 29, 2015).

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II. Final Rules

The Commission is adopting the amendments to its aggregation rules

in regulation 150.4, and certain related regulations, as set forth in

the Proposed Rule and modified in the Supplemental Notice, with certain

further changes made in response to public comments. The amendments and

the public comments relevant to each amendment are discussed below.\17\

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\17\ The public comments on the Proposed Rule and the

Supplemental Notice are available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1620.

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A. Aggregation on the Basis of Ownership or Control of Positions in

Rule 150.4(a)(1) and Related Exemption From Aggregation in Rule

150.4(b)(2)

1. Proposed Approach

The Proposed Rule reflected the Commission's long-standing

incremental approach to exemptions from the aggregation requirement for

persons owning a financial interest in an entity. The Proposed Rule

highlighted the relevant statutory language of section 4a(a)(1) of the

CEA, which requires aggregation of an entity's positions on the basis

of either ownership or control of the entity, and the related

legislative history and regulatory developments which support the

Commission's approach.\18\ In addition, the Proposed Rule explained

that the Commission's historical practice has been to craft narrowly-

tailored exemptions, when and if appropriate, to the basic requirement

of aggregation when there is either ownership or control of an entity.

On this basis, proposed rule 150.4(a)(1) would maintain the requirement

in existing regulation 150.4(b) that all positions in accounts for

which any person, by power of attorney or otherwise, directly or

indirectly, controls trading or holds a 10 percent or greater ownership

or equity interest be aggregated with the positions held and trading

done by such person.

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\18\ See Proposed Rule, 78 FR at 68956, citing 7 U.S.C. 6a(a)(1)

(``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'').

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To explain the basis for maintaining the existing 10 percent

threshold level, the Commission noted that it has generally found that

an ownership or equity interest of less than 10 percent in an account

or position that is controlled by another person who makes

discretionary trading decisions does not present a concern that such

ownership interest results in control over trading or can be used

indirectly to create a large speculative position through ownership

interests in multiple accounts.\19\ As such, the Commission has

exempted an ownership interest below 10 percent from the aggregation

requirement, while requiring aggregation when there is an ownership

interest above 10 percent.\20\ Prior comments, discussed in the

Proposed Rule, had advocated that an ownership interest of 10 percent

or more should also be exempt from the aggregation requirement, so long

as such ownership represents a passive investment that does not involve

control of the trading decisions of the owned entity.\21\ The prior

commenters had asserted that such passive investments would be unlikely

to allow the owner to directly or indirectly control the trading of the

owned entity, and therefore would be unlikely to present a risk that

persons would be able to hold an unduly large overall position through

positions in multiple accounts.\22\

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\19\ See Proposed Rule, 78 FR at 68958.

\20\ The Commission codified this aggregation threshold in its

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

administrative experience of the Commission's predecessor. See

Statement of Policy on Aggregation of Accounts and Adoption of

Related Reporting Rules, 44 FR 33839, 33843 (June 13, 1979) (``1979

Aggregation Policy''). Note, however, that proposed rule 150.4(a)(2)

would also separately require aggregation of investments in accounts

with substantially identical trading strategies.

\21\ See Proposed Rule, 78 FR at 68951.

\22\ See id.

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Responding to these prior comments, the Commission explained in the

Proposed Rule that it had previously considered, but not adopted, a

broad passive investment exemption from the aggregation requirement,

and had instead generally restricted exemptions based on ownership to

those for FCMs, limited partner investors in commodity pools, and IACs

managing customer funds for an eligible entity.\23\ Further, the

Proposed Rule reiterated the Commission's belief in incremental

development of aggregation exemptions over time.\24\ Consistent with

that incremental approach, the Proposed Rule maintained the 10 percent

threshold in the existing regulation but proposed to adopt specific,

tailored relief from the ownership criteria of aggregation for certain

situations.

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\23\ See id, citing Exemptions from Speculative Position Limits

for Positions which have a Common Owner but which are Independently

Controlled and for Certain Spread Positions; Proposed Rule, 53 FR

13290, 13292 (Apr. 22, 1988). The 1988 proposal for the independent

account controller rule requested comment on the possibility of a

broader passive investment exemption, and specifically noted:

[Q]uestions also have been raised regarding the continued

appropriateness of the Commission's aggregation standard which

provides that a beneficial interest in an account or positions of

ten percent or more constitutes a financial interest tantamount to

ownership. This threshold financial interest serves to establish

ownership under both the ownership criterion of the aggregation

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

Aggregation Policy.

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

attention where beneficial ownership in several otherwise unrelated

accounts may be greater than ten percent, but the circumstances

surrounding the financial interest clearly exclude the owner from

control over the positions. The Commission is requesting comment on

whether further revisions to the current Commission rules and

policies regarding ownership are advisable in light of the exemption

hereby being proposed. If such financial interests raise issues not

addressed by the proposed exemption for independent account

controllers, what approach best resolves those issues while

maintaining a bright-line aggregation test?

\24\ See Proposed Rule, 78 FR at 68951, citing Aggregation,

Position Limits for Futures and Swaps, 77 FR 31767, 31773 (May 30,

2012). This incremental approach to account aggregation standards

reflects the Commission's historical practice. See, e.g., Exemptions

from Speculative Position Limits for Positions Which Have a Common

Owner But Which are Independently Controlled and for Certain Spread

Positions; Final Rule, 53 FR 41563, 41567 (Oct. 24, 1988) (the

definition of eligible entity for purposes of the IAC exemption

originally only included commodity pool operators (``CPOs''), or

exempt CPOs or pools, but the Commission indicated a willingness to

expand the exemption after a ``reasonable opportunity'' to review

the exemption.); Exemption From Speculative Position Limits for

Positions Which Have a Common Owner, But Which Are Independently

Controlled, 56 FR 14308, 14312 (Apr. 9, 1991) (the Commission

expanded eligible entities to include commodity trading advisors,

but did not include additional entities requested by commenters

until the Commission had the opportunity to assess the current

expansion and further evaluate the additional entities); and

Revision of Federal Speculative Position Limits and Associated

Rules, 64 FR 24038 (May 5, 1999) (``1999 Amendments'') (the

Commission expanded the list of eligible entities to include many of

the entities commenters requested in the 1991 rulemaking).

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a. Initial Ownership Threshold for Disaggregation Relief in the

Proposed Rule

The Proposed Rule included two tiers of relief from the ownership

criteria of aggregation--relief on the basis of a notice filing,

effective upon submission, by persons holding an interest of between 10

percent and 50 percent in an owned entity, and relief on the basis of

an application by persons holding an interest of more than 50 percent

in an owned entity.\25\ Each of these procedures for relief in the

Proposed Rule is described briefly below.

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\25\ See Proposed Rule, 78 FR at 68958-61.

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The Proposed Rule set out a notice filing procedure, effective upon

submission, to permit a person with either an ownership or an equity

interest in an owned entity of 50 percent

[[Page 91456]]

or less to disaggregate the positions of an owned entity in specified

circumstances, even if such person has a 10 percent or greater interest

in the owned entity.\26\ The notice filing would have to demonstrate

compliance with certain conditions set forth in proposed rule

150.4(b)(2)(i). Similar to other exemptions from aggregation, the

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

under proposed rule 150.4(c) the Commission would be able to

subsequently call for additional information, and to amend, terminate

or otherwise modify the person's aggregation exemption for failure to

comply with the provisions of proposed rule 150.4(b)(2). Further, the

person would be obligated by proposed rule 150.4(c) to amend the notice

filing in the event of a material change to the circumstances described

in the filing.

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\26\ Under the Proposed Rule, and in a manner similar to current

regulation, if a person qualifies for disaggregation relief, the

person would nonetheless have to aggregate those same accounts or

positions covered by the relief if they are held in accounts with

substantially identical trading strategies. See proposed rule

150.4(a)(2). The exemptions in proposed rule 150.4 were set forth as

alternatives, so that, for example, the applicability of the

exemption in paragraph (b)(2) would not affect the applicability of

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

controller exemption).

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In the Proposed Rule, the Commission stated its preliminary belief

that a 50 percent limit on the ownership interest in another entity is

a reasonable, ``bright line'' standard for determining when aggregation

of positions is required, even where the ownership interest is

passive.\27\ In the Proposed Rule, the Commission explained that

majority ownership (i.e., over 50 percent) is indicative of control,

and this standard addresses the Commission's concerns about

circumvention of position limits by coordinated trading or direct or

indirect influence between entities. For these reasons, the Commission

preliminarily believed that the 50 percent limit would be appropriate

to address the heightened risk of direct or indirect influence over the

owned entity and therefore a threshold at this level would be a

reasonable approach to the aggregation of owned accounts pursuant to

Section 4a(a)(1) of the CEA.\28\

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\27\ See Proposed Rule, 78 FR at 68959.

\28\ See id.

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With respect to a person who has a greater than 50 percent

ownership or equity interest in the owned entity, proposed rule

150.4(b)(3) included disaggregation relief in limited situations where

the owned entity is not required to be, and is not, consolidated on the

financial statement of the person, if the person can demonstrate that

the person does not control the trading of the owned entity, based on

the criteria in proposed rule 150.4(b)(2)(i), and if both the person

and the owned entity have procedures in place that are reasonably

effective to prevent coordinated trading.

Under proposed rule 150.4(b)(3), a person with a greater than 50

percent ownership of an owned entity would have to apply on a case-by-

case basis to the Commission for permission to disaggregate, and await

the Commission's decision as to whether certain conditions specified in

the proposed rule had been satisfied and therefore disaggregation would

be permitted.\29\ The person would be required to demonstrate to the

Commission that:

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\29\ See Proposed Rule, 78 FR at 68959-61. This approach was

consistent with the Commission's preliminary view that relief from

the aggregation requirement should not be available merely upon a

notice filing by a person who has a greater than 50 percent

ownership or equity interest in the owned entity. The Commission

explained that, in its view, a person with a greater than 50 percent

ownership interest in multiple accounts would have the ability to

hold and control a significant and potentially unduly large overall

position in a particular commodity, which position limits are

intended to prevent. See id.

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i. The owned entity is not required to be, and is not, consolidated

on the financial statement of the person,

ii. the person does not control the trading of the owned entity

(based on criteria in proposed rule 150.4(b)(2)(i)), with the person

showing that it and the owned entity have procedures in place that are

reasonably effective to prevent coordinated trading in spite of

majority ownership,

iii. each representative of the person (if any) on the owned

entity's board of directors attests that he or she does not control

trading of the owned entity, and

iv. the person certifies that either (a) all of the owned entity's

positions qualify as bona fide hedging transactions or (b) the owned

entity's positions that do not so qualify do not exceed 20 percent of

any position limit currently in effect, and the person agrees in either

case that:

If this certification becomes untrue for the owned entity,

the person will aggregate the owned entity for three complete calendar

months and if all of the owned entity's positions qualify as bona fide

hedging transactions during that time the person would have the

opportunity to make the certification again and stop aggregating,

upon any call by the Commission, the owned entity(ies)

will make a filing responsive to the call, reflecting the owned

entity's positions and transactions only, at any time (such as when the

Commission believes the owned entities in the aggregate may exceed a

visibility level), and

the person will provide additional information to the

Commission if any owned entity engages in coordinated activity, short

of common control (understanding that if there were common control, the

positions of the owned entity(ies) would be aggregated).

The relief under proposed rule 150.4(b)(3) would not be automatic,

but rather would be available only if the Commission finds, in its

discretion, that the four conditions above are met. There would be no

time limits on the Commission's process for making the determination of

whether relief under proposed rule 150.4(b)(3) is appropriately

granted, and relief would be available only if and when the Commission

acts on a particular request for relief.\30\

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\30\ See Proposed Rule, 78 FR at 68960.

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b. Ownership Threshold for Disaggregation Relief in the Supplemental

Notice

The Supplemental Notice discussed the public comments received on

this aspect of the Proposed Rule. In brief, it noted that commenters

generally praised the proposed relief for owners of between 10 percent

and 50 percent of an owned entity, but commenters asserted that the

proposed application procedures under proposed rule 150.4(b)(3) for

owners of a more than 50 percent equity or ownership interest were

unnecessary and inappropriate.\31\ Several commenters said that the

Commission should provide the same disaggregation relief for owners of

more than 50 percent of an owned entity as was proposed to be provided

for owners of 50 percent or less.\32\ On the other hand, the

Supplemental Notice noted that a few commenters opposed providing

aggregation relief for owners of more than 10 percent of an owned

entity.\33\

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\31\ See Supplemental Notice, 80 FR at58369.

\32\ See id.

\33\ See id.

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In view of the points raised by commenters on the Proposed Rule,

the Commission proposed in the Supplemental Notice to delete proposed

rules 150.4(b)(3) and 150.4(c)(2), and to change proposed rule

150.4(b)(2) so that it would apply to all persons with an ownership or

equity interest in an owned entity of 10 percent or greater (i.e., an

interest of up to and including 100 percent) in the same manner as

proposed rule 150.4(b)(2) would have applied, before this revision, to

owners

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of an interest of between 10 percent and 50 percent.\34\ The Commission

stated in the Supplemental Notice that, while the language in section

4a of the CEA, its legislative history, subsequent regulatory

developments, and the Commission's historical practices in this regard

all support aggregation on the basis of either ownership or control of

an entity as a necessary part of the Commission's position limit

regime,\35\ the Commission is also mindful that, as discussed by

commenters on the Proposed Rule, aggregation of positions held by owned

entities may in some cases be impractical, burdensome, or not in

keeping with modern corporate structures.

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\34\ See Supplemental Notice, 80 FR at 58371. The Supplemental

Notice also laid out conforming changes in proposed rule

150.4(b)(7), to delete a cap of 50 percent on the ownership or

equity interest for broker-dealers to disaggregate, in proposed rule

150.4(e)(1)(i), to delete a delegation of authority referencing

proposed rule 150.4(b)(3), and in proposed rule 150.4(c)(1), to

delete a cross-reference. See id.

\35\ See Supplemental Notice, 80 FR at 58372, citing 1999

Amendments, 64 FR at 24044 (``[T]he Commission . . . interprets the

`held or controlled' criteria as applying separately to ownership of

positions or to control of trading decisions.''). See also,

Exemptions from Speculative Position Limits for Positions which have

a Common Owner but which are Independently Controlled and for

Certain Spread Positions; Proposed Rule, 53 FR 13290, 13292, (Apr.

22, 1988) (responding to petitions, the Commission proposed the IAC

exemption from speculative position limits, but declined to remove

the ownership standard from its aggregation policy).

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The Commission explained that the modifications in the Supplemental

Notice would address comments that ownership of a greater than 50

percent interest in an entity (and the related consolidation of

financial statements) may not mean that the owner actually controls

day-to-day trading decisions of the owned entity.\36\ The Commission

stated in the Supplemental Notice that, on balance, the overall purpose

of the position limits regime (to diminish the burden of excessive

speculation which may cause unwarranted changes in commodity prices)

would be better served by focusing the aggregation requirement on

situations where the owner is, in view of the circumstances, actually

able to control the trading of the owned entity.\37\ The Commission

reasoned that the ability to cause unwarranted changes in the price of

a commodity derivatives contract would result from the owner's control

of the owned entity's trading activity, while due to variances in

corporate structures there may be instances where one entity has a 100

percent ownership interest in another entity yet does not control day-

to-day business activities of the owned entity. In this situation the

owned entity would not have knowledge of the activities of other

entities owned by the same owner, nor would it raise the heightened

concerns, triggered when one entity both owns and controls trading of

another entity, that the owner would necessarily act in a coordinated

manner with other owned entities.\38\

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\36\ See Supplemental Notice, 80 FR at 58371.

\37\ See id. The Commission notes in this regard that there may

be significant burdens in meeting the requirements of proposed rule

150.4(b)(3) even where there is no control of the trading of the

owned entity, as was suggested by the Center for Capital Markets

Competitiveness of the U.S. Chamber of Commerce, the Asset

Management Group of the Securities Industry and Financial Markets

Association and the other commenters. See Supplemental Notice, 80 FR

at 58372.

\38\ Supplemental Notice, 80 FR at 58371. In the Supplemental

Notice, the Commission also considered that aggregation of the

positions of majority-owned subsidiaries could require corporate

groups to establish procedures to monitor and coordinate trading

activities across disparate owned entities, which could have

unpredictable consequences including not only the cost of

establishing these procedures, but also the impairment of corporate

structures which were established to ensure that the various owned

entities engage in business independently. On the other hand, the

Commission believed that the disaggregation criteria in proposed

rule 150.4(b)(2)(i) are in line with prudent corporate practices

that are maintained for longstanding, well-accepted reasons with

which the Commission did not intend to interfere. See Supplemental

Notice, 80 FR at 58372.

In the Proposed Rule, the Commission noted that if the

aggregation rules adopted by the Commission would be a precedent for

aggregation rules enforced by designated contract markets (``DCMs'')

and swap execution facilities (``SEFs''), it would be even more

important that the aggregation rules set out, to the extent

feasible, ``bright line'' rules that are capable of easy application

by a wide variety of market participants while not being susceptible

to circumvention. See Proposed Rule, 78 FR at 68596, n. 103. In the

Supplemental Notice, the Commission stated that implementing an

approach to aggregation that is in keeping with longstanding

corporate practices would promote the goal of setting out ``bright

line'' rules that are relatively easy to apply while not being

susceptible to circumvention. See Supplemental Notice, 80 FR at

58372.

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Prior to issuing the Supplemental Notice, the Commission considered

the views of commenters who warned that inappropriate relief from the

aggregation requirements could allow circumvention of position limits

through the use of multiple subsidiaries. However, the Commission

believed that the criteria in proposed rule 150.4(b)(2)(i), which must

be satisfied in order to disaggregate, will appropriately indicate

whether an owner has control of or knowledge of the trading activity of

the owned entity, such that if the disaggregation criteria are

satisfied, the ability of an owner and the owned entity to act together

to engage in excessive speculation should not differ significantly from

that of two separate individuals.\39\

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\39\ See Supplemental Notice, 80 FR at 58371. See also Proposed

Rule, 78 FR at 68961, referring to regulation 150.3(a)(4) (proposed

to be replaced by proposed rule 150.4(b)(5)). Such conditions have

been useful in ensuring that trading is not coordinated through the

development of similar trading systems, and that procedures are in

place to prevent the sharing of trading decisions between entities.

The disaggregation criteria require that the two entities not have

knowledge of each other's trading and, moreover, have and enforce

written procedures to preclude such knowledge.

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A commenter on the Proposed Rule had said the Commission should

eliminate the proposed aggregation exemptions for ownership interests

up to 50 percent, because such notices would make it virtually

impossible for the Commission to make timely, informed decisions about

whether one person in fact controls the trading decisions of another

and whether all proffered certifications are accurate.\40\ This

commenter said that, alternatively, the Commission should only provide

aggregation exemptions where the ownership interest is no greater than

25 percent, in order to prevent abusive practices, which should not

become effective prior to Commission review of the facts.\41\

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\40\ See Honorable Carl Levin, United States Senate on February

10, 2014 (``CL-Sen. Levin Feb 10''), see also Americans for

Financial Reform on February 10, 2014 (Commission should trigger

automatic aggregation for an ownership interest well under 50

percent, because potential aggregation exemptions for ownership

interests over 10 percent may undermine the proposed limits).

\41\ See CL-Sen. Levin Feb 10.

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The Commission pointed out in the Supplemental Notice that

finalization of proposed rule 150.4(b)(2), which would allow persons

with ownership or equity interests in an owned entity of up to and

including 100 percent to disaggregate the positions of the owned entity

if certain conditions were satisfied, would not mean that there would

be no aggregation on the basis of ownership. Rather, aggregation would

still be the ``default requirement'' for the owner of a 10 percent or

greater interest in an owned entity, unless the conditions of proposed

rule 150.4(b)(2) are satisfied.\42\

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\42\ See Supplemental Notice, 80 FR at 58371. The Commission

noted in the Proposed Rule that if there were no aggregation on the

basis of ownership, it would have to apply a control test in all

cases, which would pose significant administrative challenges to

individually assess control across all market participants. See

Proposed Rule, 78 FR at 68956. Further, the Commission considered

that if the statute required aggregation only if the existence of

control were proven, market participants may be able to use an

ownership interest to directly or indirectly influence the account

or position and thereby circumvent the aggregation requirement. See

id. On further review and after considering the comments on the

Proposed Rule, the Commission stated in the Supplemental Notice that

the disaggregation criteria in proposed rule 150.4(b)(2)(i) provide

an effective, easily implemented means of applying a ``control

test'' to determine if disaggregation should be allowed, without

creating a loophole through which market participants could

circumvent the aggregation requirement. See Supplemental Notice, 80

FR at 58371.

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[[Page 91458]]

2. Commenters' Views

a. Comments on the Ownership Threshold

The large majority of comments received after the Supplemental

Notice was issued supported proposed rule 150.4(b)(2) as it was

modified in the Supplemental Notice, and said the Commission should not

adopt proposed rule 150.4(b)(3). The commenters said that the

modifications described in the Supplemental Notice would provide for a

more workable aggregation standard, enhance the Commission's regulatory

goals, and focus the Commission's limited resources on only those

disaggregation filings which might reasonably warrant additional

discretionary review.\43\

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\43\ See Electric Power Supply Association on November 13, 2015

(``CL-EPSA Nov 13''); International Swaps and Derivatives

Association on November 12, 2015 (``CL-ISDA Nov 12''); Alternative

Investment Management Association on November 12, 2015 (``CL-AIMA

Nov 12''); Asset Management Group of the Securities Industry and

Financial Markets Association (``SIFMA AMG'') on November 13, 2015

(``CL-SIFMA AMG Nov 13''); International Energy Credit Association

on November 13, 2015 (``CL-IECA Nov 13''); Energy Transfer Partners,

L.P., on behalf of itself and Energy Transfer Equity, L.P. on

November 13, 2015 (``CL-Energy Transfer Nov 13''); CME Group, Inc.

on November 13, 2015 (``CL-CME Nov 13''); Coalition of Physical

Energy Companies on November 13, 2015 (``CL-COPE Nov 13'');

Commercial Energy Working Group on November 13, 2015 (``C-Working

Group Nov 13''); Morgan, Lewis & Bockius LLP on November 13, 2015

(``CL-Morgan Lewis Nov 13''); Sempra Energy on November 13, 2015

(``CL-Sempra Nov 13''); Commodity Markets Council, November 13, 2015

(``CL-CMC Nov 13''); ECOM Agroindustrial Corp., Ltd. on November 13,

2015 (``CL-ECOM Nov 13''); Edison Electric Institute on November 13,

2015 (``CL-EEI Nov 13''); Futures Industry Association (``FIA'') on

November 13, 2015 (``CL-FIA Nov 13''); Ontario Teachers' Pension

Plan on November 13, 2015 (``CL-OTPP Nov 13''); ICE Futures US, Inc.

on November 13, 2015 (``CL-ICE Nov 13''); Natural Gas Supply

Association on November 13, 2015 (``CL-NGSA Nov 13''); Managed Funds

Association on November 12, 2015 (``CL-MFA Nov 12''); Private Equity

Growth Capital Council on November 12, 2015 (``CL-PEGCC Nov 12'') ;

Minneapolis Grain Exchange, Inc. on November 13, 2015.

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Many of the commenters who supported the revisions in the

Supplemental Notice had also provided comments on the Proposed Rule to

the effect that the Commission should provide the same disaggregation

relief for owners of more than 50 percent of an owned entity as was

proposed to be provided for owners of 50 percent or less. For example,

one commented that the Commission should permit majority-owned

affiliates to be disaggregated regardless of whether the entities are

required to consolidate financial statements, another commented that

the requirement to submit an application to the Commission and await

its approval would be unworkable in practice and not provide any

apparent regulatory benefit, and a third commented that aggregation

relief for majority-owned affiliates was necessary to avoid ``serious

regulatory costs and consequences.'' \44\

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\44\ See Supplemental Notice, 80 FR at 58369-70 (describing

comments of FIA, the Center for Capital Markets Competitiveness of

the U.S. Chamber of Commerce, and MidAmerican Energy Holdings

Company).

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

Three commenters, each a public policy organization, opposed the

modifications described in the Supplemental Notice, saying the

modifications would impermissibly weaken the aggregation regime by

allowing entities with majority ownership not only to qualify for

disaggregation, but also to do so through a simple, immediately

effective filing. One commenter said that to allow this would be

fundamentally at odds with the statutory mandate of limiting

speculation and the requirement of aggregation based on indirect

control of an owned entity, because the proposal in the Supplemental

Notice would effectively remove the distinction between minority and

majority ownership by implementing a presumption that ownership does

not entail control over the owned entity's trading activity.\45\ This

commenter believes the Commission should reinstate a requirement of

aggregation of positions whenever an ownership interest in an owned

entity exceeds 10 percent.\46\ Another commenter asserted that the

procedure in the Supplemental Notice may be contrary to the CEA,

because it allows an entity other than the Commission (i.e., the entity

which files an automatically-effective compliance notice) to make the

determination of whether aggregation is required.\47\ The third

commenter in this group also maintained that relief from the

aggregation requirement should not be available to an owner of more

than 10 percent of a subsidiary, because ``allowing [position]

disaggregation of majority-owned subsidiaries would violate the clear

language'' of CEA section 4a(a)(1) and would allow the owner of such

subsidiaries to circumvent position limits through the creation of

multiple subsidiaries.\48\

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\45\ See Better Markets, Inc. (``Better Markets'') on November

13, 2015 (``CL-Better Markets Nov 13''). The commenter had also

commented on the Proposed Rule, saying that allowing disaggregation

of majority-owned subsidiaries would ignore the clear language of

CEA section 4a(a)(1). See Supplemental Notice, 80 FR at 58369

(describing comment of Better Markets).

\46\ See CL-Better Markets Nov 13.

\47\ See Occupy the SEC on November 13, 2015 (``CL-Occupy the

SEC Nov 13''). This commenter warned that challenges to the

Commission's handling of large amounts of data could likely allow

many companies that should have their positions aggregated to evade

that restriction. See id. The commenter had also commented on the

Proposed Rule, saying that no relief from aggregation should be

allowed for owners of more than 50 percent of an owned entity

because in this case the two firms are ``largely interconnected.''

See Supplemental Notice, 80 FR at 58369 (describing comment of

Occupy the SEC).

\48\ See Institute for Agriculture and Trade Policy (``IATP'')

on November 13, 2015 (``CL-IATP Nov 13'').

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

One commenter opposed to the approach in the Supplemental Notice

argued that it would lead to inconsistent results because it calls for

a case-by-case, discretionary assessment of compliance with standards

that test separation of trading activity, instead of an easy to

understand, bright-line test premised on ownership percentage. This

commenter feared that entities subject to this discretionary standard

would be able to attack the Commission's efforts to enforce the

aggregation requirement as arbitrary and capricious.\49\ Therefore, the

Commission would have to be vigilant in enforcing regulations requiring

aggregation by unaffiliated individuals acting pursuant to an implied

agreement.\50\ For example, this commenter asserted that unaffiliated

investment vehicles could serve as a conduit for the trading strategies

of a sponsor that holds no equity interest in the investment vehicle,

the trading decisions of which are nominally outsourced to an

unaffiliated investment advisor.\51\ The commenter believes that

aggregation must be applied in such a case, despite the apparent

absence of an ownership relationship between the sponsor and the

investment vehicle.\52\

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\49\ See CL-Occupy the SEC Nov 13.

\50\ See id. Along similar lines, another commenter said that

the increasing ease of electronic interoffice communication could

allow for circumvention of the aggregation requirements. See CL-IATP

Nov 13.

\51\ See CL-Occupy the SEC Nov 13.

\52\ See id.

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b. Comments Suggesting Additional Relief From the Aggregation

Requirement, or a Different Ownership Threshold

Several commenters believed that the proposal should be modified to

provide relief from the aggregation requirement in additional

situations. For instance, one commenter said that the Commission should

provide an exemption from aggregation for transitory ownership or

equity interests in an owned-entity, such as those acquired through

foreclosure or a similar credit event.\53\ Other commenters said the

Commission

[[Page 91459]]

should establish a process for entities that do not squarely meet the

criteria for disaggregation relief in proposed rule 150.4(b)(2),

allowing them to seek disaggregation relief based upon particular facts

and circumstances demonstrating that the owner does not control or have

shared knowledge of the owned entity's trading activities.\54\ Other

commenters asked for clarification of whether relief from aggregation

on the basis of ownership is available to general partners or other

persons holding interests in various forms of partnerships.\55\

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

\53\ See FIA on February 6, 2014 (``CL-FIA Feb 6'') and CL-FIA

Nov 13.

\54\ See CL-COPE Nov 13. See also CL-Morgan Lewis Nov 13

(exemption from aggregation requirement should be a non-exclusive

safe harbor, not excluding the possibility of relief for owners and

owned entities that do not satisfy every criteria; delegate

authority under 4a(a)(7) to staffs of the Commission, DCMs and SEFs

to provide disaggregation relief to such firms on a case-by-case

basis); CL-EPSA Nov 13 (10 percent ownership should invoke a

rebuttable presumption that can be overcome by making the required

notice filing in good faith).

\55\ See Managed Funds Association on February 7, 2014 (``CL-MFA

Feb 7''); CL-Energy Transfer Nov 13.

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Although commenters generally supported the modifications made in

the Supplemental Notice, and in particular the removal of the

distinction between ownership interests of less than 50 percent and

more than 50 percent, several commenters maintained that the Commission

should not apply a threshold of 10 percent for the requirement of a

notice filing in order to claim disaggregation relief.

Some commenters said that the Commission should apply a higher

threshold below which a claim for disaggregation relief would not be

required. Three commenters advocated for the threshold to be moved to

25 percent.\56\ Other commenters said the threshold should be 50

percent, claiming that minority ownership generally does not permit

control over operational aspects of the owned entity's activities,

including trading strategy and decisions.\57\ One commenter supporting

a higher threshold remarked that maintaining the 10 percent threshold

will trigger ``false positives'' requiring owners with no actual

control over an owned-entity's trading activity to file a notice with

the Commission, which will impose significant costs on market

participants to prepare and file a notice, and on the Commission which

will have to review and administer all of the filed notices.\58\ In

contrast, this commenter said, a higher threshold would allow the

Commission to focus its surveillance resources on entities where there

is a greater likelihood of commonly controlled trading activity.\59\

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

\56\ See CL-ISDA Nov 12; CL-MFA Feb 7; CL-AIMA Feb 10.

\57\ See CSC Sugar, LLC on February 10, 2014; CL-IECA Nov 13;

CL-PEGCC Nov 12; CL-OTPP Nov 13; CL-FIA Nov 13; CL-NGSA Nov 13.

\58\ See CL-FIA Nov 13.

\59\ See id.

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c. Comments Asserting That Aggregation Should Not Be Based on Ownership

Alone

Other commenters said that there should be no ownership percentage

threshold for disaggregation relief, but rather aggregation should be

required solely on the basis of actual control of trading.\60\ Certain

of these commenters asserted that the CEA requires that a person

control the owned entity's accounts in order to require

aggregation.\61\ Other commenters focused on the operational challenges

of aggregation based on ownership, and asserted that limiting the

aggregation requirement to cases where there is control would more

closely match how affiliated companies operate.\62\ One DCM argued that

aggregation should be required only when there is both ownership and

control of the owned entity, and said that it (i.e., the DCM) does not

automatically aggregate positions of companies with 100 percent common

ownership, so long as the commonly-owned companies operate

independently from one another in terms of decision-making and control

of trading decisions.\63\

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

\60\ See Wilmar International Limited on November 13, 2015

(``CL-Wilmar Nov 13''); U.S. Chamber of Commerce's Center for

Capital Markets Competitiveness on February 10, 2014 (``CL-Chamber

Feb 10''); National Council of Farmers Cooperatives on August 4,

2014 (``CL-NCFC Aug 4''); Commodity Markets Council on January 22,

2015 (``CL-CMC Jan 22''); Natural Gas Supply Association on February

10, 2014 (``CL-NGSA Feb 10''); Archer Daniels Midland Company on

January 20, 2015; The Andersons, Inc. on January 15, 2014. See also

CL-ECOM Nov 13 (Commission should apply a facts and circumstances

approach that permits disaggregation conditioned on independence of

control of trading decisions).

\61\ See CL-Wilmar Nov 13 and CL-Chamber Feb 10.

\62\ See CL-NCFC Aug 4; CL-CMC Jan 22; CL-NGSA Feb 10.

\63\ See ICE Futures US, Inc. on February 10, 2014 (``CL-ICE Feb

10''). See also CL-NGSA Feb 10 (arguing that aggregation should

require findings of both ownership and control).

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

A commenter representing investment managers maintained that the

Commission should not require passive investors in owned entities to

aggregate the owned entities' positions when the passive investors do

not have actual control over the owned entities' trading.\64\ This

commenter focused on the requirement to file a notice to claim relief

from aggregation (which it said would be burdensome for entities that

manage a large number of investment funds), and suggested instead that

the criteria in proposed rule 105.4(b)(2)(i) be treated as a non-

exclusive safe harbor, with other relief from aggregation being

available in various circumstances.\65\ The commenter asserted that the

CEA requires aggregation only when there is actual control of the owned

entity's derivatives trading, which the Commission has traditionally

interpreted not to follow necessarily from mere corporate control of

the owned entity.\66\

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\64\ See CL-SIFMA AMG Nov 13.

\65\ See SIFMA AMG on August 1, 2014 (discussing practical

difficulties such as monitoring the equity ownership held by managed

funds/accounts, and monitoring the commodity derivatives positions

held by the operating companies in which managed funds/accounts hold

equity ownership). See also CL-SIFMA AMG Nov 13; CL-Wilmar Nov 13.

\66\ See SIFMA AMG on February 10, 2014 (``CL-SIFMA AMG Feb

10'') (referring to requirement to file reports on Form 40 and

asserting that the Commission's pre-2011 rulemakings required

aggregation on the basis of direct ownership in accounts, not on the

basis of ownership interests in third parties who, in turn, owned

positions in derivatives trading accounts).

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

A holding company for a number of DCMs commented that the

Commission did not identify any basis or justification for the various

features of the Proposed Rule.\67\ This commenter contended that

features of the Proposed Rule (regarding the owned entity aggregation

rules, the IAC exemption, and the ``substantially identical trading

strategies'' rule) are not in accordance with law, are arbitrary and

capricious, are an unexplained departure from the Commission's

administrative precedent, and are not more permissive than existing

aggregation standards.\68\ Two other commenters were also of the

opinion that the Proposed Rule was not supported by the Commission's

administrative precedent.\69\

[[Page 91460]]

Commenters asserted that section 4a(a)(1) of the CEA provides no basis

for requiring aggregation of positions held by another person in the

absence of control of such other person.\70\ One of these commenters

also stated that existing regulation 150.4(b) generally exempts a

commodity pool's participants with an ownership interest of 10 percent

or greater from aggregating the positions held by the pool.\71\

Finally, commenters contended that two of the Commission's enforcement

cases indicate that the Commission has viewed aggregation as being

required only where there is common trading control.\72\

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

\67\ See CME Group, Inc. on February 10, 2014 (``CL-CME Feb

10'').

\68\ CL-CME Feb 10 (opining that under Commission precedent, a

10 percent or more ownership or equity interest in an account is an

indicia of trading control, but precedent does not support a

requirement for aggregation based on a 10 percent or more ownership

or equity interest in an entity). This commenter reasoned that the

Commission's use of the term ``account'' has never referred to an

owned entity that itself has accounts, that the 1979 Aggregation

Policy suggests the Commission contemplated a definition of

``account'' that means no more than a personally owned futures

trading account, and that the 1999 Amendments to the aggregation

rules were focused on directly owned accounts. Id.

\69\ One of these commenters contended that under the

Commission's precedents ``[l]egal affiliation [between companies]

has been an indicium but not necessarily sufficient for position

aggregation.'' See Commodity Markets Council on Feb 10, 2014 (``CL-

CMC Feb 10'').

The other commenter asserted that the Commission has never

specifically required aggregation solely on the basis of ownership

of another legal person. CL-NGSA Feb 10. To support its view, this

commenter said that the 1979 Aggregation Policy and the 1999

Amendments apply to only trading accounts that are directly or

personally held or controlled by an individual or legal entity, the

Commission's large trader rules require aggregation of multiple

accounts held by a particular person, not the accounts of a person

and its owned entities, and existing regulation 18.04(b)

distinguishes between owners of the ``reporting trader'' and the

owners of the ``accounts of the reporting trader.'' Id.

\70\ See CL-CME Feb 10; CL-NGSA Feb 10. One commenter asserted

that the Commission's citation of prior rules requiring aggregation

of owned entity positions at a 10 percent ownership level was not a

sufficient consideration of the statutorily required factors. CL-CME

Feb 10.

Another commenter contended that ``CEA section 4a(a)(1) only

allows the Commission to require the aggregation of positions on

ownership alone when those positions are directly owned by a person.

The positions of another person are only to be aggregated when the

person has direct or indirect control over the trading of another

person.'' CL-NGSA Feb 10.

\71\ See CL-CME Feb 10 (noting that the Commission's proposal to

amend regulation 150.3 to include the separately incorporated

affiliates of CPOs, CTAs or FCMs as eligible entities for the

exemption relief of regulation 150.3 (63 FR 38525 at 38532 n. 27

(July 17, 1998)) states: ``Affiliated companies are generally

understood to include one company that owns, or is owned by, another

or companies that share a common owner''). This commenter also

asserted that the term ``principals'' under existing regulation

3.1(a)(2)(ii) include entities that have a direct ownership interest

that is 10 percent or greater in a lower tier entity, such as the

parent of a wholly-owned subsidiary. Id. From these two provisions,

the commenter concluded that the corporate parent of a wholly-owned

CPO would be affiliated with, and a principal of, its wholly-owned

subsidiary.

\72\ See CL-CME Feb 10, citing In the Matter of Vitol Inc. et

al., Docket No. 10-17 (Sept. 14, 2010), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfvitolorder09142010.pdf and In the Matter of

Citigroup Inc. et al., Docket No. 12-34 (Sept. 21, 2012), available

at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcitigroupcgmlorder092112.pdf. Another

commenter contended that In the Matter of Vitol was based on facts

that would be relevant only if common trading control was necessary

for aggregating the positions of affiliated companies. See CL-NGSA

Feb 10.

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

d. Other Comments Related to Aggregation

The Commission received conflicting comments about passive index-

tracking commodity pools. One commenter asserted that the operators of

such pools do not have discretion to react to market movements and,

thus, do not ``control'' trading in the usual meaning of that word, so

the positions of such pools should not be aggregated with other pools

operated by the same operator.\73\ Another commenter said the

Commission should mandate aggregation of all positions of a group or

class of traders such as operators of passive index-tracking commodity

pools, because the Commission should focus on excessive concentration

of positions and potential market manipulation.\74\ This commenter

noted that the CEA includes language extending the CFTC's aggregation

powers to cover ``any group or class of traders.'' \75\

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

\73\ See DB Commodity Services LLC (a wholly-owned, indirect

subsidiary of Deutsche Bank AG) on February 10, 2014 (``CL-DBCS Feb

10'').

\74\ See CL-Better Markets Nov 13.

\75\ See id. (citing CEA section 4a(a)(1)).

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

Two commenters suggested that the rule provide an explicit

exemption from aggregation for pension plans, because the proposed rule

creates a complicated and potentially unavailable route to relief to

entities that are required to operate only in the best interests of

plan beneficiaries and thus cannot be used to further the interests of

the pension plan's sponsor.\76\

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

\76\ See Commercial Energy Working Group on February 10, 2014

(``CL-Working Group Feb 10''); CL-Working Group Nov 13; CL-CMC Nov

13; CL-CMC Feb 10. One of these commenters asserted that a common

structure for U.S. pension plans is to have employees of the sponsor

serve as members of the investment committee of the plan, which is a

separate legal entity from and unaffiliated with the sponsor. The

commenter claimed that these employees typically have an investment

background and may serve in trading-related roles for the plan

sponsor, and may have knowledge of both the plan and the sponsor's

trading activity, which may prevent the plan and the sponsor from

utilizing the proposed exemption from aggregation for pension plans.

Aggregation would, the commenter said, put the fiduciaries of these

plans in the position of having to account for the trading

strategies of the sponsor, which may not be in the best interests of

plan participants. See CL-Working Group Nov 13; CL-Working Group Feb

10.

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3. Final Rule

The Commission is adopting rule 150.4(a)(1) as it was stated in the

Proposed Rule and reiterated in the Supplemental Notice. This rule sets

forth the requirements to aggregate positions on the basis of ownership

or control, or when two or more persons act together under an express

or implied agreement. The Commission is also adopting rule 150.4(b)(2)

substantially as it was proposed in the Supplemental Notice (with

certain modifications discussed below) but, as stated in the

Supplemental Notice, it is not adopting proposed rule 150.4(b)(3).\77\

The Commission is also adopting the conforming change in rule

150.4(b)(6) from the Supplemental Notice, to delete a cap of 50 percent

on the ownership or equity interest for broker-dealers to

disaggregate.\78\ The Commission is persuaded by the commenters that

rule 150.4(b)(2) should apply to all persons with an ownership or

equity interest in an owned entity of 10 percent or greater (i.e., an

interest of up to and including 100 percent) in the same manner.

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

\77\ Because the Commission is not adopting proposed rule

150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed rule 150.4 are

renumbered in the final rule as paragraphs (b)(3) to (b)(8),

respectively. Also, as proposed in the Supplemental Notice, the

Commission is not adopting proposed rule 150.4(e)(1)(i) which

contained a delegation of authority referencing proposed rule

150.4(b)(3), and the final rule also reflects the deletion of a

cross-reference to proposed rule 150.4(b)(3)(vii) in rule

150.4(c)(1). See Supplemental Notice, 80 FR at 58371.

\78\ See id. Final rule 150.4(b)(6) (proposed as rule (b)(7)) is

discussed more fully in section II.F, below.

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a. Ownership Threshold for Aggregation

The Commission continues to believe that, as stated in the

Supplemental Notice, the overall purpose of the position limits regime

(to diminish the burden of excessive speculation which may cause

unwarranted changes in commodity prices) would be better served by

focusing the aggregation requirement on situations where the owner is,

in view of the circumstances, actually able to control the trading of

the owned entity.\79\ The Commission reasons that the ability to cause

unwarranted changes in the price of a commodity derivatives contract

would result from the owner's control of the owned entity's trading

activity.

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

\79\ The Commission notes in this regard that there may have

been significant burdens in meeting the requirements of proposed

rule 150.4(b)(3) even where there is no control of the trading of

the owned entity, as was suggested by the Center for Capital Markets

Competitiveness of the U.S. Chamber of Commerce, SIFMA AMG and other

commenters on the Proposed Rule. See Supplemental Notice, 80 FR at

58371.

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

Rule 150.4(b)(2) will continue the Commission's longstanding rule

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

account or position of less than 10 percent need not aggregate such

positions solely on the basis of the ownership criteria, and persons

with a 10 percent or greater ownership interest will generally be

required to aggregate the account or position.\80\ The Commission has

found,

[[Page 91461]]

over the decades that the 10 percent threshold has been in effect, that

this is an appropriate level at which aggregation should be required,

and no change to this threshold was proposed.

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

\80\ For purposes of aggregation, the Commission continues to

believe, as stated in the Proposed Rule, that contingent ownership

rights, such as an equity call option, would not constitute an

ownership or equity interest. See Proposed Rule at 68958.

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

The Commission considered the comments that suggested different

ownership thresholds (e.g., 25 percent or 50 percent) for the

aggregation requirement. In contrast to the satisfactory experience

with the 10 percent threshold, the Commission believes that none of the

commenters presented a compelling analysis to justify a different

threshold. That is, while it is undoubtedly true that application of

different ownership thresholds would result in differences in which

persons would be required to aggregate or seek exemptions from

aggregation, the commenters did not provide a persuasive explanation of

how application of a 25 percent or 50 percent ownership threshold would

more appropriately further the purposes of the position limit regime

than the 10 percent threshold which has been applied to date.

For example, one commenter posited that maintaining the 10 percent

threshold would require owners to file unnecessary notices seeking

exemptions from aggregation, imposing a burden on both market

participants and the Commission.\81\ However, the Commission believes

that preparation of the required notices (and the Commission's review

of them) will not impose undue burdens, and the notices will be helpful

to the Commission in monitoring the use of exemptions from

aggregation.\82\ So while raising the threshold would presumably

decrease the number of notices that are filed, it is not clear that the

benefit would be significant since the filing burden is minimal; at the

same time, however, the amount of information available to the

Commission for use in monitoring and enforcement would be reduced, a

potential harm. Because of this uncertainty, the Commission cannot

conclude that a 25 percent, 50 percent or other threshold would be

significantly better than the 10 percent threshold which has been

satisfactorily applied to date, and the Commission has determined to

leave the 10 percent threshold in place.

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

\81\ See CL-FIA Nov 13.

\82\ As discussed below, the Commission has instructed its staff

to conduct ongoing surveillance and monitoring of disaggregation

filings and related information for red flags.

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

After considering the comments on the proposed procedure in rule

150.4(b)(2) for a notice filing to permit a person with an ownership or

an equity interest in an owned entity of 10 percent or greater to

disaggregate the positions of the owned entity in specified

circumstances, the Commission has determined to adopt this

proposal.\83\ The notice filing must demonstrate compliance with the

conditions set forth in rule 150.4(b)(2), which are discussed below.

Similar to other exemptions from aggregation, the notice filing will be

effective upon submission to the Commission, but the Commission is able

to subsequently call for additional information, and to amend,

terminate or otherwise modify the person's aggregation exemption for

failure to comply with the provisions of rule 150.4(b)(2). Further, the

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

material change to the circumstances described in the filing.\84\

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\83\ Under the rule adopted here, and in a manner similar to

current regulation, if a person qualifies for disaggregation relief,

the person would nonetheless have to aggregate those same accounts

or positions covered by the relief if they are held in accounts with

substantially identical trading strategies. See rule 150.4(a)(2).

The exemptions in rule 150.4 are set forth as alternatives, so that,

for example, the applicability of the exemption in paragraph (b)(2)

would not affect the applicability of a separate exemption from

aggregation (e.g., the independent account controller exemption in

paragraph (b)(4)).

\84\ See rule 150.4(c), discussed in section II.C., below.

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

The Commission notes that commenters raised valid concerns about

permitting disaggregation following a notice filing that is effective

upon submission.\85\ The Commission has instructed its staff to conduct

ongoing surveillance and monitoring of disaggregation filings and

related information for red flags which could include, but would not be

limited to, the creation of multiple subsidiaries, filings that are

only superficially complete, and patterns of trading that suggest

coordination after a filing has been made. The Commission is sensitive

to the potential for circumvention of position limits through the use

of multiple subsidiaries, but it continues to believe, as stated in the

Supplemental Notice, that the criteria in rule 150.4(b)(2)(i), which

must be satisfied in order to disaggregate, will appropriately indicate

whether an owner has control of or knowledge of the trading activity of

the owned entity.\86\ The disaggregation criteria require that the two

entities not have knowledge of each other's trading and, moreover, have

and enforce written procedures to preclude such knowledge.\87\ And, in

fact, as noted in the Proposed Rule, the Commission has applied, and

expects to continue to apply, certain of the same conditions in

connection with the IAC exemption to ensure independence of trading

between an eligible entity and an affiliated independent account

controller.\88\

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\85\ See CL-Better Markets Nov 13; CL-Occupy the SEC Nov 13; CL-

IATP Nov 13.

\86\ See Supplemental Notice, 80 FR at 58371.

\87\ See rule 150.4(b)(2)(i), discussed in section II.B., below.

\88\ See Proposed Rule, 78 FR at 68961, referring to existing

regulation 150.3(a)(4) (to be replaced by rule 150.4(b)(4)). Such

conditions have been useful in ensuring that trading is not

coordinated through the development of similar trading systems, and

that procedures are in place to prevent the sharing of trading

decisions between entities.

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

If the disaggregation criteria are satisfied, the Commission

believes that disaggregation may be permitted without weakening the

aggregation regime, even if the owner has a greater than 50 percent

ownership or equity interest in the owned entity. Even in the case of

majority ownership, if the disaggregation criteria are satisfied, the

ability of an owner and the owned entity to act together to engage in

excessive speculation or to cause unwarranted price changes should not

differ significantly from that of two separate individuals. The

Commission reaches this conclusion based in part on commenters'

descriptions of relevant corporate structures. For example, one

commenter described instances where an entity has a 100 percent

ownership interest in another entity, yet does not control day-to-day

business activities of the owned entity.\89\ In this situation the

owned entity would not have knowledge of the activities of other

entities owned by the same owner, nor would it raise the heightened

concerns, triggered when one entity both owns and controls trading of

another entity, that the owner would necessarily act in a coordinated

manner with other owned entities.

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\89\ See MidAmerican Energy Holdings Company on February 7, 2014

(``CL-MidAmerican Feb 7'').

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As explained in the Supplemental Notice, the Commission believes it

would be inappropriate to disallow the possibility of a notice filing

to disaggregate the positions of majority-owned subsidiaries, because

without this possibility of relief, corporate groups may be required to

establish procedures to monitor and coordinate trading activities

across disparate owned entities, which could have unpredictable

consequences.\90\ The Commission recognizes that these consequences

could include not only the cost of establishing these procedures, but

also the impairment of corporate structures which were established to

ensure that the various

[[Page 91462]]

owned entities engage in business independently. This independence may

serve important purposes which could be lost if the aggregation

requirement were imposed too widely. The Commission does not intend

that the aggregation requirement interfere with existing corporate

structures and procedures adopted to ensure the independence of owned

entities.\91\

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\90\ See Supplemental Notice, 80 FR at 58369-70.

\91\ The Commission noted in the Supplemental Notice that the

disaggregation criteria in rule 150.4(b)(2)(i) should be relatively

familiar to corporate groups, because they are in line with prudent

corporate practices that are maintained for longstanding, well-

accepted reasons. See id. The Commission also notes that since the

aggregation rules may be a precedent for aggregation rules enforced

by DCMs and SEFs, it is even more important that the aggregation

rules set out, to the extent feasible, ``bright line'' rules that

are capable of easy application by a wide variety of market

participants while not being susceptible to circumvention. See

Proposed Rule, 78 FR at 68596, n. 103. The Commission believes that

by implementing an approach to aggregation that is in keeping with

longstanding corporate practices, rule 150.4(b)(2) promotes the goal

of setting out ``bright line'' rules that are relatively easy to

apply while not being susceptible to circumvention.

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Adoption of rule 150.4(b)(2) is in accordance with the Commission's

authority under CEA section 4a(a)(7) to provide relief from the

position limits regime. The notice filing requirement in the rule will

appropriately implement the CEA. The 10 percent threshold historically

applied by the Commission continues to have importance, because it

demarcates the level at which the notice filing and the procedures

underlying the notice are required. Relief under rule 150.4(b)(2) will

not be automatic, but rather will require a certification (provided in

the notice under rule 150.4(c)) that procedures to ensure independence

are in place.

Furthermore, as the Commission noted in the Supplemental Notice,

satisfaction of the criteria in rule 150.4(b)(2) would not foreclose

the possibility that positions of owners and owned entities would have

to be aggregated.\92\ For example, aggregation is and would continue to

be required under rule 150.4(a)(1) if two or more persons act pursuant

to an express or implied agreement; and this aggregation requirement

would apply whether the two or more persons are an owner and owned

entity(ies) that meet the conditions in proposed rule 150.4(b)(2), or

are unaffiliated individuals.

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\92\ See Supplemental Notice, 80 FR at 58371.

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b. Ownership Is a Valid Basis for Aggregation

Regarding those commenters who said that ownership of an entity

should not be a basis for aggregation of that entity's positions, the

Commission continues to interpret section 4a(a)(1) of the CEA, as

stated in the Proposed Rule and reiterated in the Supplemental Notice,

to provide for the general aggregation standard with regard to position

limits, and specifically supports aggregation on the basis of

ownership, because it provides 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.\93\

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\93\ 7 U.S.C. 6a(a)(1), cited in Proposed Rule, 78 FR at 68956,

and Supplemental Notice, 80 FR 58366.

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The Commission explained in the Proposed Rule that this

interpretation is supported by Congressional direction and Commission

precedent from as early as 1957 and continued through 1999.\94\

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\94\ See Proposed Rule, 78 FR at 68956.

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For example, in 1968, Congress amended the aggregation standard in

CEA section 4a to include positions ``held by'' one trader for

another,\95\ supporting the view that an owner should aggregate the

positions held by an owned entity (because the owned entity is holding

the positions for the owner). During the Commission's 1986

reauthorization, witnesses at Congressional hearings suggested that

``aggregation of positions based on ownership without actual control

unnecessarily restricts a trader's use of the futures and options

markets,'' but the Congressional committee did not recommend any

changes to the statute based on these suggestions.\96\

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\95\ See S. Rep No. 947, 90th Cong., 2 Sess. 5 (1968) regarding

the CEA Amendments of 1968, Public Law 90-258, 82 Stat. 26 (1968).

This Senate Report provides:

Certain longstanding administrative interpretations would be

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

the Commodity Exchange Commission to fix limits on the amount of

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

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

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

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

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

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

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

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

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

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

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

more persons acting pursuant to an express or implied understanding

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

\96\ See H.R. Rep. No. 624, 99th Cong., 2d Sess. (1986) at page

43. The Report noted that:

During the subcommittee hearings on reauthorization, several

witnesses expressed dissatisfaction with the manner in which certain

market positions are aggregated for purposes of determining

compliance with speculative limits fixed under Section 4a of the

Act. The witnesses suggested that, in some instances, aggregation of

positions based on ownership without actual control unnecessarily

restricts a trader's use of the futures and options markets. In this

connection, concern was expressed about the application of

speculative limits to the market positions of certain commodity

pools and pension funds using multiple trading managers who trade

independently of each other. The Committee does not take a position

on the merits of the claims of the witnesses. Id.

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In 1988, the Commission reviewed petitions by the Managed Futures

Trade Association and the Chicago Board of Trade which argued against

aggregation based only on ownership.\97\ In response to the petition,

however, the Commission stated that:

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\97\ The Managed Futures Trade Association petition requested

that the Commission amend the aggregation standard for exchange-set

speculative position limits in regulation 1.61(g) (now regulation

150.5(g)), by adding a proviso to exclude the separate accounts of a

commodity pool where trading in those accounts is directed by

unaffiliated CTAs acting independently. See Exemption From

Speculative Position Limits for Positions Which Have a Common Owner

but Which Are Independently Controlled; Proposed Rule, 53 FR 13290,

13291-92 (Apr. 22, 1988). The petition argued the ownership

standard, as applied to ``multiple-advisor commodity pools, is

unfair and unrealistic'' because while the commodity pool may own

the positions in the separate accounts, the CPO does not control

trading of those positions (the unaffiliated commodity trading

advisor (``CTA'') does) and therefore the pool's ownership of the

positions will not result in unwarranted price fluctuations. See id.

at 13292.

The petition from the Chicago Board of Trade (which is now a

part of CME Group, Inc.) sought to revise the aggregation standard

so as not to require aggregation based solely on ownership without

control. See id.

Both ownership and control have long been included as the

appropriate aggregation criteria in the Act and Commission

regulations. Generally, inclusion of both criteria has resulted in a

bright-line test for aggregating positions. And as noted above,

although the factual circumstances surrounding the control of

accounts and positions may vary, ownership generally is clear.

. . . In the absence of an ownership criterion in the

aggregation standard, each potential speculative position limit

violation would have to be analyzed with regard to the individual

circumstances surrounding the degree of trading control of the

positions in question. This would greatly increase uncertainty.\98\

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\98\ See id. In response to the petitions, however, the

Commission proposed the IAC exemption, which provides ``an

additional exemption from speculative position limits for positions

of commodity pools which are traded in separate accounts by

unaffiliated account controllers acting independently.'' Id.

[[Page 91463]]

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Even earlier administrative determinations, as well as regulations

of the Commodity Exchange Authority, announced standards that included

control of trading and financial interests in positions. As early as

1957, the Commission's predecessor issued determinations requiring that

accounts in which a person has a financial interest be included in

aggregation.\99\ In addition, the definition of ``proprietary account''

in regulation 1.3(y), which has been in effect for decades, includes

any account in which there is 10 percent ownership.\100\

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\99\ See Administrative Determination 163 (Aug. 7, 1957) (``[I]n

the application of speculative limits, accounts in which the firm

has a financial interest must be combined with any trading of the

firm itself or any other accounts in which it in fact exercises

control.''). In addition, the Commission's predecessor, and later

the Commission, provided the aggregation standards for purposes of

position limits in the large trader reporting rules. See Supersedure

of Certain Regulations, 26 FR 2968 (Apr. 7, 1961). In 1961, then

regulation 18.01(a) (``Multiple Accounts'') stated that if any

trader holds or has a financial interest in or controls more than

one account, whether carried with the same or with different futures

commission merchants or foreign brokers, all such accounts shall be

considered as a single account for the purpose of determining

whether such trader has a reportable position and for the purpose of

reporting. 17 CFR 18.01 (1961).

In the 1979 Aggregation Policy, the Commission discussed

regulation 18.01, stating:

Financial Interest in Accounts. Consistent with the underlying

rationale of aggregation, existing reporting Rule 18.10(a) a (sic)

basically provides that if a trader holds or has a financial

interest in more than one account, all accounts are considered as a

single account for reporting purposes. Several inquiries have been

received regarding whether a nomial (sic) financial interest in an

account requires the trader to aggregate. Traditionally, the

Commission's predecessor and its staff have expressed the view that

except for the financial interest of a limited partner or

shareholder (other than the commodity pool operator) in a commodity

pool, a financial interest of 10 percent or more requires

aggregation. The Commission has determined to codify this

interpretation at this time and has amended Rule 18.01 to provide in

part that, ``For purposes of this Part, except for the interest of a

limited partner or shareholder (other than the commodity pool

operator) in a commodity pool, the term `financial interest' shall

mean an interest of 10 percent or more in ownership or equity of an

account.''

Thus, a financial interest at or above this level will

constitute the trader as an account owner for aggregation purposes.

1979 Aggregation Policy, 44 FR at 33843.

The provisions concerning aggregation for position limits

generally remained part of the Commission's large trader reporting

regime until 1999 when the Commission incorporated the aggregation

provisions into existing regulation 150.4 with the existing position

limit provisions in part 150. See 1999 Amendments. The Commission's

part 151 rulemaking also incorporated the aggregation provisions in

vacated regulation 151.7 along with the remaining position limit

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

\100\ 17 CFR 1.3(y). This provision has been in existing

regulation 1.3(y)(1)(iv) since at least 1976, which the Commission

adopted from regulations of its predecessor, with ``for the most

part, procedural, housekeeping-type modifications, conforming the

regulations to the recently enacted CFTCA.'' See 41 FR 3192, 3195

(January 21, 1976).

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

subsequent regulatory developments, and the Commission's historical

practices in this regard, the Commission continues to interpret section

4a to require aggregation on the basis of either ownership or control

of an entity. The Commission also believes that aggregation of

positions across accounts based upon ownership is a necessary part of

the Commission's position limit regime.\101\

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\101\ See 1999 Amendments, 64 FR at 24044 (``[T]he Commission .

. . interprets the `held or controlled' criteria as applying

separately to ownership of positions or to control of trading

decisions.''). See also, Exemptions from Speculative Position Limits

for Positions which have a Common Owner but which are Independently

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

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

Commission proposed the independent account controller exemption

from speculative position limits, but declined to remove the

ownership standard from its aggregation policy. The 1999 Amendments'

reference to the Commission's large-trader reporting system, 64 FR

at 24043, is not related to the aggregation rules for the position

limits regime. Rather, the 1999 Amendments included an explanation

of situations in which reporting could be required based on both

control and ownership. 1999 Amendments, 64 FR at 24043 and n. 26.

(the ``routine large trader reporting system is set up so that it

does not double count positions which may be controlled by one and

traded for the beneficial ownership of another. In such

circumstances, although the routine reporting system will aggregate

the positions reported by FCMs using only the control criterion, the

staff may determine that certain accounts or positions should also

be aggregated using the ownership criterion or may by special call

receive reports directly from a trader.'')

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Moreover, an ownership standard establishes a bright-line test that

provides certainty to market participants and the Commission.\102\

Without aggregation on the basis of ownership, the Commission would

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

administrative challenges to individually assess control across all

market participants. Further, the Commission considers that if the

statute were read to require aggregation based only on control, market

participants may be able to use an ownership interest to directly or

indirectly influence the account or position and thereby circumvent the

aggregation requirement.

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\102\ See footnote 91, above.

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In the Supplemental Notice, the Commission responded to commenters'

assertions that the Proposed Rule was not in accordance with the

Commission's statutory authority or precedents.\103\ In brief, the

Commission explained that the aggregation requirement in CEA section 4a

is not phrased in terms of whether the owner holds an interest in a

trading account.\104\ The Commission also explained why its enforcement

history does not contradict the Commission's traditional view of

aggregation of owned entity positions as being required on the basis of

either control or ownership.\105\ The relevant commenters did not

discuss these points in the comments they submitted on the Supplemental

Notice,\106\ and the Commission considers that the discussion of these

matters in the Supplemental Notice explains how the final rule is in

accordance with law and the Commission's precedents.\107\

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\103\ See Supplemental Notice, 80 FR at 58373.

\104\ In fact, the word ``account'' does not even appear in the

statute. As noted above, section 4a(a)(1) of the CEA provides 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. 7 U.S.C. 6a(a)(1).

\105\ See Supplemental Notice, 80 FR at 58373.

\106\ See CL-CME Nov 13 and CL-NGSA Nov 13.

\107\ See Supplemental Notice, 80 FR at 58373.

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c. Other Considerations Relevant to the Proposed Rule

The Commission does not believe, as suggested by some commenters,

that the aggregation requirement in rule 150.4(a)(1) would lead to

significantly more information sharing or significantly increased

levels of coordinated speculative trading by the entities subject to

aggregation. Among other things, the position limits would affect the

trading of only entities that hold positions in excess of the limits,

which the Commission expects to be relatively small in comparison to

all entities that are active in the relevant markets.\108\ Thus, the

Commission continues to believe that the final rule will not result in

a significantly increased level of information sharing that would

increase coordinated speculative trading. The Commission notes that

rule 150.4(b) sets out various aggregation exemptions, lessening the

need to share information regarding speculative trading to ensure

compliance with position limits.

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\108\ See, e.g., Position Limits for Futures and Swaps, 76 FR

71626, 71668 (Nov. 18, 2011) (describing the number of traders

estimated to be subject to position limits).

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The Commission has also considered that relief from any rule

requiring the aggregation of positions held by separate entities is

only necessary where the entities would be below the relevant limits on

an individual basis, but above a limit when aggregated. Thus, as the

Commission suggested in the Proposed Rule, if a group of affiliated

entities can take steps to maintain an aggregate

[[Page 91464]]

position that does not exceed any limit, then the group will not have

to seek disaggregation relief.\109\

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\109\ See Proposed Rule, 78 FR at 68958.

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In other words, the Commission continues to believe that seeking

disaggregation relief is one option for those groups of affiliated

entities that may exceed a limit on an aggregate basis but will remain

below the relevant limits on an individual basis. Other avenues are

also available to corporate groups that seek to remain in compliance

with the position limit regime. For example, the affiliated entities

may put into place procedures to avoid exceeding the limits on an

aggregate basis.\110\ One potential approach that could be available to

a holding company with multiple subsidiaries would be to assign each

subsidiary an internal limit based on a percentage of the level of the

position limit. The holding company would allocate no more in aggregate

internal limits than the level of the position limit.\111\ Further, a

breach of an internal limit would provide the holding company with

notice that it should consider filing for bona fide hedging exemptions

or taking other compliance steps, as applicable.

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\110\ The procedures adopted by the affiliates may obviate more

complex steps such as the implementation of real-time monitoring

software to consolidate all derivative activities of the affiliates,

especially if the group currently does not have an aggregate

position approaching the size of a position limit and has

historically not changed position sizes day-over-day by a

significant percentage of the position limit.

\111\ An even more cautious approach would be for the holding

company to limit the overall allocation to the subsidiaries to less

than 100 percent of the position limit. For example, a holding

company with three subsidiaries may assign each subsidiary an

internal limit equal to 30 percent of the level of the federal

limit. Thus, the holding company has allocated permission to

subsidiaries to hold, in the aggregate, positions equal to up to 90

percent of the level of the relevant position limit. Each subsidiary

would simply report at close of business its derivative position to

the holding company. The 10 percent cushion provides the holding

company with the ability to remain in compliance with the limit,

even if all subsidiaries slightly exceed the internal limits on the

same side of the market at the same time.

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The Commission also considered whether aggregation of positions is

unnecessary because information about ownership and control is

available to the Commission through reports on Commission Form 40.\112\

However, the Commission is not persuaded that these reports are a

sufficient substitute for the position limits regime. While these

reports provide some information necessary for surveillance of

positions, some owned entities may not file these reports. On a more

fundamental level, the Commission believes that compliance with the

position limit rules, including aggregation of the positions of owned

entities, is primarily the responsibility of the owned entities and

their owners. Even if the information on Form 40 were sufficient, it

would be impractical and inefficient for the Commission to use that

information to monitor compliance with the position limit rules, as

compared to the ability of the entities themselves to maintain

compliance with the position limits.

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\112\ See 17 CFR part 18, Appendix A.

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d. Consideration of Alternatives Suggested by Commenters

Regarding the requests for specific exemptions or other special

treatment for various types of entities or situations, such as

investment companies, pension plans, passive index-tracking commodity

pools, and cases of transitory ownership, the Commission is not

persuaded that any further relief for such entities (i.e., beyond the

relief already provided in the final rule) would justify the complexity

of applying the new rules that would be necessary for such specific

treatment, which would likely include definitional rules to set out the

scope of entities that qualify for the special treatment. For example,

the Commission believes that distinguishing ``transitory'' ownership

from other forms of ownership would be more complicated than completing

the notice required to obtain relief, and in such situations it is

reasonable to expect that the notice filing would be made on a summary

basis appropriate to the transitory situation.

The Commission reached a similar conclusion regarding the

suggestions for different types of filings in various situations.

Again, the Commission believes that the filing required by rule

150.4(c) is relatively simple because it requires only a description of

the relevant circumstances that warrant disaggregation, and a statement

certifying that the conditions set forth in the applicable aggregation

exemption provision have been met. Therefore, the complexity of

determining which filing to provide in various situations would be

greater than that involved in completing the required filing.

As for the commenters that suggested certain categories of persons

(such as passive investors) should be exempt from the aggregation

requirement without making any filing at all, the Commission concluded

that this approach would put at risk the satisfactory experience under

the existing regulation, under which aggregation is required without

exemption. For this reason, the Commission did not propose to provide

categorical exemptions from the aggregation requirement. As explained

above, the Commission believes it is important that its staff be able

to conduct ongoing surveillance and monitoring of disaggregation

filings and related information for red flags. If greater than 10

percent owners were permitted to avoid the aggregation requirement

without making any filing, there could be a greater potential for

circumvention of position limits.

Last, the Commission emphasizes that the categories of relief from

the aggregation requirement set forth in the final rule do not limit

the Commission's existing authority under section 4a(a)(7) of the CEA

to grant exemptions from the aggregation requirement on a case-by-case

basis.

B. Criteria for Aggregation Relief in Rule 150.4(b)(2)(i)

1. Proposed Approach

The proposed criteria to claim relief addressed the Commission's

concerns that an ownership or equity interest of 10 percent and above

may facilitate or enable control over trading of the owned entity, or

allow a person to accumulate a large position through multiple accounts

that could overall amount to an unduly large position.\113\ The

Proposed Rule grouped these criteria into five paragraphs in proposed

rule 150.4(b)(2)(i). The Commission stated its intent that these

criteria would be interpreted and applied in accordance with the

Commission's past practices in this regard.\114\ In accordance with

these precedents, the Commission would not expect that the criteria

would impose requirements beyond a reasonable, plain-language

interpretation of the

[[Page 91465]]

criteria. For example, routine pre- or post-trade systems to effect

trading on an operational level (such as trade capture, trade risk or

order-entry systems) would not, broadly speaking, have to be

independently developed in order to comply with the criteria. Also,

employees that do not direct or participate in an entity's trading

decisions would generally not be subject to these requirements.

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\113\ The Proposed Rule noted that the criteria would apply to

the person filing the notice as well as the owned entity. See

Proposed Rule, 78 FR at 68961. In addition, the Proposed Rule noted

that for purposes of meeting the criteria, such ``person'' would

include any entity that such person must aggregate pursuant to

proposed rule 150.4. For example, if company A files a notice under

proposed rule 150.4(c) for company A's equity interest of 30 percent

in company B, then company A must comply with the conditions for the

exemption, including any entity with which company A aggregates

positions under proposed rule 150.4. In this connection, if company

A controlled the trading of company C, then company A's 150.4(c)

notice filing must demonstrate that there is independence between

company B and company C. See id.

\114\ See id., citing 1979 Aggregation Policy, 44 FR 33839

(providing indicia of independence); CFTC Interpretive Letter No.

92-15 (CCH ] 25,381) (ministerial capacity overseeing execution of

trades not necessarily inconsistent with indicia of independence);

1999 Amendments, 64 FR at 24044 (intent in issuing final aggregation

rule ``merely to codify the 1979 Aggregation Policy, including the

continued efficacy of the [1992] interpretative letter'').

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Proposed rule 150.4(b)(2)(i)(A) would condition aggregation relief

on a demonstration that the person filing for disaggregation relief and

the owned entity do not have knowledge of the trading decisions of the

other. The Commission noted its preliminary belief that where an entity

has an ownership interest in another entity and neither entity shares

trading information, such entities demonstrate independence.\115\ In

contrast, persons with knowledge of trading decisions of another in

which they have an ownership interest are likely to take such decisions

into account in making their own trading decisions, which implicates

the Commission's concern about independence and enhances the risk for

coordinated trading.\116\ This proposed criterion would address

concerns regarding knowledge of employees who control, direct or

participate in an entity's trading decisions, and would not prohibit

information sharing solely for risk management, accounting, compliance,

or similar purposes and information sharing among mid- and back-office

personnel that do not control, direct or participate in trading

decisions. In the Proposed Rule, the Commission clarified that this

criterion would generally not require aggregation solely based on

knowledge that a party gains during execution of a transaction

regarding the trading of the counterparty to that transaction, nor

would it encompass knowledge that an entity would gain when carrying

out due diligence under a fiduciary duty, so long as such knowledge is

not directly used to affect the entity's trading.\117\

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\115\ See Proposed Rule, 78 FR at 68961.

\116\ As noted in the Proposed Rule, the Commission does not

consider knowledge of overall end-of-day position information to

necessarily constitute knowledge of trading decisions, so long as

the position information cannot be used to dictate or infer trading

strategies. As such, the knowledge of end-of-day positions for the

purpose of monitoring credit limits for corporate guarantees does

not necessarily constitute knowledge of trading information.

However, the ability to monitor the development of positions on a

real time basis could constitute knowledge of trading decisions

because of the substantial likelihood that such knowledge might

affect trading strategies or influence trading decisions of the

other. See id.

\117\ As explained in the Proposed Rule, proposed paragraph (A)

was along the lines suggested by commenters on the proposed

amendments to part 151. These commenters had said that the limits on

sharing information between the person and the owned entity should

not apply to employees that do not direct or influence trading (such

as attorneys or risk management and compliance personnel), although

the employees may have knowledge of the trading of both the person

and the owned entity. Also, a commenter representing employee

benefit plan managers said that restrictions on information sharing

are, in general, a problem for plan managers, which have a fiduciary

duty to inquire as to an owned entities' activities, so the

Commission should recognize that acting as required by fiduciary

duties does not constitute a violation of the information sharing

restriction. And a commenter had said that information sharing

resulting when the person and the owned entity (or two owned

entities) are counterparties in an arm's length transaction should

not be a violation of the rule. See id.

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Proposed rule 150.4(b)(2)(i)(B) would condition aggregation relief

on a demonstration that the person seeking disaggregation relief and

the owned entity trade pursuant to separately developed and independent

trading systems. Further, proposed rule 150.4(b)(2)(i)(C) would

condition relief on a demonstration that such person and the owned

entity have, and enforce, written procedures to preclude the one entity

from having knowledge of, gaining access to, or receiving data about,

trades of the other. Such procedures would have to include document

routing and other procedures or security arrangements, including

separate physical locations, which would maintain the independence of

their activities. As noted in the Proposed Rule, the Commission has

applied these same conditions in connection with the IAC exemption to

ensure independence of trading between an eligible entity and an

affiliated IAC.\118\ Similar to the IAC exemption, proposed rule

150.4(b)(2) would permit disaggregation in certain circumstances where

there is independence of trading between two entities. Thus, the

Commission proposed these conditions, which were already applicable and

working well in the IAC context, and which were expected to strengthen

the independence between the two entities for the owned entity

exemption.

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\118\ See id. See also existing regulation150.3(a)(4). Such

conditions have been useful in ensuring that trading is not

coordinated through the development of similar trading systems, and

that procedures are in place to prevent the sharing of trading

decisions between entities.

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The Commission proposed that the phrase ``separately developed and

independent trading systems'' be interpreted in accordance with the

Commission's prior practices in this regard.\119\ The Commission stated

that it generally would not expect that this criterion would prevent an

owner and an owned entity from both using the same ``off-the-shelf''

system that is developed by a third party.\120\ Rather, the concern

driving the Commission's proposal was that trading systems (in

particular, the parameters for trading that are applied by the systems)

could be used by multiple parties who each know that the other parties

are using the same trading system as well as the specific parameters

used for trading and, therefore, are indirectly coordinating their

trading.\121\

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\119\ See, e.g., 1979 Aggregation Policy, 44 FR at 33840-1

(futures commission merchant (FCM) ``deemed to control'' trading of

customer accounts in trading program where FCM gives specific advice

or recommendations not made available to other customers, unless

such accounts and programs are traded independently and for

different purposes than proprietary accounts).

\120\ Commenters on the proposed amendments to part 151 had said

that this requirement should not prevent the use of third party

``off-the-shelf'' execution algorithms, should permit the sharing of

virtual documentation, so long as such document can be accessed only

by persons that do not manage or control trading, and should apply

only to systems that direct trading decisions, but not trade

capture, trade risk or trade facilitation systems. See Proposed

Rule, 78 FR at 68962.

\121\ Compare 1979 Aggregation Policy, 44 FR at 33841.

``However, the Commission also recognizes that purportedly different

programs which in fact are similar in design and purpose and are

under common control may be initiated in an attempt to circumvent

speculative limit and reporting requirements.''

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

The requirement of ``separate physical locations'' in proposed rule

150.4(b)(2)(i)(C) would not necessarily require that the relevant

personnel be located in separate buildings. In the Proposed Rule, the

Commission stated that the important factor is that there be a physical

barrier between the personnel that prevents access between the

personnel that would impinge on their independence.\122\ For example,

locked doors with restricted access would generally be sufficient,

while merely providing the purportedly ``independent'' personnel with

desks of their own would not. Similar principles would apply to sharing

documents or other resources.

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\122\ See Proposed Rule, 78 FR at 68962.

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Proposed rule 150.4(b)(2)(i)(D) would condition aggregation relief

on a demonstration that the person does not share employees that

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

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

Proposed Rule noted the Commission's concern that shared employees with

control of trading decisions may undermine the independence of trading

between entities.\123\ Regarding the sharing of

[[Page 91466]]

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

back-office personnel, the Commission proposed that sharing of such

personnel between entities would generally not compromise independence

so long as the employees do not control, direct or participate in the

entities' trading decisions.\124\ Similarly, sharing of board or

advisory committee members, research personnel or sharing of employees

for training, operational or compliance purposes would not result in a

violation of the criteria if the personnel do not influence (e.g.,

``have a say in'') or direct the entities' trading decisions.\125\

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\123\ Commenters on the proposed amendments to part 151 said

this criteria should not prohibit sharing of board or advisory

committee members who do not influence trading decisions, sharing of

research personnel, or sharing for training, operational or

compliance purposes, so long as trading of the person and the owned

entity remains independent. See id.

\124\ As noted in the Proposed Rule, the condition barring the

sharing of employees that control the owned entity's trading

decisions would include a prohibition on sharing of attorneys,

accountants, risk managers, compliance and other mid-and back-office

personnel, to the extent such employees participate in control of

the trading decisions of the person or the owned entity. See id.

\125\ In this respect, proposed rule 150.4(b)(2)(i)(D) was

consistent with the Commission's Interpretive Letter No. 92-15 (CCH

] 25,381), where an employee both oversaw the execution of orders

for a commodity pool, as well as maintained delta neutral option

positions in non-agricultural commodities for the proprietary

account of an affiliate of the sponsor of the commodity pool. The

Commission concluded that the use of clerical personnel who are dual

employees of both affiliates would not require aggregation when the

clerical personnel engage in ministerial activities and steps are

taken to maintain independence, such as: (i) Limiting trading

authority so that the personnel do not have responsibility for the

two entities' activities in the same commodity; and (ii) separating

the times at which the personnel conduct activities for the two

entities.

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

Proposed rule 150.4(b)(2)(i)(E) would condition aggregation relief

on a demonstration that the person and the owned entity do not have

risk management systems that permit the sharing of trades or trading

strategies with the other. This condition was intended to address

concerns that risk management systems that permit the sharing of trades

or trading strategies with each other present a significant risk of

coordinated trading through the sharing of information.\126\ The

Commission proposed that this criterion generally would not prohibit

sharing of information to be used only for risk management and

surveillance purposes, when such information is not used for trading

purposes and not shared with employees that, as noted above, control,

direct or participate in the entities' trading decisions.\127\ Thus,

sharing with employees who use the information solely for risk

management or compliance purposes would generally be permitted, even

though those employees' risk management or compliance activities could

be considered to have an ``influence'' on the entity's trading.

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\126\ The Commission remains concerned, as stated in the

Proposed Rule and as noted above, that a trading system, as opposed

to a risk management system, that is not separately developed from

another system can subvert independence because such a system could

apply the same or similar trading strategies even without the

sharing of trading information. See Proposed Rule, 78 FR at 68962.

\127\ See id.

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2. Commenters' Views

As a general matter, some commenters said that the disaggregation

criteria in the Proposed Rule were appropriately stated. One described

the disaggregation criteria as a balanced and effective approach that

gets to the heart of the Commission's aggregation policy, while another

said the criteria provide appropriate indications of whether an owner

has knowledge or control of the trading activity of an owned

entity.\128\ On the other hand, another commenter believed that the

criteria are vague and unclear, especially for global enterprises which

are active in more than one aspect of a market (e.g., both production

and trading activities).\129\

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

\128\ See CL-Sempra Nov 13 and CL-EEI Nov 13, respectively. A

third commenter thought the criteria are reasonable and practicable,

but cautioned that it is difficult to eliminate knowledge sharing

between related business entities, citing Paul Volcker describing as

na[iuml]ve the view that ``Chinese Walls can remain impermeable

against the pressures to seek maximum profit and personal

remuneration.'' See Chris Barnard on November 12, 2015.

\129\ See CL-Wilmar Nov 13.

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Set forth below is a brief discussion of the comments on each

aspect of the proposed disaggregation criteria.

a. Proposed Rule 150.4(b)(2)(i)(A)--No Shared Knowledge of Trading

Decisions

Commenters said that passive investors in an owned entity should be

required to certify only that they have no knowledge of the owned

entity's trading, not whether the owned entity has knowledge of the

trading of the passive investors (i.e., the owners), since passive

investors would not have insight into the knowledge of the owned

entity.\130\ One commenter asked that the Commission clarify that the

gain of information as a counterparty to a transaction would not in

itself violate this criterion regardless of how the information is

transmitted.\131\

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\130\ See CL-SIFMA AMG Nov 13; CL-MFA Nov 12; CL-AIMA Feb 10.

One of these commenters said that, as a general matter, it can be

very difficult for owners to obtain information about owned

entities, e.g., when the owned entity is in a different country. CL-

MFA Nov 12.

\131\ See Coalition of Physical Energy Companies on February 10,

2014 (``CL-COPE Feb 10'').

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

Another commenter questioned how this criterion would be applied to

trading decisions triggered by an algorithm over which human

intervention is rarely exercised. For example, the commenter asserted

that the use of off-the-shelf third party algorithms by entities owned

by a single owner could enable a de facto coordination without

intentional indirect coordination.\132\

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

\132\ See Institute for Agriculture and Trade Policy on February

10, 2014 (``CL-IATP Feb 10'').

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b. Proposed Rule 150.4(b)(2)(i)(B)--Have Separately Developed and

Independent Trading Systems

Several commenters suggested that the Commission modify this

paragraph so that it refers to ``trading strategies'' instead of

``trading systems.'' That is, they suggested that the paragraph require

that the owner and the owned entity ``Trade pursuant to separately

developed and independent trading strategies.'' One commenter was of

the view that because proposed rule 150.4(b)(2)(i)(A) would require

that the owner and the owned entity not have shared knowledge of

trading decisions, there is no need for this paragraph to require

separate ``trading systems'' when the purpose of this rule should be to

prohibit use of ``trading strategies'' that were developed in

coordination.\133\ The commenter believed that this change would allow

the owner and the owned entity to utilize a single shared system for

trading, which would be appropriate and could enhance risk management

so long as the owner and the owned entity can demonstrate that the

condition of no shared knowledge of trading decisions is met.\134\

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\133\ See CL-IECA Nov 13. See also CL-CME Nov 13 (criteria

should focus on ensuring that the entities do not share knowledge of

or control over trading, which would not be implicated merely

because they trade pursuant to commonly-developed trading systems).

\134\ This commenter also said that, at a minimum, the

Commission should distinguish between front-end systems (used for

trade capture and trade booking) and back-end systems (used for risk

management and trade reporting). See CL-IECA Nov 13.

Another commenter described ``trade capture systems'' as

distinct from trading strategies. This commenter said trade capture

systems are used to track positions on an enterprise-wide basis

across multiple affiliates for risk management, recordkeeping and

other business purposes, but these systems do not direct trading and

use of a shared trade capture system does not mean that the entities

have adopted or employed identical, or even similar, trading

strategies. See CL-EEI Nov 13.

A third commenter referred to trade capture, trade execution,

and related report-generation systems for the confirmation, booking

and accounting of orders and for any other mid- and back-office

functions. This commenter asserted that since such systems merely

record, process, and facilitate reports of trading, but do not

establish parameters (e.g., algorithms) for trading, their use by

multiple entities should be permitted under this criterion so long

as they do not enable coordinated trading. See CL-Energy Transfer

Nov 13.

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[[Page 91467]]

Other commenters remarked that a change in the rule text from

``trading systems'' to ``trading strategies'' would allow corporate

groups to take advantage of economies of scale by having one trading

system developed for multiple companies in the group, and promote

efficient trading and risk management practices through the development

of trading technologies that are unrelated to trading strategy.\135\ A

commenter representing investment managers said that disaggregation

relief should be available if the original investment decisions are

made independently, even if trades are subsequently executed and risk

managed on an aggregated basis using a single system.\136\

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

\135\ See CL-CME Nov 13; CL-FIA Nov 13; CL-FIA Feb 6.

\136\ This commenter said it would be appropriate for trading

strategies of separate investment vehicles to be executed via a

single execution desk, as long as the vehicles' portfolio managers

were not coordinating placement of the trades, in order to achieve

risk management goals such as to avoid cross and wash trading or the

submission of an excessive numbers of orders, to avoid having

vehicles bid against each other, to monitor other trading

thresholds, and to achieve fair terms of execution and aggregation.

See CL-AIMA Nov 12.

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

Commenters referred to the Commission's statement in the Proposed

Rule that it generally would not expect that this criterion would

prevent an owner and an owned entity from both using the same ``off-

the-shelf'' system that is developed by a third party.\137\ The

commenters asked that this guidance be reiterated in the final rule and

be extended beyond off-the-shelf systems or other technologies

``developed by'' third parties, to include any in-house software or

custom modules added to third-party software, so long as these internal

systems are not used to share trading information with day-day trading

personnel or otherwise permit coordinated trading.\138\

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

\137\ See Proposed Rule, 78 FR at 68962.

\138\ See CL-SIFMA AMG Nov 13; CL-AIMA Feb 10; CL-Energy

Transfer Nov 13.

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

On the other hand, another commenter said that the application of

this criterion, which implicitly assumes that market participants will

self-report common trading strategies, fails to recognize that the

participants may be reluctant to report collusive strategies, and

therefore DCMs and SEFs should be required to analyze market data for

trading strategy correlations.\139\

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

\139\ See Occupy the SEC on August 7, 2014 (``CL-Occupy the SEC

Aug 7'').

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

c. Proposed Rule 150.4(b)(2)(i)(C)--Have Written Procedures To Maintain

Independence, Including Separate Physical Locations

A commenter said that the requirement to meet this criteria (to

have written procedures restricting access to trading information)

should apply only to the owner claiming the exemption from aggregation,

and not the owned entity, because depending on the extent of an owner's

corporate control over an owned entity, the owner may not be in a

position to compel the owned entity to establish the written

procedures.\140\ This commenter believes that so long as the owner has

and enforces written procedures that preclude the owner from sharing

trading information with, and receiving trading information from, the

owned entity, then each entity will not have access to the information

of the other.\141\

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

\140\ See FIA on July 31, 2014 (``CL-FIA July 31'') and CL-FIA

Nov 13.

\141\ See id.

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

Another commenter suggested that the second sentence of this

provision should be deleted because, this commenter believes, it is

subsumed by the first sentence and such prescriptive criteria are

unnecessary in the context of a physical commodity firm as opposed to

an IAC.\142\ The commenter also asked that the Commission clarify that

the requirement of ``separate physical locations'' does not require

physically separate buildings, but rather requires only restricted

access prohibiting personnel from entering the affiliated company

without permission or signing-in or, if on the derivatives trading

floors, an escort.\143\

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

\142\ See CL-Energy Transfer Nov 13. The second sentence reads

``Such procedures must include document routing and other procedures

or security arrangements, including separate physical locations,

which would maintain the independence of their activities.'' The

commenter said that if the second sentence is retained, the

Commission should provide guidance that the routing of documents to

senior management or risk management personnel, and the routing of

documents that show aggregate, non-granular, or stale trading

positions, may be acceptable so long as such routing does not allow

coordinated trading.

\143\ See id.

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

On the other hand, another commenter said that this criterion

should be strengthened to provide realistic guidelines for meaningful

separations of location and information, because the statute requires

an entity to cease trading commodity derivatives in multiple divisions

separated by ``mere `Chinese walls' '' and it is not within the

discretion of the Commission to waive this requirement.\144\ This

commenter cited a research paper which asserted ``that in important

contexts Chinese walls fail to prevent the spread of non-public

information within financial conglomerates.'' \145\

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

\144\ See Better Markets, Inc. on February 10, 2014 (``CL-Better

Markets Feb 10'').

\145\ See id.

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

d. Proposed Rule 150.4(b)(2)(i)(D)--No Shared Employees That Control

Trading Decisions

A commenter said that the Commission should clarify that this

criterion may be met if a shared employee participates on the board but

does not control, direct or participate in the trading decisions.\146\

Another commenter requested that the Commission clarify that guidance

in the Proposed Rule about research personnel not influencing or

directing the entities' trading decisions is properly interpreted to

mean that research personnel are not precluded by this criterion from

providing market research (including, for example, market fundamentals

or technical indicators, support or resistance levels, and trade

recommendations), so long as the research personnel do not direct or

control trading decisions of the owned entities.\147\

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

\146\ See CL-COPE Feb 10.

\147\ See CL-MFA Feb 7, referring to Proposed Rule, 78 FR at

68962.

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

e. Proposed Rule 150.4(b)(2)(i)(E)--No Risk Management Systems That

Permit the Sharing of Trades or Trading Strategy

Several commenters focused on a statement in the Proposed Rule that

the Commission would interpret this criterion not to prohibit sharing

of information for risk management purposes, so long as the information

is not used for trading purposes or shared with employees that

participate in trading decisions.\148\ These commenters asked that the

Commission reiterate this guidance in the final rule.\149\ Other

commenters said that the guidance should be set forth as part of the

text of the final rule, in order to provide a safe harbor, or greater

certainty, for the

[[Page 91468]]

sharing of risk management information.\150\

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\148\ See CL-AIMA Feb 10, citing Proposed Rule, 78 FR at 68962

(``this criterion generally would not prohibit sharing of

information to be used only for risk management and surveillance

purposes, when such information is not used for trading purposes and

not shared with employees that, as noted above, control, direct or

participate in the entities' trading decisions. Thus, sharing with

employees who use the information solely for risk management or

compliance purposes would generally be permitted, even though those

employees' risk management or compliance activities could be

considered to have an `influence' on the entity's trading.''). See

also CL-ISDA Nov 12; CL-SIFMA AMG Nov 13; CL-PEGCC Nov 12; CL-CME

Nov 13.

\149\ See CL-ISDA Nov 12; CL-SIFMA AMG Nov 13; CL-PEGCC Nov 12;

CL-CME Nov 13; CL-AIMA Feb 10.

\150\ See CL-FIA Nov 13; CL-FIA July 31; CL-NGSA Nov 13;

Commodity Markets Council on February 10, 2014. Another commenter

suggested that the rule text should provide that owners and their

affiliates may share such trading information as is necessary to

manage risk and meet compliance obligations. See CL-Working Group

Nov 13 (suggesting rule text allowing ``obtaining such information

as is necessary to fulfill [the entity's] fiduciary duties or

fulfill its duty to supervise the trading activities of an

affiliate, or . . . establishing and monitoring compliance or risk

policies and procedures, including position limits, for an affiliate

or on an enterprise wide basis, or . . . sharing employees so long

as such employees do not control, direct or participate in the

entities' trading decisions'').

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

A commenter asked the Commission to state that this criterion would

not preclude disaggregation relief when there is sharing of information

for only risk management and surveillance and other non-trading

purposes, such as, for example, information used to assess collateral

requirements or verify compliance with applicable credit limits or

information maintained by a custodian or other service provider that

does not control trading.\151\

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

\151\ This commenter asserted that the condition that the owner

entity and owned entity ``do not have risk management systems that

permit the sharing of trades or trading strategy'' is ambiguous and

potentially overly broad. See CL-ISDA Nov 12.

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

Other commenters suggested various formulations for Commission

guidance or rule text to set out circumstances in which this criterion

would be interpreted not to preclude disaggregation relief, so long as

the employees who have access to the shared information do not control,

direct or participate in the entities' trading decisions. The

circumstances suggested by commenters include:

Information sharing as is necessary to fulfill fiduciary

duties or duties to supervise trading, or to monitor risk limits on an

enterprise wide basis;\152\

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

\152\ See CL-CMC Nov 13.

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

sharing of transaction and position information with and

among employees who perform risk management, accounting, compliance or

similar mid- and back-office functions; \153\

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

\153\ See CL-CME Nov 13.

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

information sharing for risk management purposes; \154\

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

\154\ See CL-COPE Nov 13. See also CL-AIMA Feb 10 (criterion

should not preclude shared risk management systems from allowing

access to share trade and trading strategies by individuals who do

not exercise control over trading decisions); CL-ECOM Nov 13

(criterion should not preclude information sharing for risk

management and compliance purposes).

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

continuous sharing of position information for risk

management and surveillance purposes only, sharing of trading and

position information for risk management purposes (even on a real-time

basis and even if the entity's risk management systems or personnel

have authority to require the reduction of positions to comply with

applicable limits), and using shared risk management services,

including real-time data sharing and position reduction mechanisms, so

long as they do not permit coordinated or shared trading;\155\

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

\155\ See CL-SIFMA AMG Nov 13.

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

sharing of derivative information with senior management

or risk committee members that oversee the risks of more than one

operating company, for risk management, accounting, compliance, or

similar purposes (even if these personnel have authority to reduce

exposure or comply with internal risk guidelines), and sharing of

trading and position information for risk management purposes, even if

such information is shared on a real-time or end-of-day basis and even

if the risk management systems or personnel have authority to reduce

positions to comply with applicable limits or other restrictions that

senior management or the risk personnel may impose; \156\ and

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

\156\ See CL-Energy Transfer Nov 13.

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

information sharing resulting from use of an affiliated

service provider, such as an affiliated FCM, an affiliated custodian,

an affiliate engaged in recordkeeping or reporting information, or an

affiliate providing clearing, custodial, or other non-trading services

for the owned entity.\157\

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\157\ See CL-ISDA Nov 12.

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

Commenters also asserted that employees at the owner entity who are

not directly or indirectly involved in trading or the supervision of

traders, and are prohibited from sharing information with owner entity

traders, should be permitted to receive trading activity and position

exposure information of the owned entity,\158\ and that the categories

of employees referred to in the guidance in the Proposed Rule are not

intended to be restrictive, so that, for example, entities could share

sales staff without leading to shared knowledge of trading

decisions.\159\ Another commenter said that the Commission should

interpret this criterion not to preclude disaggregation relief when

information sharing is limited to employees involved in risk-

management, compliance, execution or recordkeeping functions, so long

as the functions are conducted pursuant to written procedures that

protect the information from access by individuals involved in trading

decisions, and there is no access by individuals who develop or execute

trading strategies to the information shared for risk management.\160\

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

\158\ See id.

\159\ See CL-AIMA Feb 10, referring to Proposed Rule, 78 FR at

68962.

\160\ See CL-ICE Nov 13.

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3. Final Rule

The Commission is adopting rule 150.4(b)(2)(i) largely as proposed,

with certain modifications described below in response to commenters

and other considerations.

First, the lead in sentence of rule 150.4(b)(2)(i) includes the

addition of the phrase ``(to the extent that such person is aware or

should be aware of the activities and practices of the aggregated

entity or the owned entity).'' The effect of adding this phrase is to

apply the criteria in this rule to both the person who is required to

aggregate positions and the aggregated or owned entity, but only to the

extent that the person required to aggregate is aware or should be

aware of the activities and practices of the aggregated or owned

entity. This addition recognizes that, as commenters pointed out, an

owner may not have knowledge of or an ability to find out about the

trading practices of an owned entity. The Commission understands the

phrase ``should be aware'' to mean that the owner is charged with

awareness of the owned entity's activities if it is, in effect, able to

control the owned entity or routinely has access to relevant

information about the owned entity. If the owner is not aware, and

should not be aware, of the owned entity's activities, it would not

have to certify as to the owned entity.

The Commission believes that this modification addresses the

comments on subparagraph (A) to the effect that passive investors in an

owned entity should be required to certify only that they have no

knowledge of the owned entity's trading. Therefore, the final rule

adopts subparagraph (A) as it was proposed.

The final rule adopts subparagraph (B), relating to separately

developed and independent trading systems, as it was proposed. The term

``system'' is appropriately broad to encompass the various methods,

procedures and plans which market participants may use to initiate

trading. ``Trading system'' includes, for example, a program (whether

automated or not) that provides the impetus for the initiation of

trades. The suggested alternative, ``strategy,'' is too narrowly

limited to the particular trading decisions a person may make based on

particular conditions. The entire ``trading system,'' not just the

``trading strategy,'' must be

[[Page 91469]]

separately developed and independent.\161\

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\161\ The Proposed Rule noted that ``off-the-shelf'' software

could be considered to be separately developed and independent for

this purpose, so long as the software could not be used by multiple

parties to indirectly coordinate their trading. See Proposed Rule,

78 FR at 68962. The Commission reaffirms this position, and in

response to commenters (see footnote 138, above), clarifies that

customized software or in-house software could also be considered to

be separately developed and independent for this purpose, so long as

the same standard is met.

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

The Commission reiterates that, as stated in the Proposed Rule, the

purpose of this requirement is to preclude use of a trading system to

coordinate the trading of two or more entities.\162\ Thus, it is the

trading system that provides the impetus for the initiation of trades

which must be separately developed and independent, not the mechanism

or software that carries out those trades. For this reason, the

Commission does not believe that use of a shared order execution

platform, with appropriate firewalls, would necessarily mean that this

condition is not met. For purposes of the final rule, an ``order

execution platform'' is a computerized process that accepts inputs of

terms of trades desired to be made and then uses pre-determined methods

to specifically place those trades in the markets, while a ``trading

system'' is a process or method for deciding on the timing and

direction of trades.\163\ Thus, for purposes of the final rule the

Commission understands the term ``trading system'' not to include an

order execution platform. Nor would the term ``trading system'' include

systems used for back-office functions such as order capture or trade

reporting. Also, a trading system does not include broad principles to

guide trading (e.g., principles one may learn from publicly-available

literature).

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

\162\ See Proposed Rule, 78 FR at 68962.

\163\ For example, Trader A may use a trading system to develop

trading ideas, and then use a widely-used order execution platform

to execute those ideas, while affiliated Trader B (with no knowledge

of Trader A's trading system) may qualify for disaggregation when

Trader B uses an independent trading system to develop trading

ideas, and executes those ideas on the same order execution platform

that Trader A uses, provided Trader B does not have access to Trader

A's executions (and vice versa).

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

Subparagraph (C) of the final rule, relating to written procedures

to maintain independence, including separate physical locations,

reflects the deletion of the phrase ``document routing and other

procedures or'' from the second sentence. The Commission believes that

the concept of document routing is outmoded and possibly confusing (and

the concept is adequately described by the general phrase ``security

arrangements'' which is retained in the final rule).\164\

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

\164\ For consistency, the phrase ``document routing and other

procedures or'' is also deleted from rule 150.4(b)(4)(i)(A).

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

For the avoidance of doubt, the Commission reiterates its guidance

from the Proposed Rule on the reference in subparagraph (C) to separate

physical locations.\165\ Subparagraph (C) would not necessarily require

that the relevant personnel be located in separate buildings. The

important factor is that there be a physical barrier between the

personnel that prevents access between the personnel that would impinge

on their independence. For example, locked doors with restricted access

would generally be sufficient, while merely providing the purportedly

``independent'' personnel with desks of their own would not. Similar

principles would apply to sharing documents or other resources.

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

\165\ See Proposed Rule, 78 FR at 68962.

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

The final rule adopts subparagraph (D), relating to sharing of

employees that control trading decisions, as it was proposed. For the

avoidance of doubt, the Commission reiterates, as it stated in the

Proposed Rule, that the sharing of attorneys, accountants, risk

managers, compliance and other mid- and back-office personnel between

entities would generally not compromise independence so long as the

employees do not control, direct or participate in the entities'

trading decisions.\166\ Similarly, sharing of board or advisory

committee members or research personnel, or sharing of employees for

training, operational or compliance purposes, would not result in a

violation of the criteria if the personnel do not influence (e.g.,

``have a say in'') or direct the entities' trading decisions.\167\

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

\166\ See id. See also the discussion above regarding the

condition under rule 150.4(b)(2)(i)(A) (conditioning aggregation

relief on a demonstration that the person filing for disaggregation

relief and the owned entity do not have knowledge of the trading

decisions of the other, and discussing what constitutes

``knowledge'' for this purpose).

\167\ In this respect, rule 150.4(b)(2)(i)(D) is consistent with

the Commission's Interpretive Letter No. 92-15 (CCH ] 25,381), where

an employee both oversaw the execution of orders for a commodity

pool, as well as maintained delta neutral option positions in non-

agricultural commodities for the proprietary account of an affiliate

of the sponsor of the commodity pool. In that interpretive letter,

the Commission concluded that the use of clerical personnel who are

dual employees of both affiliates would not require aggregation when

the clerical personnel engage in ministerial activities and steps

are taken to maintain independence, such as: (i) Limiting trading

authority so that the personnel do not have responsibility for the

two entities' activities in the same commodity; and (ii) separating

the times at which the personnel conduct activities for the two

entities.

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

One commenter asserted that personnel could provide research about

``technical indicators, support or resistance levels, and trade

recommendations'' without being deemed to be participating in trading

decisions.\168\ The Commission believes this situation should be viewed

in light of a previous interpretation, where the Commission stated that

it ``is concerned that specific trading recommendations . . . contained

in such information not be substituted for independently derived

trading decisions. When the person who directs trading in an account or

program regularly follows the trading suggestions [from another

person], such account or program will be evidence that the account is

controlled by the [other person].'' \169\

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

\168\ See CL-MFA Feb 7.

\169\ 1979 Aggregation Policy, 44 FR at 33844.

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

The final rule adopts subparagraph (E), relating to risk management

information sharing, substantially as it was proposed, but with a

revision to clarify that the provision is focused on the sharing of

trades or trading strategy with employees that control the trading

decisions of the other entity.\170\ The Commission notes that

provisions virtually identical to this rule have been used for years in

connection with the IAC exemption, and the Commission's interpretations

of those provisions have not changed. The Commission considers this

revision to the rule text to be a clarification of its existing

interpretations.

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\170\ For example, the rule would preclude Trader A and

affiliated Trader B from having a risk management system that

permits the sharing of Trader A's trades or trading strategy with

employees that control the trading decisions of Trader B, or that

permits the sharing of Trader B's trades or trading strategy with

employees that control the trading decisions of Trader A.

But, in conjunction with that limitation, the rule would not

preclude Trader A and affiliated Trader B from having a risk

management system that permits the sharing of Trader A's trades or

trading strategy with employees that handle risk management

functions for Trader B but do not control its trading decisions.

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Further, the Commission adopts and reiterates its guidance on this

provision in the Proposed Rule.\171\ That is, subparagraph (E) is

intended to address concerns that risk management systems that permit

entities to share trades or trading strategies with each other present

a significant risk of coordinated trading through the sharing of

information.\172\ The Commission

[[Page 91470]]

intends that, generally speaking, subparagraph (E) would not prohibit

sharing of information to be used only for risk management and

surveillance purposes, when such information is not used for trading

purposes and not shared with employees that, as noted above, control,

direct or participate in the entities' trading decisions. Thus, sharing

with employees who use the information solely for risk management or

compliance purposes would generally be permitted, even though those

employees' risk management or compliance activities could be considered

to have an ``influence'' on the entity's trading.

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

\171\ See Proposed Rule, 78 FR at 68962.

\172\ The Commission remains concerned that a trading system, as

opposed to a risk management system, that is not separately

developed from another system can subvert independence because such

a system could apply the same or similar trading strategies even

without the sharing of trading information.

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In response to questions from commenters, the Commission believes

that transaction and position information may be shared among the risk

assessment employees of a single entity or of affiliated entities as is

necessary for certain explicitly specified risk and compliance

purposes, such as complying with internal credit limits or fulfilling a

fiduciary responsibility with respect to a third party's investment.

However, transaction and position information could not be used for

non-hedging purposes or shared with employees who participate in non-

hedging decisions. (``Non-hedging'' is defined in this context as

activities to take, or liquidate, positions that are not bona fide

hedging positions.)

So long as these restrictions are satisfied, the information may be

shared on a real-time basis,\173\ and may be used to effect reductions

in non-hedging positions, but such reductions should be mandated by

pre-established credit risk management procedures or compliance

procedures regarding permissible investment activities. Within these

restrictions, affiliated entities may use shared risk management

services, and the information may be used for back-office recordkeeping

and middle-office risk assessment, so long as such functions occur

independently of any non-hedging decisions made by other employees who

did not have access to shared information. Companies within an

affiliated partnership or limited liability company structure (i.e.,

where the relevant entities are under common ownership or control) may

be considered to be affiliated for this purpose.

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\173\ The Commission emphasizes that so long as the restrictions

discussed here are satisfied, the information may be shared on a

real-time basis, in addition to on an end-of-day basis. As noted

above, the Commission does not consider knowledge of end-of-day

position information to necessarily constitute knowledge of trading

decisions, so long as the position information cannot be used to

dictate or infer trading strategies, but has been concerned that the

ability to monitor the development of positions on a real-time basis

could constitute knowledge of trading decisions. See footnote 116,

above. In response to questions from commenters, the Commission has

considered the circumstances in which such information may be shared

on a real-time basis, and the purpose of the discussion here is to

explain when real-time sharing would be permissible.

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Commenters proposed various alternative criteria which could be

used to determine whether the positions of an owner and owned entity

could be disaggregated.\174\ However, after considering these

suggestions, the Commission does not believe that the suggested

criteria are significantly different from the criteria in rule

150.4(b)(2)(i). Also, some of the suggested criteria appear to be

suitable for particular situations, but not necessarily all corporate

groups.\175\ Overall, the Commission believes that the criteria in rule

150.4(b)(2)(i) are appropriate and suitable for determining when

disaggregation is permissible due to a lack of control and shared

knowledge of trading activities.\176\

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\174\ See, e.g., CL-MidAmerican Feb 7 and Commodity Markets

Council on July 25, 2014.

\175\ For example, one commenter recommended factors such as

whether the owner and the owned entity have separate trading

accounts, separate assets, separate lines of business, independent

credit support and other specific indications of separation. See CL-

MidAmerican Feb 7. In the Commission's view, criteria such as these

are specific manifestations of the general principles stated in

proposed rule 150.4(b)(2)(i) that the owner and the owned entity not

have knowledge of the trading decisions of the other and trade

pursuant to separately developed and independent trading systems.

Similarly, whether the two entities do or do not have separate

assets or separate lines of business would not necessarily indicate

whether they are engaged in coordinated trading.

\176\ The criteria in rule 150.4(b)(2)(i) will be interpreted

and applied in accordance with the Commission's past practices. See

footnote 114, above.

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C. Notice Filing Requirement in Rule 150.4(c)

1. Proposed Approach

The Commission proposed a notice filing requirement in proposed

rule 150.4(c).\177\ The proposed rule contemplated that the filing

would be made before the exemption from aggregation is needed, since

the filing would be a pre-requisite for obtaining the exemption.

However, where a prior filing is impractical (such as where a person

lacks information regarding a newly-acquired subsidiary's activities),

the Commission proposed that the filing should be made as promptly as

practicable.\178\

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\177\ The Commission also proposed an application procedure for

ownership interests of more than 50 percent in proposed rule

150.4(c)(2). However, since the Commission is not adopting proposed

rule 150.4(b)(3), that application procedure is not relevant and the

Commission is not adopting proposed rule 150.4(c)(2). The text of

rule 150.4(c)(2) in the final rule is a new provision discussed

below.

\178\ See Proposed Rule, 78 FR at 68962.

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Even though a filing under proposed rule 150.4(c) could be made

after an ownership or equity interest is acquired, the Commission

proposed that the exemption from aggregation would not be effective

retroactively because the filing is a pre-requisite to the exemption.

The Commission reasoned that retroactive application of such filings

could result in administrative difficulty in monitoring the scope of

exemptions from aggregation and negatively affect the Commission

staff's surveillance efforts.\179\

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\179\ See id.

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Generally, the Commission proposed that entities could consolidate

their filings in any efficient manner by, for example, discussing more

than one owned entity in a single filing, so long as the scope of the

filing is made clear.\180\ The Commission also emphasized that if an

entity determines to no longer apply an exemption (or if an exemption

is no longer available), the entity would be required to inform the

Commission by making a filing under proposed rule 150.4(c) because this

would constitute a material change to the prior filing. Of course, once

an exemption no longer applies to an owned entity, the person would be

required to subsequently aggregate the positions of the entity in

question.\181\

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\180\ In the Proposed Rule, the Commission clarified that

section 8 of the CEA would apply to the information that the

Commission may request under proposed rule 150.4(c), and sets out

the extent to which such information will be treated confidentially.

See id.

\181\ See id.

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2. Commenters' Views

Commenters addressed the time limit for making the proposed notice

filing, the situations in which subsequent filings (after the initial

notice) should be required, the consequences for failure to make a

timely filing, the contents of the notice filing and how the notice

filing should be signed.

Regarding the time limit for making the proposed notice filing,

commenters said the rule should provide a reasonable period of time to

file, in order to perform due diligence and gather information. Several

commenters suggested that a three-month grace period would be

reasonable before requiring aggregation, because this would be adequate

to conduct the internal review to support and approve the notice

filing.\182\

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\182\ See CL-CME Nov 13; CL-PEGCC Nov 12; CL-FIA Nov 13; CL-FIA

July 31; CL-ISDA Nov 12; CL-Energy Transfer Nov 13. One of these

commenters allowed that aggregation would be required if, during the

grace period, an owner entity takes active steps to control and

direct the trading strategy of a newly acquired owned entity. See

CL-ISDA Nov 12. The three month time period was said to be adequate

for a new owned entity to undertake post-closing diligence and

operational measures to confirm whether seeking or claiming the

aggregation exemption is necessary. See CL-Energy Transfer Nov 13.

Another commenter suggested a grace period, but did not suggest a

specific time period. See CL-SIFMA AMG Nov 13.

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[[Page 91471]]

Regarding the situations in which subsequent filings (after the

initial notice) should be required, several commenters stated that a

subsequent filing should be required only in the event of a material

change to the facts set forth in the relevant notice filing.\183\ One

commenter thought that a subsequent filing should be required only if

there was a change in the ability to comply with the conditions of the

exemption so that the criteria for disaggregation are no longer met,

but not upon a mere internal reorganization of an affiliate which does

not affect compliance with the criterion.\184\ Another commenter said a

subsequent filing should be required only when an owner entity is

withdrawing the notice filing because it no longer maintains a

requisite ownership interest in the owned entity, or in the event that

the owner entity is no longer in compliance with the exemption criteria

with respect to an owned entity or another material change in the

contents of the notice filing has occurred.\185\

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\183\ See CL-Working Group Nov 13; CL-EEI Nov 13; CL-FIA Nov 13;

CL-NGSA Nov 13; CL-CME Nov 13.

\184\ See CL-Energy Transfer Nov 13.

\185\ See CL-ISDA Nov 12.

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Regarding the consequences for failure to make a timely filing, one

commenter proposed that the rule allow an entity five business days

after exceeding a position limit to make the notice filing, if the

entity is otherwise eligible to claim an exemption from aggregation and

was deemed in excess of a position limit only because of aggregation

from which it could have been exempt.\186\ Another commenter said that

if an entity is eligible to claim an exemption from aggregation, but

fails to make a timely notice filing, that should constitute only a

single violation for failure to make the filing, not a separate

violation of position limits.\187\ Other commenters addressed a

slightly different situation, contending that if a market participant

relies on an exemption from aggregation in good faith, but the

Commission subsequently determines that an exemption was not available,

the Commission should require aggregation only from the date of its

determination.\188\

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\186\ See CL-CME Nov 13.

\187\ This commenter asserted that this modification would not

undermine the Commission's aggregation rule because it would apply

only where an entity is entitled to an exemption from the

aggregation requirement. See CL-FIA Nov 13.

\188\ See CL-FIA Nov 13; CL-FIA July 31; CL-CME Nov 13; CL-IECA

Nov 13.

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

Regarding the contents of the notice filing, two commenters

requested that the Commission remove the requirement to provide a

description of the relevant circumstances that warrant disaggregation

in proposed rule 150.4(c)(1)(i), and instead require only a

certification that the owner entity, as of the date of the filing,

meets the conditions of the exemption with respect to each owned entity

specified in the filing.\189\

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\189\ See CL-ISDA Nov 12 and CL-PEGCC Nov 12.

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

Regarding signature of the notice filing, two commenters asked that

the Commission clarify that the specific senior officer signing or

submitting the notice filing may be any individual appropriately

determined within the context of a particular owner entity's governance

structure.\190\ On the other hand, another commenter asserted that the

rule should specifically require that the notice filing be signed by

the CEO and the chief compliance officer or chief of risk management of

the owner entity.\191\

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\190\ See CL-ISDA Nov 12 and CL-PEGCC Nov 12.

\191\ This commenter felt that the signature requirement in the

proposed rule appears casual and may lead the owner entity to assume

that granting of exemptions from aggregation would be routine, while

they should be exceptional. See CL-IATP Feb 10.

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3. Final Rule

The Commission is adopting rule 150.4(c) largely as proposed, with

certain modifications to reflect points made by commenters. Primarily,

rule 150.4(c) includes a modification to provide for a 60-day period

after acquisition of an ownership interest to conduct due diligence and

prepare the notice filing.\192\ In other words, a notice filing made

within 60 days after an acquisition would have retroactive effect as of

the date of acquisition. The Commission believes that a 60-day period

would be adequate for the acquirer to perform due diligence and gather

the information necessary to make the notice filing.

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\192\ See rule 150.4(c)(2). Rule 150.4(c)(2) is new text that

was not included in the Proposed Rule, but rather is adopted in

response to commenters' suggestions. As noted in footnote 177,

above, the Commission is not adopting proposed rule 150.4(c)(2).

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

Rule 150.4(c) has also been modified to address a situation where a

person is eligible to claim an exemption from aggregation, but does not

make a filing at the proper time. In this case, rule 150.4(c)(6)

provides that the failure to timely file the notice would be a

violation of rule 150.4(c), but there would not be a violation of the

aggregation requirement or of a position limit so long as the required

filing is made within five business days after the person is aware, or

should have been aware, that the notice has not been timely filed. That

is, since the person was eligible to claim the exemption, aggregation

was not required, but a violation of the filing requirement has

occurred.

On the other hand, the Commission does not believe relief is

appropriate if a person is not eligible to claim an exemption from

aggregation, but erroneously believes that it is (even if the error

occurs in good faith). In this case, the person could not ``cure'' the

situation by taking steps to become eligible for the exemption, and

then attempting to provide the notice filing with retroactive

effect.\193\ Where the person is not eligible for any exemption from

aggregation and therefore aggregation is required, the ineligibility

cannot be cured by making a later notice filing.

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\193\ In this regard, the Commission disagrees with commenters

who argued that if a market participant relies on an exemption from

aggregation in good faith, but the Commission subsequently

determines that an exemption was not available, the Commission

should require aggregation only from the date of its determination.

See CL-FIA Nov 13; CL-FIA July 31; CL-CME Nov 13; CL-IECA Nov 13.

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

As for a requirement to make filings subsequent to the initial

filing, the Commission believes that a further filing is required only

in the event of a material change to the facts set forth in the

relevant notice filing, as is stated in rule 150.4(c)(4). The

Commission understands that the Proposed Rule referred at one point to

persons making one filing each year, but this was in the context of

estimating how often filings might occur.\194\ The Commission did not

intend that notices be filed annually in the absence of a material

change.

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

\194\ See Proposed Rule, 78 FR at 68975.

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

As for the content of the notice filing, rule 150.4(c) includes the

same requirements as were in the proposed rule. The Commission has not

removed the requirement to provide a description of the relevant

circumstances that warrant disaggregation, because it believes that a

short description of circumstances helps the Commission and its staff

to understand the context of the filing. In this regard, the Commission

notes that under the earlier proposed amendment to part 151, the person

claiming the exemption would

[[Page 91472]]

have been required to demonstrate compliance with each condition of

relief, which would likely include an organizational chart showing the

ownership and control structure of the involved entities, a description

of risk management and information-sharing systems, and an explanation

of trade data and position information distribution.\195\ The

Commission has not specifically adopted this guidance for rule

150.4(c). Instead, the Commission notes the distinction between rule

150.4(c)(1)(i), which requires a description of the relevant

circumstances that warrant disaggregation to be included in each

filing, and rule 150.4(c)(3), which allows the Commission to obtain

information demonstrating that the person meets the requirements of the

exemption in those cases where the Commission calls for such

information.\196\

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\195\ See Proposed Rule, 78 FR at 68952.

\196\ The Commission is adopting a delegation of authority to

the Director of the Division of Market Oversight or the Director's

designee to call under rule 150.4(c)(3) for additional information

from a person claiming an aggregation exemption. See rule

150.4(e)(1)(ii). This parallels a provision in proposed rule

150.4(e)(1) delegating authority to call for additional information

from a person claiming the exemption in proposed rule 150.4(b)(9)

(renumbered (b)(8) in the final rule). The subparagraphs in rule

150.4(e)(1) have been renumbered from the proposed rule, because as

noted in footnote 77, the Commission is not adopting proposed rule

150.4(e)(1)(i), which contained a delegation of authority

referencing proposed rule 150.4(b)(3). Also, the cross-references in

rule 150.4(e)(1)(i) have been corrected to refer to paragraph

(b)(8)(iv) and paragraph (b)(8).

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

With regard to signature of the notice and the certification

requirement in rule 150.4(c)(1)(ii), the Commission believes that rule

150.4(c) is satisfied when the notice containing the statement required

by 150.4(c)(1)(ii) is signed by a senior officer of the entity claiming

relief from the aggregation requirement or, if the entity does not have

senior officers, a person of equivalent authority and responsibility

with respect to the entity.

D. Other Issues Related to Aggregation on the Basis of Ownership

The Proposed Rule discussed or requested comment on several other

issues related to aggregation due to ownership of another entity, or

relief from that requirement. In addition, commenters raised certain

miscellaneous issues related to the rule. These issues were the

effective date for the final rule, how entities that hold an interest

in the entity that submits a notice should be treated (i.e., the

treatment of ``higher-tier entities''), whether aggregation should be

required on a basis pro rata to the ownership interest in the owned

entity, and how the aggregation rule would interact with other

Commission rules.

1. Proposed Approach

Regarding the effective date for the final rule, the Commission

discussed in the Proposed Rule a potential transition period for

application of the requirement of aggregation based on ownership.

However, the Commission concluded that this would not be necessary

because the Proposed Rule would apply to existing position limits

currently in effect and would provide further aggregation

exemptions.\197\ Therefore, the Proposed Rule did not suggest any

compliance period or delayed effectiveness of the final rule.

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

\197\ See Proposed Rule, 78 FR at 68959.

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Regarding the treatment of higher-tier entities, proposed rule

150.4(b)(9) \198\ provided that if an owned entity has filed a notice

under proposed rule 150.4(c), any person with an ownership or equity

interest of 10 percent or greater in the owned entity need not file a

separate notice identifying the same positions and accounts previously

identified in the notice filing of the owned entity, if such person

complies with the conditions applicable to the exemption specified in

the owned entity's notice filing, other than the filing requirements;

and does not otherwise control trading of the accounts or positions

identified in the owned entity's notice. Further, proposed rule

150.4(b)(9) provided that any person relying on the exemption for

higher-tier entities must provide to the Commission information

concerning the person's claim for exemption called for by the

Commission.

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

\198\ As noted above, because the Commission is not adopting

proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed

rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to

(b)(8), respectively. Thus, final rule 150.4(b)(8) corresponds to

proposed rule 150.4(b)(9).

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

In the Proposed Rule, the Commission noted that the proposed

approach for higher-tier entities should significantly reduce the

filing requirements for aggregation exemptions.\199\ The proposed

approach would allow higher-tier entities to rely upon a notice for

exemption filed by the owned entity, and such reliance would only go to

the accounts or positions specifically identified in the notice.\200\

The proposed approach would also mean that a higher-tier entity that

wishes to rely upon an owned entity's exemption notice would be

required to comply with conditions of the applicable aggregation

exemption other than the notice filing requirements.\201\ The

Commission did not anticipate that the reduction in filing would impact

the Commission's ability to effectively surveil the proper application

of exemptions from aggregation. The first filing of an owned entity

exemption notice should provide the Commission with sufficient

information regarding the appropriateness of the exemption, while

repetitive filings of higher-tier entities would not be expected to

provide additional substantive information.\202\

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\199\ See Proposed Rule, 78 FR at 68975.

\200\ For example, if company A had a 30 percent interest in

company B, and company B filed an exemption notice for the accounts

and positions of company C, then company A could rely upon company

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

Should company A wish to disaggregate the accounts or positions of

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

exemption. See Proposed Rule, 78 FR at 68953.

\201\ Although higher-tier entities would not have to submit a

separate notice to rely upon the notice filed by an owned entity,

the Commission noted that it would be able, upon call, to request

that a higher-tier entity submit information to the Commission, or

allow an on-site visit, demonstrating compliance with the applicable

conditions. See id.

\202\ See id.

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Regarding aggregation on a basis that is pro rata to the relevant

ownership interest, the Commission preliminarily concluded in the

Proposed Rule that a pro rata approach would be administratively

burdensome for both owners and the Commission.\203\ For example, the

Commission suggested that the level of ownership interest in a

particular owned entity may change over time for a number of reasons,

including stock repurchases, stock rights offerings, or mergers and

acquisitions, any of which may dilute or concentrate an ownership

interest. Thus, it may be burdensome to determine and monitor the

appropriate pro rata allocation on a daily basis. Moreover, the

Commission stated that it has historically interpreted the statute to

require aggregation of all the relevant positions of owned entities,

absent an exemption, which is consistent with the view that a holder of

a significant ownership interest in another entity may have the ability

to influence all the trading decisions of the entity in which such

ownership interest is held. However, the Commission asked commenters to

address whether the Commission should permit a person to aggregate only

a pro rata allocation of the owned entity's positions based on that

person's less than 100 percent ownership, including a system for

aggregation based on ownership tiers.\204\

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\203\ See Proposed Rule, 78 FR at 68958.

\204\ See Proposed Rule, 78 FR at 68959.

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[[Page 91473]]

The Commission also invited comment on the interplay between the

Proposed Rule and other Commission rules. In the Proposed Rule, the

Commission asked commenters to address the issues or concerns arising

from the Proposed Rule that would have to be addressed if the

Commission were to adopt its proposal to establish speculative position

limits for other exempt and agricultural commodity futures and option

contracts, and physical commodity swaps that are ``economically

equivalent'' to such contracts.\205\ The Commission also asked about

implications with respect to the interplay between the proposed

disaggregation relief and the Commission's other rules relating to

swaps.

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\205\ See Proposed Rule, 78 FR at 68963, referring to Position

Limits for Derivatives, 78 FR 75680 (Dec. 12, 2013).

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2. Commenters' Views

Regarding the effective date for the final rule, several commenters

said that the rule should provide for an initial compliance or

transition period during which the rule would not be enforced and

market participants would be able to adjust their positions to the new

aggregation rules.\206\ The period of time suggested for this

transition ranged from two and one-half months to nine months.\207\

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\206\ See CL-ISDA Nov 12; CL-PEGCC Nov 12; CL-FIA Feb 6; CL-

Working Group Feb 10; CL-AIMA Feb 10; CL-ICE Nov 13.

\207\ See id.

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

Commenters did not address the terms of proposed rule 150.4(b)(9),

relating to higher-tier entities. One commenter said that an entity

should be able to file for aggregation relief on behalf of any or all

of its affiliates (including joint ventures) as long as the criteria

for relief are satisfied for the entities receiving relief.\208\

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

\208\ See CL-Working Group Nov 13and CL-Working Group Feb 10.

That is, all affiliates, not just higher-tier entities, could rely

on a filing made by one entity in an affiliated group.

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

Regarding aggregation on a basis pro rata to the ownership interest

in the owned entity, one commenter thought that the rule should permit

entities to aggregate on a basis pro rata to the person's ownership or

equity interest, because pro rata aggregation would more accurately

reflect the positions owned by market participants and would not

unnecessarily restrict the positions of market participants, while

reducing the risk of an inadvertent position limits overage.\209\

Another commenter supporting pro rata aggregation suggested that the

Commission obtain the pro rata percentage that should be attributed to

the owner from the owner's filings on Form 40 and the Commission's

special call authority.\210\ To address potential administrative

burdens on the Commission, commenters proposed that entities that apply

pro rata aggregation would have to commit to informing the Commission

promptly upon a change in the relevant ownership or equity interest, or

upon request by the Commission.\211\

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\209\ See CL-FIA Feb 6. See also CL-COPE Feb 10; CL-SIFMA AMG

Feb 10.

\210\ See CL-MFA Feb 7.

\211\ See CL-DBCS Feb 10 and CL-Working Group Feb 10,

respectively.

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In response to the Commission's request for information on

implications with respect to the interplay of the aggregation

provisions and other Commission rules, one commenter thought that the

full implications of disaggregation relief ``will not be readily

apparent to physical commodity market participants'' until the

Commission finalizes the scope of contracts to be included in position

limits, especially with regards to trade options, the treatment of

which may have a ``dramatic impact on whether or not affiliated energy

business units . . . require disaggregation relief.'' \212\ Further,

this commenter said, the manner of organizing physical commodity

contracts is likely to be distinct from how financial transactions are

organized and executed, and a policy requiring aggregation of both

would ``create undue hardships'' for energy end-users unless there are

``accessible, practicable means'' of acquiring disaggregation

relief.\213\

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

\212\ See American Gas Association on February 10, 2014 (``CL-

AGA Feb 10'').

\213\ See id.

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

Another commenter, which is a DCM, sought clarification of how the

proposed aggregation requirement would affect the reporting of large

trader positions, asserting that reporting firms currently aggregate

accounts for reporting purposes by ownership and control so that

independently operated subsidiaries of a wholly-owned parent currently

report such positions separately in large trader reports and open

interest.\214\ This commenter believed that if both firms were to

aggregate those positions, each could carry large positions on opposite

sides of the market but would only report a small aggregate position,

which could be highly disruptive to the markets.\215\ The commenter

requested that the Commission make clear that ``the current reporting

regime would be maintained and not affected by whatever form the final

aggregation rule takes.'' \216\

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\214\ See CL-ICE Feb 10.

\215\ See id. (asserting that lifting one side of a large two-

sided spread would result in a big open interest change).

\216\ See id.

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

This same commenter also requested the Commission to confirm that

``an exchange will continue to be permitted to grant separate

exemptions to commonly owned affiliates when the affiliates are

required to be aggregated,'' and that ``if firms that are aggregated

submit separate Form 204s to the Commission, . . . the quantities

reported roll up to the aggregate level for position limit purposes.''

\217\ The commenter noted that it currently permits ``commonly owned

entities that are under separate decision-making and trading control to

transact EFRPs and block trades with each other'' and asked the

Commission to indicate if these entities would be required to aggregate

for position limit purposes, and whether ``EFRPs and block trades

executed between such firms [are] prohibited trades under the CEA.''

\218\

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\217\ See id.

\218\ See id.

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3. Final Rule

The final rule will be effective 60 days after publication in the

Federal Register. The Commission considered comments requesting an

additional compliance or transition period during which the rule would

not be enforced and has determined additional time would not be

necessary or appropriate for this rule. One effect of the final rule is

to provide for certain exemptions from the aggregation requirement.

Considering both the relief available under the exemptions and the

requirements imposed by the final rule, the Commission concluded that a

period of 60 days would be appropriate to prepare for effectiveness of

the final rule.

As for higher-tier entities, the Commission is adopting rule

150.4(b)(8) largely as it was proposed,\219\ but with a modification to

provide that one entity may file a notice for aggregation relief on

behalf of any or all of its affiliates, as long as the criteria for

relief are satisfied. The Commission finds merit in a commenter's

suggestion that reliance by affiliates on a filing made by one entity

in an affiliated group should be permitted for the same reasons that

higher-tier entities would be permitted to rely on filings made by

subsidiaries.

[[Page 91474]]

The Commission clarifies that, in order to meet the requirements of

rule 150.4(c), a filing made on behalf of affiliates must be signed by

a senior officer (or equivalent) of each such affiliate. The Commission

intends that filing on behalf of affiliates will be optional;

affiliates may also file individual notices.

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\219\ As noted above, because the Commission is not adopting

proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed

rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to

(b)(8), respectively. Thus, final rule 150.4(b)(8) corresponds to

proposed rule 150.4(b)(9).

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Regarding aggregation on a pro rata basis, the Commission concludes

that although the commenters point out the theoretical merits of a pro

rata procedure, none of them explained how pro rata aggregation would

be workable in practice. The Commission did not propose adopting pro

rata aggregation, because it was concerned about the administrative

burdens for both owners and the Commission.\220\ After considering the

comments received, the Commission has determined not to adopt a pro

rata procedure because it remains concerned about the difficulty of

specifying a broadly applicable procedure for calculating the level of

ownership interests and using those levels to allocate positions to the

owner entity. The Commission also finds merit in the procedure that has

been applied to date (under which owners aggregate all of the relevant

positions of the owned entities for which aggregation applies) and

concludes that the potential benefits of a pro rata procedure do not

support changes in the current practice.

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

\220\ See Proposed Rule, 78 FR at 68958.

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

In response to the comments about the interplay of the aggregation

provisions and other Commission rules, the Commission clarifies that,

generally speaking, the final aggregation rules are intended for

purposes of position limits and would not modify practices with respect

to other rules. Exchanges will continue to be permitted to require

separate reporting by aggregated entities, and to grant separate

exemptions to aggregated entities. Also, exchanges will continue to be

able to enforce separate limits on entities that are aggregated for

federal limits.

E. Exemption for Certain Accounts Held by FCMs in Rule 150.4(b)(3)

1. Proposed Approach

The Commission proposed to move the exemption for certain accounts

held by FCMs in existing regulation 150.4(d) to a new proposed rule

150.4(b)(4),\221\ so that all aggregation exemptions would be located

in paragraph (b) of proposed rule 150.4. The text of proposed rule

150.4(b)(4) was substantially the same as existing regulation 150.4(d),

except that it was rephrased in the form of a positive statement of the

availability of an exemption from the aggregation requirement, as

contrasted to the statement in the existing regulation that the

aggregation requirement applies unless certain conditions are met.\222\

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

\221\ As noted above, because the Commission is not adopting

proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed

rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to

(b)(8), respectively. Thus, final rule 150.4(b)(3) corresponds to

proposed rule 150.4(b)(4).

\222\ See Proposed Rule, 78 FR at 68964.

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2. Commenters' Views and Final Rule

No commenter addressed proposed rule 150.4(b)(4). The Commission is

adopting it as proposed, but renumbered as rule 150.4(b)(3).

F. Exemptions From Aggregation for Underwriting and Broker-Dealer

Activities in Rules 150.4(b)(5) and (b)(6)

1. Proposed Approach

Proposed rule 150.4(b)(6) \223\ stated that a person need not

aggregate the positions or accounts of an owned entity if the ownership

or equity interest is based on the ownership of securities constituting

the whole or a part of an unsold allotment to or subscription by such

person as a participant in the distribution of such securities by the

issuer or by or through an underwriter. This proposal was similar to

regulation 151.7(g) (in the now-vacated part 151 regulations), which

provided for an exemption from aggregation where an ownership interest

is in an unsold allotment of securities.

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\223\ As noted above, because the Commission is not adopting

proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed

rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to

(b)(8), respectively. Thus, final rule 150.4(b)(5) corresponds to

proposed rule 150.4(b)(6).

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Proposed rule 150.4(b)(7) stated that a broker-dealer registered

with the Securities and Exchange Commission,\224\ or similarly

registered with a foreign regulatory authority, need not aggregate the

positions or accounts of an owned entity if the ownership or equity

interest is based on the ownership of securities acquired in the normal

course of business as a dealer, so long as the broker-dealer does not

have actual knowledge of the trading decisions of the owned

entity.\225\

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\224\ See 15 U.S.C. 78o. Final rule 150.4(b)(6) corresponds to

proposed rule 150.4(b)(7).

\225\ As initially proposed, the rule also required that the

broker-dealer not have a greater than a 50 percent ownership or

equity interest in the owned entity. See Proposed Rule, 78 FR at

68977. In the Supplemental Notice, the Commission proposed to remove

this requirement for the reasons supporting removal of the separate

conditions for owners of a greater than a 50 percent ownership or

equity interest in general. See Supplemental Notice, 80 FR at 58371.

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

In the Proposed Rule, the Commission noted that the ownership

interest of a broker-dealer in an entity based on the ownership of

securities acquired as part of reasonable activity in the normal course

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

unsold allotment of securities covered by the underwriting exemption in

regulation 151.7(g).\226\ In both circumstances, the ownership interest

is likely not held for investment purposes.\227\ Accordingly, the

Commission proposed to include an aggregation exemption in proposed

rule 150.4(b)(7) for such activity.\228\

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\226\ See Proposed Rule, 78 FR at 68964.

\227\ The Commission specifically noted that this proposed

exemption would not apply to registered broker-dealers that acquire

an ownership interest in securities with the intent to hold for

investment purposes. See id.

\228\ As proposed, the exemption would encompass a broker-

dealer's ownership of securities in anticipation of demand or as

part of routine life cycle events, if the activity was in the normal

course of the person's business as a broker-dealer. See id.

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

2. Commenters' Views

Commenters did not address proposed rule 150.4(b)(6).

One commenter said the rationale for the broker-dealer exemption in

proposed rule 150.4(b)(7) should be expanded and clarified, asserting

that if a broker-dealer acquires a substantial but not controlling

interest in a trading entity, its due diligence would reveal historical

information while the availability of an exemption appears to be

conditioned upon acquiring no further knowledge.\229\ The commenter

asked that the Commission provide further explanation of what

constitutes ``actual knowledge,'' and in particular whether it is

limited to knowledge at the moment of acquisition, or also includes any

knowledge of trading decisions by the newly acquired entity and other

entities in which the broker-dealer has an equity based interest.\230\

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

\229\ See CL-IATP Feb 10.

\230\ See id.

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3. Final Rule

The Commission is adopting rule 150.4(b)(6) as it was proposed, but

renumbered as rule 150.4(b)(5). For purposes of this rule, the

Commission expects to interpret the term ``unsold allotment'' along the

lines that it is interpreted under the Securities Exchange Act of 1934.

The Commission is adopting rule 150.4(b)(7) as it was proposed in

the Supplemental Notice, but renumbered as rule 150.4(b)(6). In

response to the commenter's question, the Commission clarifies that it

expects traditional

[[Page 91475]]

standards of a broker-dealer's due diligence to apply for this

provision. As stated in the Proposed Rule,\231\ the Commission would

interpret the phrase ``reasonable activity'' to be effectively

synonymous with the phrase ``normal course of business'' in this

context.

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

\231\ See Proposed Rule, 78 FR at 68964.

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G. Exemption From Aggregation Where Information Sharing Would Violate

Law in Rule 150.4(b)(7)

1. Proposed Approach

a. In General

The Commission proposed rule 150.4(b)(8) \232\ to provide

exemptions from aggregation under certain conditions where the sharing

of information would cause a violation of state or federal law or the

law of a foreign jurisdiction, or regulations adopted thereunder. These

exemptions have not previously been available under the Commission's

existing rules. The Commission intended that the proposed rule make

clear that the exemption to the aggregation requirement would include

circumstances in which the sharing of information would create a

``reasonable risk'' of a violation--in addition to an actual

violation--of law or regulations.\233\ The Commission noted that

whether a reasonable risk exists would depend on the interconnection of

the applicable statute and regulatory guidance, as well as the

particular facts and circumstances as applied to the statute and

guidance.\234\ Also, it would not be necessary to show that a

comparable federal law exists in order for a state law to be the basis

for an exemption.\235\

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\232\ As noted above, because the Commission is not adopting

proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed

rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to

(b)(8), respectively. Thus, final rule 150.4(b)(7) corresponds to

proposed rule 150.4(b)(8).

\233\ See Proposed Rule, 78 FR at 68950.

\234\ See Proposed Rule, 78 FR at 68948.

\235\ See Proposed Rule, 78 FR at 68950.

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The Commission stated that the proposed rule was intended to

respond to concerns that market participants could face increased

liability under state, federal and foreign law. For example, the

proposed rule would reduce risk of liability under antitrust or other

laws by allowing market participants to avail themselves of the

violation of law exemption in those circumstances where the sharing of

information created a reasonable risk of violating the above mentioned

bodies of law.\236\

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

\236\ See Proposed Rule, 78 FR at 68949.

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

b. Laws of Non-U.S. Jurisdictions and International Law

The proposed rule would not allow local law or principles of

international law (as opposed to the specific laws of foreign

jurisdictions) to be a basis for the exemption. With regard to local

law, the Commission stated that an exemption for local law would be

difficult to implement due to the number of laws and regulations that

would need to be considered and the number of localities that might

issue them. While the number of such laws and regulations may be large,

the Commission was not persuaded that there would be a significant

number of instances where these laws and regulations would prohibit

information sharing that would otherwise be permitted under federal and

state law.\237\

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

\237\ See Proposed Rule, 78 FR at 68950. In addition, in those

instances where local law would impose an information sharing

restriction that is not present under state or federal law, the

Commission believed that it could be inappropriate to favor the

local law serving a local purpose to the detriment of the position

limits under federal law that serve a national purpose. See id.

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

Furthermore, the Commission was concerned that reviewing notices of

exemptions based on local laws would create a substantial

administrative burden for the Commission. That is, balancing the

possibility that including local law as a basis for the exemption would

be helpful to market participants against the possibility that doing so

would lead to confusion or inappropriate results, the Commission

concluded that the better course is not to provide for local law to be

a basis for the exemption.\238\

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

\238\ See id.

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

With regard to international law, the Commission believed that the

sources of international law, such as treaties and international court

decisions, would be unlikely to include information sharing

prohibitions that would not otherwise apply under foreign or federal

law, and that therefore including international law as a basis for the

exemption is unnecessary.\239\

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

\239\ See id.

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c. Memorandum of Law

Under proposed rule 150.4(b)(8), market participants would be

required to provide a written memorandum of law (which may be prepared

by an employee of the person or its affiliates) which explains the

legal basis for determining that information sharing creates a

reasonable risk that either person could violate federal, state or

foreign law. The Commission explained that requiring a formal opinion

of counsel may be expensive and may not provide benefits, in terms of

the purposes of this requirement, as compared to a memorandum of law.

The memorandum of law would allow Commission staff to review the legal

basis for the asserted statutory or regulatory impediment to the

sharing of information, and would be particularly helpful where the

asserted impediment arises from laws or regulations that the Commission

does not directly administer. Further, Commission staff would have the

ability to consult with other federal regulators as to the accuracy of

the memorandum, and to coordinate the development of rules surrounding

information sharing and aggregation across accounts. The Commission

stated its expectation that a written memorandum of law would, at a

minimum, contain information sufficient to serve these purposes.\240\

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

\240\ See id.

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

The Commission also noted that if there is a reasonable risk that

persons in general could violate a provision of federal, state or

foreign law of general applicability by sharing information associated

with position aggregation, then the written memorandum of law may be

prepared in a general manner (i.e., not specifically for the person

providing the memorandum) and may be provided by more than one person

in satisfaction of the requirement. For example, the Commission noted

that trade associations commission law firms to provide memoranda on

various legal issues of concern to their members. Under the Proposed

Rule, such a memorandum (i.e., one that sets out in detail the basis

for concluding that a certain provision of federal, state or foreign

law of general applicability creates a reasonable risk of violation

arising from information sharing) could be provided by various persons

to satisfy the requirement, so long as it is clear from the memorandum

how the risk applies to the person providing the memorandum. \241\

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

\241\ See id.

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

On the other hand, the Commission did not believe that simply

providing a copy of the law or other legal authority would be

sufficient, because this would not set out the basis for a conclusion

that the law creates a reasonable risk of violation if the particular

person providing the document shared information associated with

position aggregation. If the effect of the law is clear, the written

memorandum of law need not be complex, so long as it explains in detail

the effect of the law on the person's information sharing. Also, the

question of what legal

[[Page 91476]]

authorities, in particular, constitute ``state law'' or ``foreign

law,'' where it is relevant, is a question to be addressed in the

written memorandum of law. In general, any state-level or foreign legal

authority that is binding on the person could be a basis for the

exemption.\242\

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

\242\ See id.

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

Proposed rule 150.4(b)(8) also included a parenthetical clause to

clarify that the types of information that may be relevant in this

regard may include, only by way of example, information reflecting the

transactions and positions of a such person and the owned entity. The

Commission believed it helpful to clarify in the rule text what types

of information may potentially be involved. The mention of transaction

and position information as examples of this information was not

intended to limit the types of information that may be relevant.\243\

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

\243\ See id.

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

2. Commenters' Views

One commenter supported the proposal and said the Commission should

include in the final regulatory text or preamble ``all elements'' of

the discussion in the Proposed Rule as to what constitutes a state law,

who can prepare the memorandum of law, and what must be included in

such memorandum, in order to provide clarity and ensure the process for

seeking relief has its intended effects.\244\ Another commenter called

for the Commission to expand on this provision by granting foreign law-

based exemptions on cross-border compliance, and developing memoranda

of understanding with foreign jurisdiction authorities concerning the

criteria for substituted compliance for aggregation exemptions.\245\

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

\244\ See CL-AGA Feb 10.

\245\ See CL-IATP Feb 10.

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

Other commenters said the Commission should clarify whether the

violation of law exemption would be available for other regulations

promulgated by the Commission, or for supranational laws, including

those promulgated by the European Union.\246\ A commenter asked the

Commission to clarify whether the memorandum may be prepared by an

employee of the firm, or of an affiliate of the firm, that is seeking

the exemption.\247\

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

\246\ See CL-Working Group Feb 10 and Alternative Investment

Management Association on February 10, 2014 (``CL-AIMA Feb 10''),

respectively.

\247\ See (CL-AIMA Feb 10).

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

Another commenter suggested that the rule permit filing of a

summary explanation of legal restrictions in lieu of a full legal

memorandum (provided the full memorandum is available for inspection by

the Commission upon request), to protect privileged attorney-client

communications and confidential work-product.\248\ On the other hand, a

commenter asserted that while a memorandum of law may entail lower

costs it would not provide sufficient accountability, in contrast to an

opinion of counsel that the commenter believes would be a reliable,

thorough, and formal document that provides a distinct level of

accountability to the firm making the attestation.\249\

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

\248\ See CL-FIA Feb 6.

\249\ See CL-Better Markets Feb 10 (also arguing that the CEA

requires an entity to obtain a legal opinion to avail itself of an

aggregation exemption, and it is not within the discretion of the

Commission to waive this requirement).

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

3. Final Rule

The Commission is adopting rule 150.4(b)(8) as proposed, but

renumbered as rule 150.4(b)(7). The Commission also adopts the

statements from the Proposed Rule noted above, including the statements

as to what constitutes a state law, who can prepare the memorandum of

law, and what must be included in such memorandum.\250\

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

\250\ See Proposed Rule, 78 FR at 68950.

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

In response to comments, the Commission clarifies that

supranational laws (such as EU laws) constitute laws of a foreign

jurisdiction which may be a basis for the exemption, if they meet the

standard of being the basis for a reasonable risk of violation arising

from information sharing. Similarly, the Commission's own regulations

may be a basis for the exemption if they meet that standard.

Also, the Commission clarifies that the memorandum of law

supporting an exemption may be prepared by an employee of the firm, or

of an affiliate of the firm, that is seeking the exemption. However,

the Commission does not agree with the commenters who suggested that a

more summary document may support an exemption, or that a formal

opinion of counsel should be required. Instead, the Commission

continues to believe that, as stated in the Proposed Rule,\251\

requiring a formal opinion of counsel would be expensive and may not

provide benefits, in terms of the purposes of this requirement, as

compared to a memorandum of law. The Commission expects that a

memorandum of law submitted in support of an exemption will contain

information sufficient to allow Commission staff to review the legal

basis for the asserted statutory or regulatory impediment to the

sharing of information (particularly where the asserted impediment

arises from laws or regulations that the Commission does not directly

administer), to consult with other federal regulators as to the

accuracy of the memorandum, and to coordinate the development of rules

surrounding information sharing and aggregation across accounts.

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

\251\ See id.

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H. Aggregation Requirement for Substantially Identical Trading in Rule

150.4(a)(2)

1. Proposed Approach

The Commission first adopted an aggregation requirement for

substantially identical trading in the part 151 rules in order to

prevent circumvention of the aggregation requirements.\252\ In adopting

this proposal, the Commission explained that ``In [the] absence of such

aggregation requirement, a trader can, for example, acquire a large

long-only position in a given commodity through positions in multiple

pools, without exceeding the applicable position limits.'' \253\ The

Commission further explained that under this provision, no ownership

threshold would apply and positions of any size in accounts or pools

would require aggregation.\254\

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

\252\ See Position Limits for Futures and Swaps, 76 FR 71626,

71654 (Nov. 18, 2011). The provision was adopted as rule 151.7(d)

(since vacated).

\253\ Id.

\254\ See id.

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

The Proposed Rule, adopted after the part 151 rules were vacated,

included a similar provision in proposed rule 150.4(a)(2), noting that

the proposed rule was intended to be consistent with the approach taken

in vacated rule 151.7(d).\255\

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

\255\ See Proposed Rule, 78 FR at 68951 n 39.

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

2. Commenters' Views

A commenter representing managers of registered investment

companies said aggregation should not be required where a common

investment adviser controls the activities of various registered

investment companies, so long as the investment companies have

different investment strategies, because restructuring of the advisory

business to obtain an exemption from aggregation would impose costs on

the shareholders in the investment companies.\256\

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

\256\ See Investment Company Institute on February 10, 2014

(``CL-ICI Feb 10'') (asserting that investment strategies that do

not necessarily dictate the same specific trades should not be

considered ``substantially identical,'' noting that registered

investment companies may be managed by unaffiliated advisors that

follow similar strategies disclosed in their prospectuses).

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

Another commenter representing investment managers asked the

Commission to provide further guidance on the situations that will be

covered by

[[Page 91477]]

the ``substantially identical trading strategies'' provision, including

whether the Commission may apply the provision to situations other than

passively managed index funds.\257\ This commenter believed that the

aggregation requirement should not apply to accounts placed in

``separate performance composites,'' and suggested that the Commission

consider using in this rule the term ``trading program'' as defined in

rule 4.10(g), rather than the term ``trading strategies,'' which is not

defined.\258\ A third commenter representing investment managers

suggested that the Commission remove from the rule any requirement that

a person holding or controlling the trading of positions in accounts or

pools with substantially identical trading strategies aggregate those

positions.\259\

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

\257\ See CL-AIMA Feb 10. Passively managed index funds were

cited as an example of pools with identical trading strategies in

the adoption of rule 151.7(d). See Position Limits for Futures and

Swaps, 76 FR at 71654.

A commenter representing managers of pension plans asked for

guidance on how to determine if two investment vehicles in which an

investor holds an interest are pursuing ``substantially identical

trading strategies.'' See American Benefits Council, Inc. on

February 10, 2014 (``CL-ABC Feb 10'').

\258\ See CL-AIMA Feb 10.

\259\ See CL-SIFMA AMG Feb 10.

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

Two commenters asserted that the Commission did not provide a

statutory or policy rationale for, or consider the costs and benefits

of, this requirement, or provide guidance regarding the meaning of

``substantially identical trading strategies.'' \260\ Both of these

commenters asserted that the proposed rule would result in an absurd

consequence requiring a person to aggregate all of the positions of two

single-commodity index funds using the same index in which the person

invested, or in which a fund-of-funds manager invested for that

person.\261\

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

\260\ See CL-SIFMA AMG Feb 10 and CL-CME Feb 10. As an

alternative, one of these commenters suggested that the requirement

be limited to persons that directly control the trading of positions

in substantially identical accounts or pools. See CL-SIFMA AMG Feb

10.

\261\ See CL-SIFMA AMG Feb 10 and CL-CME Feb 10. One commenter

provided an example of its reading of the requirement, asserting

that ``a $10,000 investor in two $1 billion commodity index mutual

funds using the same index may have to aggregate the positions in

those two $1 billion mutual funds'' because the funds follow

substantially identical trading strategies. See CL-SIFMA AMG Feb 10.

This commenter posited that the investor would have to implement a

compliance program to prevent inadvertent violations of the position

limits rules, which (in addition to imposing significant legal and

operational obstacles) would impose costs many times the investor's

$10,000 investment. See id.

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

On the other hand, a commenter argued that the Commission's

position limit aggregation regime should limit financial speculation by

any group or class of traders in a given contract that becomes large

enough to threaten the contract's ability to serve the needs of

hedgers.\262\ This commenter asserted that commodity index traders,

which the commenter believes trade en masse with respect to an explicit

programmed common strategy, are clearly covered by the statutory

provision on ``two or more persons acting pursuant to an expressed or

implied agreement or understanding'' and these traders must be

aggregated for position limit purposes.\263\ Another commenter endorsed

the view that commodity index traders' positions should be aggregated

because they ``operate outside of the normal operation of the commodity

markets [and] sway market prices due to sheer volume and for exogenous,

non-market reasons,'' so that aggregating their positions would

significantly reduce market speculation and facilitate predictable

commodities market operations.\264\

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

\262\ See CL-Better Markets Feb 10 and Better Markets, Inc. on

March 30, 2015 (``CL-Better Markets Mar 30'').

\263\ See CL-Better Markets Mar 30 (arguing that Congress did

not permit the discretion of the Commission to apply position limits

to allow for an ``abdication of responsibility'' to act with respect

to commodity index traders).

\264\ See CL-Occupy the SEC Aug 7.

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3. Final Rule

The Commission is adopting rule 150.4(a)(2) substantially as it was

proposed, but with clarifying changes discussed below. The Commission

continues to believe that this provision is necessary to prevent

circumvention of the aggregation requirements. In this regard, the

Commission notes, for example, that the exemption in rule 150.4(b)(1)

will generally permit limited partners, limited members, shareholders

and other similar types of pool participants not to aggregate the

accounts or positions of the pool with any other accounts or positions

such person is required to aggregate, unless certain circumstances

specified in rule 150.4(b)(1) are present.\265\ As a result of this

exemption, a person could hold significant positions in multiple pools

without any aggregation requirement, which the Commission believes to

be acceptable so long as the pools do not have substantially identical

trading strategies. However, in the absence of rule 150.4(a)(2) the

exemption would also permit a trader to separate a large position in a

given commodity derivative into positions held in pools that have

substantially identical trading strategies (i.e., the example cited in

the adoption of vacated regulation 151.7(d)). To ensure that this

situation is covered by the aggregation requirement, rule 150.4(a)(2)

requires that trader to aggregate its positions in all pools or

accounts that have substantially identical trading strategies.

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

\265\ See generally the discussion of rule 150.4(b)(1) in part

II.I, below.

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

Also, even apart from the exemption in rule 150.4(b)(1), a person

would (in the absence of rule 150.4(a)(2)) generally not be required to

aggregate positions in accounts or pools if those positions are below

the 10 percent threshold in rule 150.4(a)(1) and no control is present.

For this reason, and as was the case in vacated regulation 151.7(d),

there is no ownership threshold in rule 150.4(a)(2), so that if the

accounts or pools have substantially identical trading strategies, a

person must aggregate its positions in the accounts or pools regardless

of ownership level. Also, as was proposed, aggregation under rule

150.4(a)(2) is not subject to the exemptions in rule 150.4(b).\266\

And, as is stated in the rule, aggregation under rule 150.4(a)(2) is

required if a person either holds positions in more than one account or

pool with substantially identical trading strategies, or controls the

trading of such positions without directly holding them.

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

\266\ See Proposed Rule, 78 FR at 68959 n 109.

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

In response to the commenters, the Commission disagrees that this

provision could lead to absurd results. In the example described by one

commenter, where a person has holdings of $10,000 each in two commodity

index funds with substantially identical strategies,\267\ the terms of

the rule require the owner to aggregate the positions that it (i.e.,

the owner) holds in the two commodity index mutual funds, not the

positions of the funds themselves. That is, the two holdings would be

aggregated into one $20,000 holding.\268\ The owner is not required to

aggregate all the positions held by the two funds. Effectively, it is

the person's pro rata interest (held or controlled) in each account or

pool with substantially identical trading strategies that must be

included in the aggregation.

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

\267\ See footnote 256.

\268\ The commenter described the holdings in dollar amounts.

See CL-SIFMA AMG Feb 10. The Commission notes however that the

position limits generally are stated in terms of a number of

contracts, not a dollar amount. To apply rule 150.4(a)(2), a person

holding or controlling the trading of positions in more than one

account or pool with substantially identical trading strategies must

determine the person's pro rata interest in the number of contracts

such accounts or pools are holding.

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

The Commission also believes that proposed rule 150.4(a)(2) was

slightly unclear when it stated that the person ``must aggregate such

positions''

[[Page 91478]]

without stating precisely with what such positions must be aggregated.

To clarify how aggregation under rule 150.4(a)(2) is to be effected,

the Commission has modified the last clause of the rule so that it

reads ``. . . must aggregate each such position (determined pro rata)

with all other positions held and trading done by such person and the

positions in accounts which the person must aggregate pursuant to

paragraph (a)(1) of this section.'' That is, rules 150.4(a)(1) and

(a)(2) are to be applied cumulatively, so that a person must aggregate

all positions held and trading done by such person with all positions

that must be aggregated pursuant to rule 150.4(a)(1) and all positions

that must be aggregated pursuant to rule 150.4(a)(2).

I. Exemption for Ownership by Limited Partners, Shareholders or Other

Pool Participants in Rule 150.4(b)(1)

1. Proposed Approach

Proposed rule 150.4(b)(1) was substantially similar to existing

regulation 150.4(c). The Commission proposed rule 150.4(b)(1) as part

of an organizational revision intended to make rule 150.4 easy to

understand and apply. In the Proposed Rule, the Commission explained

that stating this provision as the first exemption will clarify that

this exemption may be applied by any person that is a limited partner,

limited member, shareholder or other similar type of pool participant

holding positions in which the person, by power of attorney or

otherwise, directly or indirectly, has a 10 percent or greater

ownership or equity interest in a pooled account or positions.\269\

That is, if the requirements of this exemption are satisfied with

respect to a person, then the person need not determine if the

requirements of the exemption in paragraph (b)(2) are satisfied. The

text of paragraph (b)(2), in turn, states that it applies to persons

with an ownership or equity interest in an owned entity, other than an

interest in a pooled account which is subject to paragraph (b)(1).

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

\269\ See Proposed Rule, 78 FR at 68963.

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

Proposed rule 150.4(b)(1) stated that for any person that is a

limited partner, limited member, shareholder or other similar type of

pool participant holding positions in which the person, by power of

attorney or otherwise, directly or indirectly, has a 10 percent or

greater ownership or equity interest in a pooled account or positions,

aggregation of the accounts or positions of the pool is not required,

except as provided in paragraphs (b)(1)(i), (b)(1)(ii) or (b)(1)(iii).

Although existing regulation 150.4(c) does not contain any explicit

statement of this rule, the lack of an aggregation requirement in these

circumstances is implicit in the existing regulation's statement that

aggregation is required only in certain specified circumstances. Thus,

proposed rule 150.4(b)(1)(i) stated explicitly a principle that is

implicit in the existing regulation.\270\ Paragraphs (b)(1)(i),

(b)(1)(ii) and (b)(1)(iii) of proposed rule 150.4 set out the

circumstances in which aggregation requirements apply; these

circumstances are substantially similar to those covered by paragraphs

(c)(1), (c)(2) and (c)(3) of existing regulation 150.4, but the text of

the rule was modified to simplify the wording of the provisions.

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\270\ The Commission stated that this modification was not

intended to effect a substantive change. Rather, it is intended to

state explicitly a rule that the Commission has applied since at

least 1979. See footnote 99, above.

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The Proposed Rule also briefly addressed the treatment of 4.13

pools in a manner that is equivalent to the treatment of operating

companies.\271\ The Commission noted that the proposed amendment to the

later-vacated part 151 regulations had proposed to expand the

definition of independent account controller to include the managing

member of a limited liability company, and to amend the definitions of

eligible entity and independent account controller to specifically

provide for 4.13 pools established as limited liability companies.\272\

In the Proposed Rule, the Commission stated that this is a matter that

could be the subject of relief granted under CEA section 4a(a)(7) and

that persons wishing to seek such relief should apply to the Commission

stating the particular facts and circumstances that justify the

relief.\273\

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\271\ A ``4.13 pool'' is a commodity pool for which the relevant

CPO has claimed an exemption from registration under regulation

4.13. A commenter on the proposed amendments to part 151 had

addressed 4.13 pools more broadly, and said that the Commission's

rules should treat ownership of 4.13 pools in the same way that the

rules treat ownership of operating companies. In particular, this

commenter said that the Commission should eliminate the requirement

that the positions of a 4.13 pool be aggregated with the positions

of any person that owns more than 25 percent of the 4.13 pool. See

Proposed Rule, 78 FR at 68965.

\272\ See id.

\273\ See id.

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2. Commenters' Views

Commenters did not address the proposed reorganization and

rephrasing of proposed rule 150.4(b)(1). However, some commenters

addressed the substance of the rule, which is the same as existing

regulation 150.4(c).

One commenter asked that the Commission make the following

technical changes to the proposed rule: Expand the exemption in the

rule to include the beneficiary of a trust, clarify that a ``limited

member'' of a limited liability company is any person who is not a

managing member, construe the term CPO to include a person discharging

the function of CPO (to account for situations where the function has

been delegated from one person to another), and confirm that a filing

generally is not required for relief under 150.4(b)(1), with the

exception of relief under rule 150.4(b)(1)(ii).\274\

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\274\ See CL-AIMA Feb 10.

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Several commenters said the Commission should provide an ownership

exemption for interests held by a limited partner in a commodity pool--

i.e., the rule should permit disaggregation on a showing that the

limited partner does not control trading by the commodity pool (for

which the CPO is exempt from registration).\275\ That is, these

commenters believed that the rule requiring aggregation when a limited

partner owns more than 25 percent of a pool (i.e., existing regulation

150.4(c)(3)) should be modified to allow for disaggregation following a

filing attesting to no control by the limited partner.\276\

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\275\ See CL-OTPP Nov 13; CL-PEGCC Nov 12; CL-DBCS Feb 10; CL-

SIFMA AMG Nov 13; CL-MFA Nov 12; CL-MFA Feb 7.

\276\ See id.

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One of these commenters asserted that investors holding greater

than 25 percent ownership interests in pools often do not have control

of the pools' trading (or ability to monitor the pools' positions) and

thus would qualify for disaggregation under the criteria in proposed

rule 150.4(b)(2)(i).\277\ This commenter cited a no-action letter

issued by the staff of the Commission, which the commenter interpreted

to acknowledge that, in the case of a manager of a fund of funds, there

may be a ``lack of visibility . . . regarding the positions of an

Investee Fund,'' that ``such opaqueness'' may not allow the manager to

have adequate data to determine a position, and when

[[Page 91479]]

investment managers of underlying investee funds provide full position

data, such data is rarely made available on a real-time basis.\278\

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\277\ The commenter believes that while the requirement to

aggregate for pools run by exempt CPOs was adopted in 1999 when very

few CPOs were exempt and there was a concern about small pools, this

requirement is no longer appropriate given the expanded number of

exempt CPOs. See CL-MFA Nov 12 and CL-MFA Feb 7.

Another commenter said that passive investors in 4.13 pools

should not be required to aggregate, and they should not have to

make a filing with the Commission as a condition of such

disaggregation, so that they would be treated the same as

unaffiliated passive investors in non-exempt pools under rule

150.4(b)(1). See CL-SIFMA AMG Nov 13 and CL-SIFMA AMG Feb 10.

\278\ See CL-MFA Feb 7, citing CFTC No-Action Letter No. 12-38

(Nov 29, 2012).

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A commenter representing managers of pension fund investments

believed that it is unclear whether proposed rule 150.4(b)(1)(iii) was

meant to require a passive investor that holds a 25 percent or greater

ownership interest in a 4.13 pool to aggregate the pool's

positions.\279\ The commenter felt that the Commission had not provided

any rationale for, or evaluated the costs of, such a requirement, with

which compliance would be impractical, if not impossible.\280\

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\279\ See CL-ABC Feb 10.

\280\ The commenter asserted that managers of 4.13 pools will be

reluctant to provide such information because (i) the selective

disclosure of fund position information to only certain investors

could raise legal liability issues under the federal securities

laws; (ii) certain employee benefit plans could utilize position

information provided by the fund to deduce proprietary and

confidential investment strategies of the advisor/manager to such

funds; and (iii) the operational burdens associated with the fund

providing such information to certain employee benefit plans, to the

extent not legally prohibited, may be deemed too costly. See id.

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3. Final Rule

The Commission is adopting rule 150.4(b)(1) as it was proposed. In

response to a commenter, the Commission notes that rule 150.4(c), as

was the case for the proposed rule, requires a filing to claim an

aggregation exemption under paragraph (b)(1)(ii), but not the other

subparagraphs of paragraph (b)(1).

The commenters' other discussion of this rule goes beyond the scope

of the proposal, because no substantive changes to the rule were

proposed. Rather, this rule was included in the proposal as part of the

reorganization of rule 150.4.

The question in the proposal about treating 4.13 pools the same as

operating companies was accompanied by a statement that ``this is a

matter that could be the subject of relief granted under CEA section

4a(a)(7).'' That is, this question requested comment on the

circumstances that could justify relief that may be granted in the

future under CEA section 4a(a)(7).

J. Exemption for Accounts Carried by an Independent Account Controller

in Rule 150.4(b)(4) and Conforming Change in Rule 150.1

1. Proposed Approach

The Commission proposed rule 150.4(b)(5) to take the place of the

existing IAC provision in existing regulation 150.3(a)(4) (which was

proposed to be deleted).\281\ The Commission also proposed conforming

changes to the definition of the term ``eligible entity'' in proposed

rule 150.1(d) and (e). Existing regulation 150.3(a)(4) provides an

eligible entity with an exemption from aggregation of the eligible

entity's customer accounts that are managed and controlled by

IACs.\282\ The Commission stated that the reason for this

organizational change was to place the IAC exemption in the regulatory

section providing for aggregation of positions.\283\ Proposed rule

150.4(b)(5) was substantially similar to existing regulation

150.3(a)(4) except that the Commission proposed to modify it (and the

related definition in proposed rule 150.1(d)) so that it could be

applied with respect to any person with a role equivalent to a general

partner in a limited liability partnership or a managing member of a

limited liability company.\284\

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\281\ See Proposed Rule, 78 FR at 68965. As noted above, because

the Commission is not adopting proposed rule 150.4(b)(3), paragraphs

(b)(4) to (b)(9) of proposed rule 150.4 are renumbered in the final

rule as paragraphs (b)(3) to (b)(8), respectively. Thus, final rule

150.4(b)(4) corresponds to proposed rule 150.4(b)(5).

\282\ The definition of eligible entity in existing regulation

150.1(d) includes the limited partner or shareholder in a commodity

pool the operator of which is exempt from registration under Sec.

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

4.13, the definition of an independent account controller in

existing regulation 150.1(e)(5) only extends to a general partner of

a commodity pool the operator of which is exempt from registration

under Sec. 4.13. At the time the Commission expanded the IAC

exemption to include regulation 4.13 commodity pools, market

participants generally structured such pools as limited

partnerships. See Proposed Rule, 78 FR at 68964.

\283\ See Proposed Rule, 78 FR at 68965.

\284\ A commenter on the proposed amendments to part 151 had

suggested that this rule be expanded to apply to any person with a

role equivalent to a general partner in a limited partnership or

managing member of a limited liability company, to accommodate

various structures that are used for commodity pools in

jurisdictions outside the U.S. See id.

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2. Commenters Views'

Commenters did not address the proposed reorganization and

rephrasing of proposed rule 150.4(b)(5). However, some commenters

addressed the substance of the rule, which is the same as existing

regulation 150.3(a)(4).

Several commenters asked that the Commission expand the definition

of the term ``eligible entity'' to include a variety of different

entities, such as:

The operators of certain similar investment vehicles, such

as governmental or pension-sponsored investment management vehicles;

\285\

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\285\ See CL-OTPP Nov 13.

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

non-corporate entities that sponsor plans, such as

governmental plans or church plans; \286\

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

\286\ This commenter said that the phrase ``commodity pool the

operator of which is excluded from registration'' should be deleted

from proposed rule 150.1(e)(5)(ii) and replaced by the following

text from proposed rule 150.1(d): ``trading vehicle which is

excluded, or which itself has qualified for exclusion from the

definition of the term `pool' or `commodity pool operator,'

respectively.'' See CL-AIMA Feb 10.

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

foreign entities that perform a similar role or function

subject to foreign regulation; \287\

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\287\ This commenter said that disaggregation relief should be

available to an affiliate which operates as a Registered Fund

Management Company in Singapore managing non-U.S. client accounts

holding U.S. futures, options and swaps and, thus, is not subject to

U.S. registration requirements. See Olam International Limited on

February 10, 2014.

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

exempt CTAs, and all registered, exempt or excluded CPOs;

\288\

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

\288\ See CL-AIMA Feb 10 and CL-ICI Feb 10.

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

a CPO exempt from registration; all operators excluded

from the definition of CPO; a limited partner, a limited member,

shareholder or other pool participant of a pool whose operator is

either registered or exempt from registration; a CTA that is exempt

from registration; a person excluded from the definition of CTA; and a

general partner, managing member or manager of a commodity pool whose

operator is either registered, exempt from registration, or excluded

from the definition of CPO.\289\

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

\289\ See CL-MFA Nov 12.

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

Two commenters suggested that the definition of the term ``eligible

affiliate'' should include sister companies, consistent with the

definition of the term ``eligible affiliate counterparty'' under

existing regulation 50.52, because the proposed definition does not

appear to cover sister affiliates in a corporate group where neither

affiliate holds an ownership interest in the other.\290\ Another two

commenters suggested the deletion of the proposed filing requirement

for the IAC exemption in proposed rule 150.4(c)(1), because, they

argued, no filing has been necessary to rely on the IAC exemption, and

the Proposed Rule provides no justification for deviating from this

established practice.\291\

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\290\ See CL-FIA Feb 6 and Commercial Energy Working Group on

March 30, 2015.

\291\ See CL-ABC Feb 10 and CL-SIFMA AMG Nov 13.

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Last, a commenter argued that the Commission provided no rationale

for the proposed amendments to the IAC exemption, and asserted that

since at least 1999 the IAC exemption is not limited to ``customer''

positions traded by IACs but rather is available to limited

[[Page 91480]]

partners who may be affiliates or principals of an owned-CPO.\292\

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

\292\ See CL-CME Feb 10.

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3. Final Rule

The Commission is adopting rules 150.1(d) and (e) and rule

150.4(b)(5) as they were proposed, but proposed rule 150.4(b)(5) is

renumbered as 150.4(b)(4).\293\ Regarding the comments that the term

``eligible entity'' should include entities such as the operators of

governmental or church plans, the Commission notes that rule 150.1(d)

defines the term to include the operator of a trading vehicle which is

excluded, or which itself has qualified for exclusion from the

definition of the term ``pool'' or ``commodity pool operator,''

respectively, under Sec. 4.5, and existing regulation 4.5 has

exclusions from the definition of ``pool'' for governmental plans and

church plans.\294\ Thus, operators of such trading vehicles would be

eligible entities.

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\293\ Rule 150.1(e)(2), as adopted, reflects two grammatical

corrections: The phrase ``fiduciary responsibilities to the managed

positions and accounts'' is corrected to read ``fiduciary

responsibilities for managed positions and accounts'' and the word

``is'' is added before the second usage of the word ``consistent.''

Rule 150.4(b)(4)(i)(A), as adopted, reflects the deletion of the

phrase ``document routing and other procedures or'' for consistency

with rule 150.4(b)(2)(i)(C). See footnote 164, above.

\294\ See existing regulations 4.5(a)(4)(iii) and 4.5(a)(4)(v),

respectively.

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The commenters' discussion of proposed rule 150.4(b)(5) (final rule

(150.4(b)(4)) goes beyond the scope of the proposal. As proposed, this

paragraph replaced the existing IAC rule in existing regulation

150.3(a)(4), except that it was expanded to include any person with a

role equivalent to a general partner in an limited partnership or

managing member of a limited liability company. The Commission did not

propose any other changes to the definitions of eligible entity or IAC.

Other changes to this regulation would be a matter for future

consideration.\295\

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\295\ The Commission notes that commenters have suggested that

registered CPOs and exempt CTAs should be included in the definition

of the term ``eligible entity'' and the definition should clarify

the treatment of certain persons who are exempt from registration as

CPOs. The Commission is considering these comments and may take them

up in a later proceeding.

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

The Commission believes that the existing IAC exemption, the

substance of which is included in the final rule, is consistent with

the CEA and prior Commission precedents. In this regard, it is

important to distinguish between the exemption in existing regulation

150.4(c)(2) (e.g., for a limited partner of a CPO who is also a

principal or affiliate of the CPO) and the IAC exemption in existing

regulation 150.3(a)(4). These two distinct exemptions are incorporated

into the final rule as rules 150.4(b)(1)(ii) and (b)(4), respectively.

Thus, the comment implying that Commission precedent has not limited

the IAC exemption to ``customer'' positions traded by IACs is

misplaced. The discussion cited by the commenter related to the

definitions of the terms ``eligible entity'' and ``IAC'' and was

codified in existing regulation 150.4(c)(2); this precedent did not

relate to the exemption language in existing regulation

150.3(a)(4).\296\

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\296\ See 1999 Amendments, 64 FR 24038 at 24045.

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Regarding the potential for aggregation between ``sister

affiliates'' where neither affiliate holds an ownership interest in the

other, the Commission notes that an entity generally would not require

relief in this situation because aggregation is required only when one

entity owns an interest in, or controls, the other. Last, the

definition of the term ``eligible affiliate'' is not part of the

Proposed Rule and so comments on this definition are not germane to

this rulemaking.

K. Revisions To Clarify Regulations

1. Proposed Approach

In connection with the proposed modifications to rule 150.4, the

Commission reviewed whether the text of existing regulation 150.4 is

easy to understand and apply. In this regard, the Commission noted that

the existing regulation may be unclear, especially in terms of the

relationship between the provisions of paragraphs (a) through (d) of

the existing regulation and whether a particular paragraph is an

exception to another.\297\ Also, as more market participants active in

different parts of the market have studied existing regulation 150.4,

both in connection with the Dodd-Frank Act and otherwise, questions

have arisen about the application of the aggregation requirements to a

wide variety of circumstances. The Commission believed it is important

that the rules setting forth the aggregation requirements be clear in

their application to both the circumstances in which they currently

apply, and the various circumstances in which they may apply in the

future. The textual modifications in the proposed rule were not

intended to effect any substantive change to the meaning of rule

150.4.\298\

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\297\ See Proposed Rule, 78 FR at 68953.

\298\ See id. The textual modifications in the Proposed Rule

related to the Commission regulations currently in effect. The

Commission noted that its proposal regarding position limits

includes amendments to the text of certain Commission regulations

(See Position Limits for Derivatives, 78 FR 75680 (Dec. 12, 2013))

and that if the later proposal is adopted, conforming technical

changes to reflect the interplay between the two amendments may be

necessary.

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Therefore, the Commission proposed to modify the text to clarify

that paragraph (a) of rule 150.4 states the general requirement to

aggregate positions a person may hold in various accounts, and

paragraph (b) of the rule sets out the exemptions to the aggregation

requirement that may apply. The Commission believed that this format

clarifies that the exemptions in rule 150.4(b) are alternatives; that

is, aggregation is not required to the extent that any of the

exemptions in rule 150.4(b) may apply.\299\

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\299\ See Proposed Rule, 78 FR at 68963.

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Proposed rule 150.4(b)(1) stated that for any person that is a

limited partner, limited member, shareholder or other similar type of

pool participant holding positions in which the person by power of

attorney or otherwise directly or indirectly has a 10 percent or

greater ownership or equity interest in a pooled account or positions,

aggregation of the accounts or positions of the pool is not required,

except as provided in paragraphs (b)(1)(i), (b)(1)(ii) or (b)(1)(iii).

Proposed rule 150.4(b)(2) and proposed rule 150.4(b)(3) set out

exemptions permitting disaggregation of the positions of owned entities

in certain circumstances.

Paragraphs (b)(4) to (b)(8) of proposed rule 150.4 (renumbered as

paragraphs (b)(3) to (b)(7) of the final rule) set forth other

exemptions that may apply in various circumstances. The exemption for

certain accounts held by FCMs in paragraph (b)(4) of the proposed rule

(final rule (b)(3)) was substantially the same as existing regulation

150.4(d), except that it was rephrased in a form of a statement of when

an exemption is available, instead of the statement in the existing

regulation that the aggregation requirement applies unless certain

conditions are met. Paragraph (b)(5) of the proposed rule (final rule

(b)(4)) set forth the exemption for accounts carried by an IAC that was

substantially similar to existing regulation 150.3(a)(4). Paragraphs

(b)(6), (b)(7) and (b)(8) of the proposed rule (final rule paragraphs

(b)(5), (b)(6) and (b)(7), respectively) set forth the exemptions for

underwriting, broker-dealer activity and circumstances where laws

restrict information sharing. Paragraph (b)(9) of the proposed rule

(final rule (b)(8)) described how higher-tier entities may apply an

exemption pursuant to a notice filed by an owned entity.

[[Page 91481]]

2. Commenters' Views and Final Rule

No commenters raised any problems or issues arising from these

organizational changes, so they are reflected in the final rule adopted

by the Commission.

Finally, it should be noted that the amendments to part 150 adopted

here may require further conforming technical changes if the Commission

adopts any proposed amendments to its regulations regarding position

limits.\300\ Such changes would be explained at the time they are

adopted.

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\300\ See Position Limits for Derivatives, 78 FR 75680 (December

12, 2013).

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III. Related Matters

A. Considerations of Costs and Benefits

Section 15(a) of the CEA \301\ requires the Commission to consider

the costs and benefits of its actions before promulgating a regulation

under the CEA or issuing certain orders. Section 15(a) further

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

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

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

competitiveness, and financial integrity of futures markets; (3) price

discovery; (4) sound risk management practices; and (5) other public

interest considerations. The Commission considers the costs and

benefits resulting from its discretionary determinations with respect

to the section 15(a) factors.

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\301\ 7 U.S.C. 19(a).

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As discussed in Section I (Background), above, the Commission

proposed amendments to its existing aggregation rules.\302\ In November

2013, the Commission proposed amendments to existing regulations 150.1

and 150.4.\303\ In response to commenters, the Commission issued a

supplemental notice in September 2015 to modify one of the proposed

exemptions to the Commission's proposed aggregation requirement.\304\

The modification changed the exemption category that was tied to

ownership and equity levels. In the main, the Commission is adopting

all of the changes identified in the Proposed Rule, as modified by the

Supplemental Notice. The Commission believes that the final rules are a

reasoned approach to complying with CEA section 4a(a)(1)'s aggregation

requirement. The Commission also believes that the final rules, via

exemptions, give market participants opportunities and processes to

reduce costs and burdens associated with aggregating positions that

might hinder trading or reduce liquidity.

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\302\ 17 CFR part 150.

\303\ 17 CFR 150.1 and 150.4. See Aggregation of Positions;

Proposed Rule, 78 FR 68946 (Nov. 15, 2013) (``Proposed Rule'').

\304\ See Aggregation of Positions: Supplemental notice of

proposed rulemaking, 80 FR 58365 (Sept. 29, 2015) (``Supplemental

Notice'').

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Current part 150 is the baseline against which the costs and

benefits associated with these final rules will be identified and

considered.\305\ The current regulations in part 150 require certain

market participants to aggregate positions subject to the position

limits.\306\ As discussed above in Section II., the Commission's

aggregation policy under existing regulation 150.4 generally requires

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

positions and accounts for which that person controls the trading

decisions with all positions and accounts in which that person has a 10

percent or greater ownership interest, and with the positions of any

other persons with whom the person is acting pursuant to an express or

implied agreement or understanding.\307\ There are several exemptions

from aggregation listed, such as the ownership interests of limited

partners in pooled accounts,\308\ discretionary accounts and customer

trading programs of FCMs,\309\ and eligible entities with IAC that

manage customer positions.\310\

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\305\ 17 CFR part 150.

\306\ See Proposed Rule, 78 FR at 68946; Supplemental Notice, 80

FR at 58374 (for a discussion of the baseline).

\307\ See 17 CFR 150.4(a) and (b).

\308\ See 17 CFR 150.4(c).

\309\ See 17 CFR 150.4(d).

\310\ See 17 CFR 150.3(a)(4).

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In the Proposed Rule and the Supplemental Notice, the Commission

also requested comments on its costs-and-benefits assessments and

sought data as well as other information in the estimation of

quantifiable costs and benefits of the final changes to part 150.\311\

The commenters addressed the cost-and-benefit aspect of the Proposed

Rule and the Supplemental Notice in a general manner; commenters did

not provide data.\312\ Accordingly, since the data requisite to

quantification is by-and-large proprietary, specific to individual

market participants, and not otherwise reasonably accessible to the

Commission, the Commission's cost-and-benefit discussion that follows

is largely qualitative in nature. The Commission, nevertheless,

attempts to quantify costs and benefits where possible, especially, in

the area of market participants' filing exemption notices.

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\311\ See Proposed Rule, 78 FR at 68972, and Supplemental

Notice, 80 FR at 58375.

\312\ See CL-Working Group Feb 10; CL-CME Feb 10; CL-SIFMA AMG

Feb 10; CL-FIA Feb 6; CL-FIA Nov 13; CL-COPE Feb 10. Also, the

Proposed Rule included a discussion of comments on costs related to

the now-vacated Part 151 received prior to the 2013 proposal. See

Proposed Rule, 78 FR at 68971.

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1. Final Rules--Summary

The Commission is adopting final rules that, primarily, have two

objectives. First, the final rules state the Commission's aggregation

requirement. Second, the final rules identify exemptions that relieve

market participants from the requirement to aggregate all held

positions that are subject the Commission's position limits.

Final rules 150.4(a)(1) and (a)(2) set out two aggregation

requirements: (1) An aggregation requirement for a person exercising

trading control or possessing certain ownership or equity interests in

positions in accounts, which is the same as in existing regulation

150.4(b); and (2) an aggregation requirement for a person who holds or

controls positions in more than one account that employ substantially

identical trading strategies, which is new under the final rule. The

exemptions are in rules 150.4(b)(1) to (b)(8), and apply only to

persons who fall within the first category of persons who must

aggregate--i.e., persons subject to rule 150.4(a)(1). The exemption

notice filing process is in rules 150.4(c) and (d). In rule 150.4(e),

the Commission delegates authority over aggregation and exemption

related duties to the Director of the Division of Market Oversight.

There are eight exemptions. Three of them are largely the same as

in existing regulations: An exemption for limited partners,

shareholders, or other pool participants; an exemption for FCMs that

hold certain accounts; and an exemption for independent account

controllers that control trading by certain accounts or positions.\313\

Five of the exemptions are new in the final rule. There is an exemption

from aggregation of the positions and accounts of owned entities if the

owner meets certain conditions intended to ensure independence of

trading.\314\ There is exemptive relief for persons who hold positions

or accounts for the purpose of underwriting, and for certain broker-

dealers.\315\ There also is a violation-of-law exemption for persons

who must not share trading information to avoid violating state or

federal laws, or the law of a foreign jurisdiction.\316\ Finally,

[[Page 91482]]

there is an exemption that relieves persons who are affiliated with a

person who has already filed an exemption notice from filing a

duplicative exemption notice with the Commission.\317\

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\313\ See rules 150.4(b)(1), (b)(3) and (b)(4), respectively.

See also existing regulations 150.4(c), 150.4(d) and 150.3(a)(4),

respectively.

\314\ See rule 150.4(b)(2).

\315\ See rules 150.4(b)(5) and (b)(6), respectively.

\316\ See rule 150.4(b)(7).

\317\ See rule 150.4(b)(8).

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Persons seeking an exemption under most, but not all, of the

exemptive categories must file a notice with the Commission to obtain

relief from the aggregation requirement. Persons required to file a

notice include the following: Certain principals or affiliates of

commodity pool operators; persons with ownership or equity levels of 10

percent or greater; independent account controllers, and persons who do

not share trading information to avoid violating laws.\318\ The notice

must describe the relevant circumstances that warrant disaggregation,

and have a senior officer's certification.\319\ The relevant

circumstances that may warrant disaggregation are described in rule

150.4(b)(2)(i)(A)-(E) and include the following four factors for the

owner entity and the owned entity: \320\ Lack trading-decision

knowledge; trade through separately developed and independent trading

systems; possess and enforce written procedures to preclude each from

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

of the other; do not share employees that control the trading decisions

of the owned entity or owner; and do not have a risk management system

that permits the sharing of trades or trading strategy.

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\318\ See rule 150.4(c)(1).

\319\ See rules 150.4(c)(1)(i), (ii) and 150.4(b)(2)(ii).

\320\ These factors apply to the owned entity to the extent that

the owner is or should be aware of the activities and practices of

the owned entity. The factors also apply to any other entity that

the owner must aggregate, again to the extent the owner is or should

be aware of its activities and practices. See rule 150.4(b)(2).

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The Commission also is finalizing definition changes to the term

``eligible entity'' in rule 150.1(d), and ``independent account

controller'' in rule 150.1(e). These changes reorganize where the

defined terms are located in the Commission's regulations, and clarify

that they apply not only to limited partnerships (as in the existing

regulation), but also to limited liability companies and other

equivalent corporate structures. The Commission believes that these

definition changes, in and of themselves, have no cost-benefit

concerns; their cost-benefit impact relates to implementing the

exemptions.

2. Benefits

The purpose of requiring positions to be aggregated among

affiliated and otherwise connected entities is to prevent evasion of

prescribed position limits through coordinated trading. Because the

same reasoning applies to a person who holds or controls positions in

more than one account or pool with substantially identical trading

strategies, the final rule includes a new provision to require

aggregation in these circumstances. The Commission believes that the

new requirement to aggregate positions under substantially identical

trading strategies will provide benefits by helping to prevent evasion

of the position limits.

The Commission also recognizes that an overly restrictive or

prescriptive aggregation policy may result in unnecessary burdens or

unintended consequences. Therefore, the final rule adopts five new

exemptions from the aggregation requirement, as described above. The

Commission believes that providing these exemptions will mitigate these

burdens and consequences in situations where the risks of coordinated

trading are low. Thus, the Commission believes the final rule provides

benefits to market participants who would have been subject to such

burdens and consequences, while at the same time maintaining an

aggregation requirement that is sufficient to maintain the benefit of

preventing evasion.

The unnecessary burdens and unintended consequences that could

arise from an overly restrictive or prescriptive aggregation policy

could take the form of reduced liquidity because the imposition of

aggregation requirements on entities that are not susceptible to

coordinated trading would restrict their ability to trade commodity

derivatives contracts if the aggregation requirements brought them

close to the applicable limits. The Commission also recognizes that

requiring passive investors to aggregate their positions may

potentially diminish capital investments, or interfere with existing

decentralized business structures.

The following example illustrates how the final rule is expected to

provide benefits by allowing new exemptions to the aggregation

requirement. In this example, Entity A seeks to pursue a business or

investment strategy that involves the use of futures transactions.

Before proceeding, Entity A must consider whether the futures

transactions would cause it to exceed any applicable position limit.

Under the aggregation requirement in current regulations, which has

only limited exceptions, Entity A's decision of whether to proceed

could depend on the futures transactions of its subsidiaries or other

entities whose positions it is required to aggregate. If one such

entity has significant positions in place, then Entity A may be

prevented from entering into the desired transactions, because the

aggregation of Entity A's positions with the positions of the other

entity would exceed a position limit.

The final rules permit Entity A to seek disaggregation relief for

the positions of certain of its subsidiaries and potentially other

entities. Thus, under the final rules Entity A will have more

flexibility to put in place a management structure that allows Entity A

to make business and investment decisions independently of its

subsidiaries and other potentially aggregated entities so long as

applicable criteria (which relate to independent decision making and

other indications of separateness) are met. This is beneficial to

Entity A because it can focus its business and investment decisions on

its own business needs. If disaggregation relief were not available to

Entity A, then the requirement to aggregate other entities' positions

might unnecessarily distort Entity A's business and investment

decisions by requiring Entity A to consider factors that do not relate

directly to those decisions. So by establishing exemptive relief that

is available to market participants that take steps to establish

independent decision making and separateness--for instance, the

demonstration of no shared control over trading--potential negative

effects, such as impediments to sound decision making, will be reduced.

The exemptions added by the final rules also will benefit market

participants by mitigating their compliance burdens associated with

meeting the aggregation requirement as well as position limits more

generally. Eligible market participants will not have to establish and

maintain the infrastructure necessary to aggregate positions across

affiliated entities where an exemption is available. Further, an

eligible entity with legitimate hedging needs and whose aggregated

positions are above the position limits thresholds in the absence of

any exemption will have the option of applying for an aggregation

exemption (if it meets the stated criteria) instead of applying for a

bona fide hedging exemption. In other words, an eligible entity will

have the benefit of being able to choose the exemption it deems

appropriate, and in many cases the exemption from aggregation, which

requires only a notice filing, may be less costly to

[[Page 91483]]

obtain than other exemptions from position limits.

The final rules also provide legal consistency for those persons

that own multiple entities with multiple ownership or equity interest

levels. Because the final rules treat all persons that possess at least

a 10 percent ownership or equity interest in another entity (other than

persons with an interest in a pooled account subject to rule

150.4(b)(1)) in the same way for purposes of receiving exemptive relief

from the Commission's aggregation requirement, there is a unified

exemptive framework. This will reduce confusion and further mitigates

the burdens facing market participants. Consider, for example, a

parent-holding company that has different levels of ownership or equity

interest in its various subsidiaries. Under the final unified

framework, it may establish and maintain one notice-filing system for

the purpose of obtaining aggregation exemptions for any or all of these

subsidiaries.

The Commission also has reduced, consistent with regulatory

objectives, the administrative and compliance burden of filing the

notice required to receive an exemption. For example, for the

violations-of-law exemption, the Commission will allow a memorandum of

law prepared by internal counsel instead of a formal opinion. This

reduces legal costs and is a benefit available to market participants.

Finally, the Commission recognizes the benefits of notice filing. This

will result in reduced administrative and compliance costs given that

updates will be necessary only when there are material changes.

3. Costs

The Commission recognizes that entities subject to the Commission's

aggregation policy in rule 150.4, including entities seeking to apply

one of the existing or newly-provided exemptions, will incur direct

costs. Such costs will include: (i) Initially determining which owned

entities, other persons, or transactions qualify for any of the

exemptions from aggregation in rule 150.4(b); (ii) developing and

maintaining a system of determining the scope of such exemptions over

time; (iii) potentially amending current operational structures to

achieve eligibility for such exemptions; (iv) preparing and filing

notices of exemption with the Commission; and (v) developing a system

for aggregating positions across entities, persons or transactions for

which no exemption is available.

The Commission has also considered whether its proposed amendments

expanding position limits \321\ would result in an increase in the

number of market participants that will have to consider the effects of

the Commission's aggregation policy, as compared to the number of

market participants that are currently subject to position limits and

potentially subject to aggregation.\322\ If the proposed position

limits are adopted, market participants would be required to aggregate

the accounts and positions of owned entities and other aggregated

entities that engage in the contracts and swap equivalents covered by

the new position limits. Thus, the Commission's adoption of the

proposed position limits would mean that the aggregation requirement in

the final rule (even though it largely continues the aggregation

requirement in the existing regulations) would apply to new market

participants who have not previously been subject to position limits or

the aggregation requirement.\323\ The Commission has considered the

costs that these market participants will face.

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\321\ See Position Limits for Derivatives, 78 FR 75680 (December

12, 2013).

\322\ See generally Proposed Rule, 78 FR at 68970, and

Supplemental Notice, 80 FR at 58375.

\323\ The Commission notes that market participants that are

currently subject to the aggregation requirement in the existing

regulations should have already a system in place for aggregating

positions across owned entities or as otherwise required. Further,

entities that have been transacting in futures markets have been

subject to these aggregation requirements for decades, and have

extant operational structures that are appropriate for their trading

and other activities. Given these considerations, the Commission

believes that for market participants that are currently subject to

position limits (and, potentially, the aggregation requirement)

prior to any adoption of new position limits, these final rules do

not increase significantly the costs of compliance as compared to

the status quo--that is, the aggregation requirements of existing

part 150 of the Commission's regulations.

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Many of these costs--such as building out new compliance systems--

would be attributable to complying with position limits that may be

adopted in the future and not with the final rule adopted here.\324\

However, the Commission has considered that as market participants

become subject to position limits or subject to position limits

applicable to a wider scope of their derivatives activities, the market

participants may face more complex situations involving owned entities

or other entities potentially subject to the aggregation requirement.

For example, if the scope of the position limits expands,

interpretation and application of the criteria for disaggregation

relief in rule 150.4(b)(2) may become more complex, even though these

criteria are largely the same as criteria previously applied with

respect to the exemption used by eligible entities using an IAC.\325\

The Commission has considered the potential for these costs but cannot

quantify them, because the costs that would be incurred by each market

participant will depend upon its management and corporate structure,

its trading practices, its information-sharing practices and other

factors specific to the market participant.

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\324\ The adoption of the proposed position limits for 28 exempt

and agricultural commodity futures and options contracts and the

physical commodity swaps that are economically equivalent to such

contracts would be pursuant to the requirements of CEA section

4a(a)(5). See Position Limits for Derivatives, 78 FR 75680 (December

12, 2013). Thus, costs resulting from this statutory requirement and

not the Commission's discretion are not subject to the consideration

of costs and benefits required by CEA section 15(a). The costs and

benefits attributable to the specific position limit levels that may

be adopted by the Commission would be considered in the rulemaking

establishing those limits.

\325\ See footnote 118 and accompanying text, above.

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The Commission has also considered that a large part of the final

rule (in particular, paragraphs (2), (5), (6) and (7) of rule 150.4(b))

adds potential exemptions from the aggregation requirement that were

not available under the existing regulations. While market participants

may incur some costs in determining whether to use these newly-

available exemptions and in filing the related notices, the market

participants are also free not to use the exemptions if the costs of

doing so are too high. In other words, if the costs attributable to

paperwork and compliance practices that are necessary to take advantage

of one of these exemptions do not make economic sense, market

participants will not avail themselves of the exemptions under this

rulemaking.

The Commission understands that there will be some costs to

investors in commodity pools in aggregating positions under rule

150.4(a)(2), which is a newly adopted requirement to aggregate the

positions of accounts or pools with substantially identical trading

strategies. First, investors may not be able to easily determine which

positions are held by a particular pool. Furthermore, the investors may

not be able to easily determine their percentage ownership or equity

interest in a pool that is open-ended and allows investors to

continuously buy and redeem shares. The Commission is unable to

quantify the effect of this rule because there are varying factors such

as complicated trading strategies and changing ownership levels within

a pool. Nonetheless, the Commission recognizes that there will be costs

[[Page 91484]]

associated with the aggregation requirement of this rule.

In addition, DCMs and SEFs will be required to conform their

aggregation policies, if their rules do not conform to the Commission's

aggregation policy already. As noted above, the requirement to

aggregate the positions of accounts or pools with substantially

identical trading strategies, as well as the potential application of

the aggregation requirement to a broader scope of positions and market

participants, may increase the complexity of applying the aggregation

requirement. The Commission recognizes that this complexity may

increase costs for DCMs and SEFs to enforce their aggregation policies,

but for the reasons noted above the Commission cannot quantify these

costs at this time. The actual costs will depend on, among other

things, the extent to which market participants may become subject to

position limits and the characteristics of their corporate structures

and trading practices. On the other hand, the Commission understands

that some DCMs have made conforming rule changes already. In these

cases, there are no incremental costs to consider.

The Commission believes that the final rules will decrease costs by

providing market participants new options to elect an exemption and

obtain relief from the aggregation requirements. Consequently, the main

direct costs associated with the changes to rule 150.4, relative to the

standard of existing regulation 150.4, will be those incurred by

entities as they determine whether they may be eligible for the final

exemptions, if they modify their management or corporate structures or

trading practices to comply with the exemptions, and if they make

subsequent exemption filings for material changes. These costs will

apply to market participants that pursue exemptions because they are a

principal or affiliate of an operator of a pooled account; person with

a 10 percent or greater owner or equity interest in another entity; a

certain type of FCM; a certain type of independent account controller;

or a person who must share information to avoid a violation of law.

The Commission believes there will be insignificant costs, if any,

for persons electing to take the underwriting and broker-dealer

exemptions. These groups are not required to file exemption notices

under rule 150.4(c). As a result, the cost these persons will incur

will be those dedicated to determining whether they are eligible for

the exemption.

There also will be a cost-savings to entities affiliated with an

entity who has already filed for an exemption under existing regulation

150.4. The Commission has offered affiliated entities greater relief by

affording them an opportunity under rule 150.4(b)(8) to reduce

administrative costs because they will not need to file a notice if

their affiliated entity has filed an exemption notice previously and

updates the previous filing to include the affiliated entities. While

there will be some associated costs to monitor records of notices filed

by affiliated entities and make the updates, the Commission expects

those costs will be small and will likely decline over time as tracking

systems are maintained and automated.

In short, the direct costs of the final rules are difficult to

quantify in the aggregate because such costs are heavily dependent on

each entity's characteristics. In other words, costs vary according to

an entity's current systems, its corporate structure, its use of

derivatives, the specific modifications it will implement in order to

qualify for an exemption, and other circumstances. The Commission,

nevertheless, believes that market participants will choose to incur

the costs of qualifying for and using the exemptions in the final rules

when doing so is less costly than complying with position limits. Thus,

by providing these market participants with a lower cost alternative

(i.e., qualifying for and using the exemptions) the final rules may

ease overall compliance burdens resulting from position limits.

There is an inherent trade-off between the benefits arising from

aggregation exemptions in certain circumstances and maintaining the

effectiveness of the Commission's position limits. The Commission

believes that it has tailored the exemptions sufficiently to

circumstances where the exemptions should not weaken the integrity of

the Commission's position limits significantly, because, for instance,

the exemptions apply only to accounts that pose a low risk of

coordinated trading.

In accordance with the Paperwork Reduction Act the Commission has

estimated the costs of the paperwork required to claim the final

exemptions. As stated in Section III.C., below, the Commission

estimates that 240 entities will submit a total of 340 responses per

year and incur a total burden of 6,850 labor hours at a cost of

approximately $1,096,000 annually to claim exemptive relief under

regulation 150.4.

The Commission also considers the cross-border implications of this

rulemaking. The Commission believes that the costs might be slightly

higher for entities that conduct business in both domestic and foreign

jurisdictions. Multi-jurisdictional entities will likely need to

consider the implications of memoranda of understanding between the

Commission and foreign regulators as well as non-U.S. privacy laws that

might apply to them. The Commission believes, however, that while there

may be costs for initial assessments, these costs will decline over

time for entities as they gain more experience with the aggregation

requirements discussed herein.

4. Comments

The Commission received several comments on cost-benefit issues in

response to the Proposed Rule and the Supplemental Notice. One

commenter argued that market participants faced the burden of building

compliance systems and programs to (i) capture the information

necessary to determine whether they may exceed position limits and (ii)

avoid violating such limits on an intraday basis. The commenter

believed that the number of potential market participants at risk of

violating limits ``is likely significantly larger'' than the number of

those who actually exceed limits, and the obligation to aggregate where

there is currently no information sharing increases costs associated

with aggregation.\326\

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\326\ See CL-Working Group Feb 10.

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As noted above, the Commission has considered that the requirement

to aggregate the positions of accounts or pools with substantially

identical trading strategies, along with the potential application of

the aggregation requirement to a broader scope of positions and market

participants, may increase the complexity of applying the aggregation

requirement. On the other hand, the Commission believes that it is

important to continue to apply the aggregation requirement in the

existing regulation (and to add the aggregation requirement related to

substantially identical trading) in order to forestall evasion of the

position limits through coordinated trading and to close potential

loopholes, as discussed above. To the extent a market participant

incurs costs in determining whether to seek an exemption or to comply

with an exemption provided in the final rule, the market participant

could avoid those costs if they are not sensible in relation to the

benefits of using the exemption.

Another commenter asserted that the Commission's cost-benefit

consideration of the proposed aggregation rules was inadequate,

including for investors applying the substantially identical trading

strategies aggregation requirement in rule 150.4(a)(2) to their

[[Page 91485]]

holdings in multiple funds or funds-of-funds. The commenter also

expressed that the Commission did not consider the costs for DCMs and

SEFs to implement aggregation standards for all derivatives that would

have to conform with proposed rule 150.4. These would include the costs

of validating and approving aggregation-related notice filings made

under proposed rule 150.4(c).\327\

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\327\ See CL-CME Feb 10.

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Regarding the costs faced by investors in multiple funds or funds-

of-funds, this rulemaking considers these costs qualitatively but not

quantitatively, because quantitative costs depend upon the specific

characteristics and activities of market participants--for example, the

extent to which investors have to aggregate pro rata interests in

multiple funds or funds-of-funds. The Commission recognizes that these

costs may be significant in some situations, such as where a single

investor transacts in derivatives subject to position limits through

multiple entities and funds. As noted in the discussion of costs in

Section III.A.3., above, investors may not be able to determine easily

which positions are held by an underlying fund or their precise

percentage interests in funds.

However, the Commission has determined that the requirements

resulting in these costs are appropriate in order to prevent evasion of

the position limits through coordinated trading. For example, as noted

above in section II.H.3., in the absence of rule 150.4(a)(2) the

exemption in rule 150.4(b)(1) would permit an investor to separate a

large position in a given commodity derivative into positions held in

various funds that have substantially identical trading strategies. As

a practical matter, if an investor's positions are near position

limits, the investor could consider the merits of holding its positions

in a single fund as compared to holding the positions in multiple

funds. The investor might elect to hold its positions in a single fund

instead of through multiple funds, in order to avoid the requirement

under rule 150.4(a)(2) to aggregate the multiple holdings. Of course,

the investor would have to comply with position limits whether it holds

its positions in a single fund or in multiple funds.

The discussion of costs in Section III.A.3., above, also covered

costs to DCMs and SEFs that will be required to conform their

aggregation policies to the Commission's aggregation policy. Moreover,

the Commission had discussed this issue in the Proposed Rule, when it

noted that because the Commission's aggregation rules would be

precedent for aggregation rules enforced by DCMs and SEFs, it is

important that the aggregation rules set out, to the extent feasible,

bright line rules that are capable of easy application in a wide

variety of circumstances, without being susceptible to

circumvention.\328\ The Commission notes that proposed rule

150.4(c)(2), which required a finding as to whether an applicant has

satisfied the conditions for an exemption, is not being adopted. This

should reduce the costs to DCMs and SEFs in reviewing filings made

under rule 150.4(c), which was a concern to the commenter.

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\328\ See Proposed Rule, 78 FR at 68956, n. 103.

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One commenter claimed that when considering the costs and benefits

of its proposed owned entity aggregation rules, the Commission assumes

a cost-benefit baseline that requires position aggregation based solely

on ownership, regardless of the existence of common control.\329\ The

commenter goes further to say that this is an inappropriate baseline,

because neither the Commission nor DCMs currently require the

aggregation of owned entity positions regardless of the existence of

common control, and also because speculative positions outside of the

spot month have not been subject to position limits in 19 out of the 28

``referenced contract'' markets.\330\ ``Aggregating non-spot-month

positions of entities in which passive investors make investments

presents considerable new challenges, which not been adequately

considered,'' the commenter stated.\331\

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\329\ See CL-SIFMA AMG Feb 10.

\330\ See id.

\331\ See id.

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In response to this commenter, the Commission reiterates that the

baseline is existing regulation 150.4, which does require aggregation

based solely on ownership, regardless of the existence of common

control.\332\

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\332\ See the discussion in Section II.A.3, above.

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Also, as noted previously, the Commission has considered that the

requirement to aggregate the positions of accounts or pools with

substantially identical trading strategies, as well as the potential

application of the aggregation requirement to a broader scope of

positions and market participants, may increase the complexity of

applying the aggregation requirement. The Commission understands that

passive investors may be among those market participants that are

affected by the new requirements. In response to this commenter's

concerns, the Commission notes that passive investors should be able to

qualify for the exemption from aggregation in rule 150.4(b)(2), because

if the investor were passive it would meet the conditions for that

exemption, which relate to an absence of coordinated trading. Thus,

rule 150.4(b)(2) will mitigate the burdens on passive investors.\333\

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\333\ The Commission believes that the newly added exemption in

rule 150.4(b)(2) will also mitigate the concerns that this commenter

expressed about undue costs on passive investors that have no

control over or knowledge of the commodity derivatives trading

activities of the owned entities in which they invest. See CL-SIFMA

AMG Feb 10. In the absence of such control or knowledge, the

investor would be eligible for an exemption from the aggregation

requirement. Thus, it is not the case, as the commenter argued (see

id.), that the owned entity aggregation threshold at 10 percent is

over-inclusive, or that it would require a purely passive investor

to aggregate the positions of all entities in which the investor has

beneficial equity ownership of 10 percent or more. Also, passive

investors would not necessarily have to determine how owned entities

transact in commodity derivatives, as the commenter argued. See id.

Instead, passive entities would only have to ensure that they meet

the requirements for the exemption in rule 150.4(b)(2), which the

Commission expects they would, and file the notice required to use

that exemption.

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The commenter also criticized the exemption for ownership interests

in rule 150.4(b)(2) because it would not extend to all ownership

interests, and would require a ``burdensome'' notice filing in all

investment circumstances, despite the absence of any common trading

control, ``for no apparent benefit.'' The commenter noted that passive

investors in a commodity pool that are not affiliated with the pool

operator would not, under the exemption in proposed rule 150.4(b)(1),

be required to submit a notice filing to disaggregate the positions of

pools in which they have invested, ``regardless of their ownership

interest in the pool,'' and the Proposed Rule provides no reason why

passive investors in owned entities should not have at least the same

degree of deference.\334\

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\334\ See CL-SIFMA AMG Feb 10.

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The Commission disagrees with the comment. The Commission does not

believe that a notice filing is a heavy burden on any investor, passive

or not, because the notice filing merely requires the investor to name

the entities involved, describe the relevant circumstances that warrant

disaggregation, and certify that the conditions in the applicable

aggregation exemption have been met. As discussed above, the Commission

believes that the notice filing requirement benefits the public and

market participants because it will allow the Commission to monitor

usage of the aggregation exemptions and receive notice of potential red

flags that warrant further investigation.

Furthermore, the Commission believes that the difference in

treatment

[[Page 91486]]

between limited partners and similar pool participants in rule

150.4(b)(1), and owners of entities in rule 150.4(b)(2), is sensible.

First, the Commission notes that rule 150.4(b)(1) continues the

treatment of pool participants under the existing regulation. As the

commenter said, rule 150.4(b)(1) does not include a notice filing

requirement where the participant is not affiliated with the commodity

pool operator. The Commission is comfortable that little additional

benefit would be achieved by requiring a notice filing in this

situation, because a separate entity is designated as the commodity

pool operator (and may be subject to registration with the Commission).

By contrast, rule 150.4(b)(2) applies to any type of owned entity. In

this situation, the Commission believes that the costs incurred by the

owner seeking an exemption to file a notice with the Commission are

reasonable in view of the very large variety of corporate structures

and management arrangements that may be in place. Given this variety,

there are important benefits from a notice filing because the notices

inform the Commission of the circumstances in which the exemption is

being used and thereby permit the Commission to monitor use of the

exemption.

The commenter also maintained that the Commission inadequately

considered the costs and benefits of the proposed substantially

identical trading strategies requirement at proposed rule 150.4(a)(2),

and that the requirement is unworkable in practice. The commenter

noted, for example, ``a $10,000 investor in two $1 billion commodity

index mutual funds using the same index may have to aggregate the

positions in those two $1 billion mutual funds because they follow

`substantially identical trading strategies.' '' The commenter believed

such an investor would have to implement a compliance program to

prevent inadvertent violations of the position limits rules, which (in

addition to imposing significant legal and operational obstacles) would

impose costs many times the investor's $10,000 investment.\335\

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\335\ See id.

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The Commission disagrees with the commenter's view that it

inadequately considered the costs and benefits of the substantially

identical trading strategies requirement. The Commission has explained

that the requirement under proposed rule 150.4 is effected on a pro

rata basis. That is, the terms of the rule require the owner to

aggregate the positions that it (i.e., the owner) holds in the two

commodity index mutual funds, not the positions of the funds

themselves, so that in the commenter's example the two holdings would

be aggregated into one $20,000 holding.\336\ The Commission

acknowledges that the determination of the owner's pro rata interest in

the number of contracts such accounts or pools are holding may create

practical difficulties for the owner--in particular when the owner is

unaware of the underlying positions of the account or pool. However, as

discussed above the Commission believes that the requirement in rule

150.4(a)(2) provides important benefits by preventing circumvention of

the aggregation requirements.

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\336\ The commenter described the holdings in dollar amounts.

See id. The Commission notes however that the position limits

generally are stated in terms of a number of contracts, not a dollar

amount. To apply rule 150.4(a)(2), a person holding or controlling

the trading of positions in more than one account or pool with

substantially identical trading strategies must determine the

person's pro rata interest in the number of contracts such accounts

or pools are holding.

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5. Alternatives

The Commission considered the cost-benefit implications of the

following significant alternatives:

Different ownership thresholds (e.g., 25 percent or 50

percent) for the aggregation requirement in rule 150.4(a)(1). As

discussed in Section II.A.3.a, the Commission recognizes that a higher

ownership threshold would presumably decrease the number of persons

required to aggregate or seek exemptions from aggregation. Yet, there

is uncertainty about how beneficial this reduction would be in reducing

burdens and how harmful it would be in reducing the amount of

information available to the Commission. Because of this uncertainty,

the Commission has determined not to change the 10 percent threshold in

effect under the current regulations.

Aggregation on a basis pro rata to the ownership interest

in the owned entity. Commenters suggested that Commission base the

aggregation requirement on a pro rata ownership or equity

interest.\337\ Arguably, pro rata aggregation would more accurately

reflect the positions owned by market participants and would not

unnecessarily restrict the positions of market participants, while

reducing the risk of an inadvertent position limits overage. The

Commission has decided not to offer such an aggregation method. As

explained above, while there are theoretical merits to a pro rata

aggregation method as it would measure a market participant's ownership

and equity levels more accurately, commenters did not offer suggestions

on how such an exemption would work practically, especially when

ownership and control may change on an inter-day basis. Nor did

commenters provide information regarding the extent to which a pro rata

approach would actually mitigate the aggregation requirement (e.g., how

often entities which are subject to an aggregation requirement, and not

eligible for an exemption, are owned at a level substantially below 100

percent). In such circumstances, implementing a pro rata aggregation

standard would be expensive in terms of costs related to developing and

maintaining systems that would connect multiple market participants

(e.g., CPOs, beneficial owners), DCMs, and SEFs, to share information

to perform pro rata calculations. The Commission believes a pro rata

aggregation standard would be more costly than the standard the

Commission is finalizing.

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\337\ See e.g., CL-FIA Feb 6; CL-COPE Feb 10; CL-SIFMA AMG Feb

10.

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No notice filing. A commenter suggested that the

Commission eliminate the exemption notice filing for passive

investors.\338\ The Commission disagrees and has not added any new

exemption from the notice filing. A one-time notice filing (with

updates upon any material change) is not a substantial burden. It is

noteworthy that, as discussed above, commenters made suggestions as to

the timing and mechanics of the notice filing, but generally did not

object to the requirement to make an exemption-notice filing. Moreover,

as discussed above, a notice filing increases the Commission's and

other market regulators' abilities to monitor usage of the aggregation

exemptions and oversee market participants benefitting from the

exemptions.

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\338\ See CL-SIFMA AMG Nov 13.

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Addition of exemptions for passive investors such as

pension plans and transitory ownership interests acquired through

credit events.\339\ As discussed above in Section II.A.3.d., the

Commission believes that applying rules for specific treatment of

particular situations or classes of entity would be complex and not

justified by the potential benefits to the entities receiving different

treatment. For example, the Commission believes that distinguishing

``transitory'' ownership from other forms of ownership would be more

complicated than completing the notice required to obtain relief, and

in such situations it is reasonable to expect that the notice filing

would be made on a summary basis appropriate to the

[[Page 91487]]

transitory situation. Similarly, application of definitional rules to

delineate when a class of entities such as pension plans would not have

to apply for an exemption from aggregation would be complex as compared

to the notice filing that a pension plan could file to receive an

exemption from aggregation.

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

\339\ See e.g., CL-SIFMA AMG Nov 13; CL-FIA Nov 13 CL-Working

Group Nov 13.

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

6. Section 15(a) Considerations

As the Commission has long held, position limits are regulatory

tools that are designed to prevent concentrated positions of sufficient

size to manipulate or disrupt markets. The aggregation of accounts for

purposes of applying position limits represents an integral component

that impacts the effectiveness of those limits. The Commission believes

the final rules will preserve the important protections of the existing

aggregation policy, but at a lower cost for market participants.

a. Protection of Market Participants and the Public

The Commission believes these final rules will not materially

affect the level of protection afforded market participants and the

public that is provided by the aggregation policy reflected currently

in regulation 150.4. Given that the aggregation standards are necessary

to implement effective position limits, it is important that the final

exemptions be sufficiently tailored to exempt from aggregation only

those positions or accounts that pose a low risk of coordinated

trading. The owned-entity exemption will maintain the Commission's

historical presumption threshold of 10 percent ownership or equity

interest and make that presumption rebuttable only where several

conditions indicative of independence are met. This final exemption

focuses on the conditions that impact trading independence. In

addition, by providing an avenue to apply for relief when ownership is

greater than 10 percent of the owned entity, the final rules will allow

market participants greater flexibility in meeting the requirements of

the position limits regulations, provided they are eligible to apply.

The Commission believes that all of the exemptions will allow the

Commission to direct its resources to monitoring those entities that

pose a higher risk of coordinated trading and thus a higher risk of

circumventing position limits. Furthermore, the exemptions will not

significantly reduce the protection of market participants and the

public that the Commission's aggregation policy affords.

b. Efficiency, Competition, and Financial Integrity of Markets

The Commission believes the final exemptions will reduce costs for

market participants without compromising the integrity or effectiveness

of the Commission's aggregation policy. An important rationale for

providing aggregation exemptions is to avoid overly restricting

commodity derivatives trading of affiliated entities not susceptible to

coordinated trading. Such trading restrictions may potentially result

in reduced liquidity in commodity derivatives markets, diminished

investment by largely passive investors, or distortions of existing

decentralized business structures. Thus, the final exemptions help

promote efficiency and competition, and protect market integrity by

helping to prevent these undesirable consequences.

c. Price Discovery

The Commission expects the final rules to further the Commission's

mission to deter and prevent manipulative behavior while maintaining

sufficient liquidity for hedging activity and protecting the price

discovery process. By relaxing aggregation requirements in

circumstances not conducive to coordinated trading, the final

exemptions may help improve liquidity by encouraging more market

participation. Specifically, the Commission believes that these

exemptions will help to encourage market participation on registered

exchanges so that price discovery will not move to other market

platforms where similar transactions could be effected, such as foreign

boards of trade.

d. Sound Risk Management Practices

The imposition of position limits helps to restrict market

participants from amassing positions that are of sufficient size to

disrupt the operation of commodity derivatives markets. The final

exemptions will allow affiliated entities to disaggregate their

positions in circumstances that the Commission believes present minimal

risk of coordinated trading with potential to disrupt market

operations. The Commission believes that the final exemptions will not

materially inhibit the use of commodity derivatives for hedging, as

bona fide hedging exemptions are available to any entity regardless of

aggregation of positions and exemptions from aggregation. Where there

is little possibility of coordinating trading, the final rules

facilitate sound risk management by permitting an entity to manage its

risks where risks are being generated.\340\

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\340\ See earlier discussion of the example involving Entity A

in Section III.A.2., above.

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e. Other Public Interest Considerations

The Commission did not identify any other public interest

considerations related to the costs and benefits in the proposed

exemptive relief to aggregation. No commenter on the Proposed Rule or

the Supplemental Notice identified any other public interest

consideration, either.

B. Regulatory Flexibility Act

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

consider whether the rules they propose will have a significant

economic impact on a substantial number of small entities and, if so,

provide a regulatory flexibility analysis respecting the impact.\341\ A

regulatory flexibility analysis or certification typically is required

for ``any rule for which the agency publishes a general notice of

proposed rulemaking pursuant to'' the notice-and-comment provisions of

the Administrative Procedure Act, 5 U.S.C. 553(b).\342\ The

requirements related to the proposed amendments fall mainly on

registered entities, exchanges, FCMs, swap dealers, clearing members,

foreign brokers, and large traders. The Commission has previously

determined that registered DCMs, FCMs, swap dealers, major swap

participants, eligible contract participants, SEFs, clearing members,

foreign brokers and large traders are not small entities for purposes

of the RFA.\343\ While the requirements under the proposed rulemaking

may impact non-financial end users, the Commission notes that position

limits levels apply only to large traders.

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\341\ 44 U.S.C. 601 et seq.

\342\ 5 U.S.C. 601(2), 603-05.

\343\ See Policy Statement and Establishment of Definitions of

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

47 FR 18618, 18619 (Apr. 30, 1982) (DCMs, FCMs, and large traders);

Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25, 2001)

(eligible contract participants); Position Limits for Futures and

Swaps; Final Rule and Interim Final Rule, 76 FR 71626, 71680 (Nov.

18, 2011) (clearing members); Core Principles and Other Requirements

for Swap Execution Facilities, 78 FR 33476, 33548 (June 4, 2013)

(SEFs); A New Regulatory Framework for Clearing Organizations, 66 FR

45604, 45609 (Aug. 29, 2001) (DCOs); Registration of Swap Dealers

and Major Swap Participants, 77 FR 2613 (Jan. 19, 2012) (swap

dealers and major swap participants); and Special Calls, 72 FR 50209

(Aug. 31, 2007) (foreign brokers).

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

certifies, pursuant to 5 U.S.C. 605(b), that the actions taken herein

will not have a significant economic impact on a substantial number of

small entities.

[[Page 91488]]

The Chairman made the same certification in the Proposed Rule and the

Supplemental Notice,\344\ and the Commission did not receive any

comments on the RFA.

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\344\ See Proposed Rule, 78 FR at 68973, and Supplemental

Notice, 80 FR at 58377.

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C. Paperwork Reduction Act

1. Overview

The Paperwork Reduction Act (``PRA''), 44 U.S.C. 3501 et seq.,

imposes certain requirements on Federal agencies in connection with

their conducting or sponsoring any collection of information as defined

by the PRA. An agency may not conduct or sponsor, and a person is not

required to respond to, a collection of information unless it displays

a currently valid control number issued by the Office of Management and

Budget (``OMB''). Certain provisions of the final rules will result in

amendments to previously-approved collection of information

requirements within the meaning of the PRA. Therefore, the Commission

submitted to OMB for review, in accordance with 44 U.S.C. 3507(d) and 5

CFR 1320.11, the information collection requirements in this

rulemaking, as an amendment to the previously-approved collection

associated with OMB control number 3038-0013.

Responses to this collection of information will be mandatory. The

Commission will protect proprietary information according to the

Freedom of Information Act and 17 CFR part 145, titled ``Commission

Records and Information.'' In addition, the Commission emphasizes that

section 8(a)(1) of the Act strictly prohibits the Commission, unless

specifically authorized by the Act, from making public ``data and

information that would separately disclose the business transactions or

market positions of any person and trade secrets or names of

customers.'' The Commission also is required to protect certain

information contained in a government system of records pursuant to the

Privacy Act of 1974.

On November 15, 2013, the Commission published in the Federal

Register a notice of proposed modifications to part 150 of the

Commission's regulations (i.e., the Proposed Rule). The modifications

addressed the policy for aggregation under the Commission's position

limits regime for futures and option contracts on nine agricultural

commodities set forth in part 150, and noted that the modifications

would also apply to the position limits regimes for other exempt and

agricultural commodity futures and options contracts and the physical

commodity swaps that are economically equivalent to such contracts, if

such regimes are finalized. On September 29, 2015, the Commission

published in the Federal Register a revision to the Proposed Rule

(i.e., the Supplemental Notice).

The Commission final rule provides that all persons holding a

greater than 10 percent ownership or equity interest in another entity

could avail themselves of an exemption in rule 150.4(b)(2) to

disaggregate the positions of the owned entity. To claim the exemption,

a person needs to meet certain criteria and file a notice with the

Commission in accordance with proposed rule 150.4(c). The notice filing

needs to demonstrate compliance with certain conditions set forth in

rule 150.4(b)(2)(i)(A)-(E). Similar to other exemptions from

aggregation, the notice filing is effective upon submission to the

Commission (or earlier, as provided in rule 150.4(c)(2)), but the

Commission may call for additional information as well as reject,

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

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

to the filing.

2. Methodology and Assumptions

It is not possible at this time to precisely determine the number

of respondents affected by the final rule. The final rule relates to

exemptions that a market participant may elect to take advantage of,

meaning that without intimate knowledge of the day-to-day business

decisions of all its market participants, the Commission could not know

which participants, or how many, may elect to obtain such an exemption.

Further, the Commission is unsure of how many participants not

currently in the market may be required to or may elect to incur the

estimated burdens in the future.

These limitations notwithstanding, the Commission has made best-

effort estimations regarding the likely number of affected entities for

the purposes of calculating burdens under the PRA. The Commission used

its proprietary data, collected from market participants, to estimate

the number of respondents for each of the proposed obligations subject

to the PRA by estimating the number of respondents who may be close to

a position limit and thus may file for relief from aggregation

requirements.

The Commission's estimates concerning wage rates are based on 2013

salary information for the securities industry compiled by the

Securities Industry and Financial Markets Association (``SIFMA''). The

Commission is using a figure of $160 per hour, which is derived from a

weighted average of salaries across different professions from the

SIFMA Report on Management & Professional Earnings in the Securities

Industry 2013, modified to account for an 1800-hour work-year, adjusted

to account for the average rate of inflation in through April 2016.

This figure was then multiplied by 1.33 to account for benefits \345\

and further by 1.5 to account for overhead and administrative expenses,

and rounded to the nearest ten dollars.\346\ The Commission anticipates

that compliance with the provisions would require the work of an

information technology professional; a compliance manager; an

accounting professional; and an associate general counsel. Thus, the

wage rate is a weighted national average of salary for professionals

with the following titles (and their relative weight); ``programmer

(average of senior and non-senior)'' (15 percent weight), ``senior

accountant'' (15 percent), ``compliance manager'' (30 percent), and

``assistant/associate general counsel'' (40 percent).

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

\345\ The Bureau of Labor Statistics reports that an average of

32.8 percent of all compensation in the financial services industry

is related to benefits. This figure may be obtained on the Bureau of

Labor Statistics Web site, at http://www.bls.gov/news.release/ecec.t06.htm. The Commission rounded this number to 33 percent to

use in its calculations.

\346\ Other estimates of this figure have varied dramatically

depending on the categorization of the expense and the type of

industry classification used (see, e.g., BizStats at http://www.bizstats.com/corporation-industry-financials/finance-insurance-52/securities-commodity-contracts-other-financial-investments-523/commodity-contracts-dealing-and-brokerage-523135/show and Damodaran

Online at http://pages.stern.nyu.edu/~adamodar/pc/datasets/

uValuedata.xls. The Commission has chosen to use a figure of 50

percent for overhead and administrative expenses to attempt to

conservatively estimate the average for the industry.

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

The Commission requested comment on its assumptions and estimates

in the Proposed Rule and the Supplemental Notice,\347\ but did not

receive any comments.

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

\347\ See Proposed Rule, 78 FR at 68975 and Supplemental Notice,

80 FR at 58378.

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3. Collections of Information

Rule 150.4(b)(2) requires qualified persons to file a notice in

order to claim exemptive relief from aggregation. Further, rule

150.4(b)(2)(ii) states that the notice is to be filed in accordance

with rule 150.4(c), which requires a description of the relevant

circumstances that warrant disaggregation and a statement that

certifies that the conditions set forth in the exemptive provision have

been met. Persons claiming these exemptions would be required to submit

to the

[[Page 91489]]

Commission, as requested, such information as relates to the claim for

exemption. An updated or amended notice must be filed with the

Commission upon any material change.

The final rule also extends relief available under rule 150.4(b)(4)

to additional entities; so the Commission expects that, as a result of

the expanded exemptive relief available to these entities, a greater

number of persons will file exemptive notices under 150.4(b)(4). The

Commission also expects entities to file for relief under rule

150.4(b)(7), which allows for entities to file a notice, including a

memorandum of law, in order to claim the exemption.

Given the expansion of the exemptions that market participants may

claim, the Commission anticipates an increase in the number of notice

filings. However, because of the relief for ``higher-tier'' entities

under rule 150.4(b)(8) the Commission expects that increase to be

offset partially by a reduction in the number of filings by ``higher-

tier'' entities. Thus, the Commission anticipates a net increase in the

number of filings under regulation 150.4 as a result of the adoption of

these final rules. The Commission believes that this increase will

create an increase in the annual labor burden. However, because

entities have already incurred the capital, start-up, operating, and

maintenance costs to file other exemptive notices--such as those

currently allowed for independent account controllers and futures

commission merchants under regulation 150.4--the Commission does not

anticipate an increase in those costs.

In the Supplemental Notice, the Commission estimated that 100

entities will each file two notices annually, and 25 entities will each

file one notice annually,\348\ under proposed rule 150.4(b)(2), at an

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

total per entity average burden of 36 labor hours annually.\349\ At an

estimated labor cost of $120 per hour, the Commission estimated a cost

of approximately $4,320 per entity on average for filings under rule

150.4(b)(2). For this final rule, while the Commission maintains its

estimates of the number of entities and number of filings, its update

of the estimated labor cost to $160 per hour, as noted above, increases

the estimated cost to approximately $5,760 per entity on average for

filings under rule 150.4(b)(2).

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\348\ The Commission's estimate that 25 entities will each file

one notice annually reflected those entities which had been

estimated to each file one notice annually under proposed rule

150.4(b)(3), which the Commission is not adopting. Therefore, the

Commission estimated that each of these 25 entities would file one

notice annually under rule 150.4(b)(2), in place of the assumed

filing under proposed rule 150.4(b)(3). See Supplemental Notice, 80

FR at 58378.

\349\ That is, the Commission estimated that a total of 225

filings would be made each year. At 20 hours per filing, the total

burden would be 4,500 labor hours, which divided among the 125

entities results in an average burden of 36 labor hours per entity.

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

As in the Proposed Rule and the Supplemental Notice, the Commission

estimates that 75 entities will each file one notice annually under

rule 150.4(b)(4) (proposed paragraph (b)(5)), at an average of 10 hours

per filing. Thus, the Commission approximates a total per entity burden

of 10 labor hours annually. At an estimated labor cost of $160 per

hour, the Commission estimates a cost of approximately $1,600 per

entity for filings under rule 150.4(b)(4).

And, again as in the Proposed Rule and the Supplemental Notice, the

Commission estimates that 40 entities will each file one notice

annually under rule 150.4(b)(7) (proposed paragraph (b)(8)), including

the requisite memorandum of law, at an average of 40 hours per filing.

Thus, the Commission approximates a total per entity burden of 40 labor

hours annually. At an estimated labor cost of $160 per hour, the

Commission estimates a cost of approximately $6,400 per entity for

filings under rule 150.4(b)(7).

In sum, the Commission estimates that 240 entities will submit a

total of 340 responses per year and incur a total burden of 6,850 labor

hours. At the updated cost of $160 per hour, this results in a cost of

approximately $1,096,000 annually in order to claim exemptive relief

under rule 150.4.

List of Subjects in 17 CFR Part 150

Position limits, Bona fide hedging, Referenced contracts.

For the reasons discussed in the preamble, the Commodity Futures

Trading Commission amends 17 CFR part 150 as follows:

PART 150--LIMITS ON POSITIONS

0

1. The authority citation for part 150 is revised to read as follows:

Authority: 7 U.S.C. 6a, 6c, and 12a(5), as amended by Title VII

of the Dodd-Frank Wall Street Reform and Consumer Protection Act,

Pub. L. 111-203, 124 Stat. 1376 (2010).

0

2. In Sec. 150.1, revise paragraphs (d), (e)(2), and (e)(5) to read as

follows:

Sec. 150.1 Definitions.

* * * * *

(d) Eligible entity means a commodity pool operator; the operator

of a trading vehicle which is excluded, or which itself has qualified

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

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

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

operator of which is exempt from registration under Sec. 4.13 of this

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

savings association; an insurance company; or the separately organized

affiliates of any of the above entities:

(1) Which authorizes an independent account controller

independently to control all trading decisions with respect to the

eligible entity's client positions and accounts that the independent

account controller holds directly or indirectly, or on the eligible

entity's behalf, but without the eligible entity's day-to-day

direction; and

(2) Which maintains:

(i) Only such minimum control over the independent account

controller as is consistent with its fiduciary responsibilities to the

managed positions and accounts, and necessary to fulfill its duty to

supervise diligently the trading done on its behalf; or

(ii) If a limited partner, limited member or shareholder of a

commodity pool the operator of which is exempt from registration under

Sec. 4.13 of this chapter, only such limited control as is consistent

with its status.

(e) * * *

(2) Over whose trading the eligible entity maintains only such

minimum control as is consistent with its fiduciary responsibilities

for managed positions and accounts to fulfill its duty to supervise

diligently the trading done on its behalf or as is consistent with such

other legal rights or obligations which may be incumbent upon the

eligible entity to fulfill;

* * * * *

(5) Who is:

(i) Registered as a futures commission merchant, an introducing

broker, a commodity trading advisor, or an associated person of any

such registrant, or

(ii) A general partner, managing member or manager of a commodity

pool the operator of which is excluded from registration under Sec.

4.5(a)(4) of this chapter or Sec. 4.13 of this chapter, provided that

such general partner, managing member or manager complies with the

requirements of Sec. 150.4(c).

* * * * *

Sec. 150.3 [Amended]

0

3. Amend Sec. 150.3 as follows:

[[Page 91490]]

0

a. Remove the semicolon and the word ``or'' at the end of paragraph

(a)(3) and add a period in their place; and

0

b. Remove paragraph (a)(4).

0

4. Revise Sec. 150.4 to read as follows:

Sec. 150.4 Aggregation of positions.

(a) Positions to be aggregated--(1) Trading control or 10 percent

or greater ownership or equity interest. For the purpose of applying

the position limits set forth in Sec. 150.2, unless an exemption set

forth in paragraph (b) of this section applies, all positions in

accounts for which any person, by power of attorney or otherwise,

directly or indirectly controls trading or holds a 10 percent or

greater ownership or equity interest must be aggregated with the

positions held and trading done by such person. For the purpose of

determining the positions in accounts for which any person controls

trading or holds a 10 percent or greater ownership or equity interest,

positions or ownership or equity interests held by, and trading done or

controlled by, two or more persons acting pursuant to an expressed or

implied agreement or understanding shall be treated the same as if the

positions or ownership or equity interests were held by, or the trading

were done or controlled by, a single person.

(2) Substantially identical trading. Notwithstanding the provisions

of paragraph (b) of this section, for the purpose of applying the

position limits set forth in Sec. 150.2, any person that, by power of

attorney or otherwise, holds or controls the trading of positions in

more than one account or pool with substantially identical trading

strategies, must aggregate all such positions (determined pro rata)

with all other positions held and trading done by such person and the

positions in accounts which the person must aggregate pursuant to

paragraph (a)(1) of this section.

(b) Exemptions from aggregation. For the purpose of applying the

position limits set forth in Sec. 150.2, and notwithstanding the

provisions of paragraph (a)(1) of this section, but subject to the

provisions of paragraph (a)(2) of this section, the aggregation

requirements of this section shall not apply in the circumstances set

forth in this paragraph (b).

(1) Exemption for ownership by limited partners, shareholders or

other pool participants. Any person that is a limited partner, limited

member, shareholder or other similar type of pool participant holding

positions in which the person by power of attorney or otherwise

directly or indirectly has a 10 percent or greater ownership or equity

interest in a pooled account or positions need not aggregate the

accounts or positions of the pool with any other accounts or positions

such person is required to aggregate, except that such person must

aggregate the pooled account or positions with all other accounts or

positions owned or controlled by such person if such person:

(i) Is the commodity pool operator of the pooled account;

(ii) Is a principal or affiliate of the operator of the pooled

account, unless:

(A) The pool operator has, and enforces, written procedures to

preclude the person from having knowledge of, gaining access to, or

receiving data about the trading or positions of the pool;

(B) The person does not have direct, day-to-day supervisory

authority or control over the pool's trading decisions;

(C) The person, if a principal of the operator of the pooled

account, maintains only such minimum control over the commodity pool

operator as is consistent with its responsibilities as a principal and

necessary to fulfill its duty to supervise the trading activities of

the commodity pool; and

(D) The pool operator has complied with the requirements of

paragraph (c) of this section on behalf of the person or class of

persons; or

(iii) Has, by power of attorney or otherwise directly or

indirectly, a 25 percent or greater ownership or equity interest in a

commodity pool, the operator of which is exempt from registration under

Sec. 4.13 of this chapter.

(2) Exemption for certain ownership of greater than 10 percent in

an owned entity. Any person with an ownership or equity interest in an

owned entity of 10 percent or greater (other than an interest in a

pooled account subject to paragraph (b)(1) of this section), need not

aggregate the accounts or positions of the owned entity with any other

accounts or positions such person is required to aggregate, provided

that:

(i) Such person, including any entity that such person must

aggregate, and the owned entity (to the extent that such person is

aware or should be aware of the activities and practices of the

aggregated entity or the owned entity):

(A) Do not have knowledge of the trading decisions of the other;

(B) Trade pursuant to separately developed and independent trading

systems;

(C) Have and enforce written procedures to preclude each from

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

of the other. Such procedures must include security arrangements,

including separate physical locations, which would maintain the

independence of their activities;

(D) Do not share employees that control the trading decisions of

either; and

(E) Do not have risk management systems that permit the sharing of

its trades or its trading strategy with employees that control the

trading decisions of the other; and

(ii) Such person complies with the requirements of paragraph (c) of

this section.

(3) Exemption for accounts held by futures commission merchants. A

futures commission merchant or any affiliate of a futures commission

merchant need not aggregate positions it holds in a discretionary

account, or in an account which is part of, or participates in, or

receives trading advice from a customer trading program of a futures

commission merchant or any of the officers, partners, or employees of

such futures commission merchant or of its affiliates, if:

(i) A person other than the futures commission merchant or the

affiliate directs trading in such an account;

(ii) The futures commission merchant or the affiliate maintains

only such minimum control over the trading in such an account as is

necessary to fulfill its duty to supervise diligently trading in the

account;

(iii) Each trading decision of the discretionary account or the

customer trading program is determined independently of all trading

decisions in other accounts which the futures commission merchant or

the affiliate holds, has a financial interest of 10 percent or more in,

or controls; and

(iv) The futures commission merchant or the affiliate has complied

with the requirements of paragraph (c) of this section.

(4) Exemption for accounts carried by an independent account

controller. An eligible entity need not aggregate its positions with

the eligible entity's client positions or accounts carried by an

authorized independent account controller, as defined in Sec.

150.1(e), except for the spot month in physical-delivery commodity

contracts, provided that the eligible entity has complied with the

requirements of paragraph (c) of this section, and that the overall

positions held or controlled by such independent account controller may

not exceed the limits specified in Sec. 150.2.

(i) Additional requirements for exemption of affiliated entities.

If the independent account controller is affiliated with the eligible

entity or

[[Page 91491]]

another independent account controller, each of the affiliated entities

must:

(A) Have, and enforce, written procedures to preclude the

affiliated entities from having knowledge of, gaining access to, or

receiving data about, trades of the other. Such procedures must include

security arrangements, including separate physical locations, which

would maintain the independence of their activities; provided, however,

that such procedures may provide for the disclosure of information

which is reasonably necessary for an eligible entity to maintain the

level of control consistent with its fiduciary responsibilities to the

managed positions and accounts and necessary to fulfill its duty to

supervise diligently the trading done on its behalf;

(B) Trade such accounts pursuant to separately developed and

independent trading systems;

(C) Market such trading systems separately; and

(D) Solicit funds for such trading by separate disclosure documents

that meet the standards of Sec. 4.24 or Sec. 4.34 of this chapter, as

applicable, where such disclosure documents are required under part 4

of this chapter.

(ii) [Reserved].

(5) Exemption for underwriting. A person need not aggregate the

positions or accounts of an owned entity if the ownership or equity

interest is based on the ownership of securities constituting the whole

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

participant in the distribution of such securities by the issuer or by

or through an underwriter.

(6) Exemption for broker-dealer activity. A broker-dealer

registered with the Securities and Exchange Commission, or similarly

registered with a foreign regulatory authority, need not aggregate the

positions or accounts of an owned entity if the ownership or equity

interest is based on the ownership of securities acquired in the normal

course of business as a dealer, provided that such person does not have

actual knowledge of the trading decisions of the owned entity.

(7) Exemption for information sharing restriction. A person need

not aggregate the positions or accounts of an owned entity if the

sharing of information associated with such aggregation (such as, only

by way of example, information reflecting the transactions and

positions of a such person and the owned entity) creates a reasonable

risk that either person could violate state or federal law or the law

of a foreign jurisdiction, or regulations adopted thereunder, provided

that such person does not have actual knowledge of information

associated with such aggregation, and provided further that such person

has filed a prior notice pursuant to paragraph (c) of this section and

included with such notice a written memorandum of law explaining in

detail the basis for the conclusion that the sharing of information

creates a reasonable risk that either person could violate state or

federal law or the law of a foreign jurisdiction, or regulations

adopted thereunder. However, the exemption in this paragraph shall not

apply where the law or regulation serves as a means to evade the

aggregation of accounts or positions. All documents submitted pursuant

to this paragraph shall be in English, or if not, accompanied by an

official English translation.

(8) Exemption for affiliated entities. After a person has filed a

notice under paragraph (c) of this section, another person need not

file a separate notice identifying any position or account identified

in such notice filing, provided that:

(i) Such other person has an ownership or equity interest of 10

percent or greater in the person that filed the notice, or the person

that filed the notice has an ownership or equity interest of 10 percent

or greater in such other person, or an ownership or equity interest of

10 percent or greater is held in such other person by a third person

who holds an ownership or equity interest of 10 percent or greater in

the person that has filed the notice (in any such case, the ownership

or equity interest may be held directly or indirectly);

(ii) Such other person complies with the conditions applicable to

the exemption specified in such notice filing, other than the filing

requirements; and

(iii) Such other person does not otherwise control trading of any

account or position identified in such notice filing.

(iv) Upon call by the Commission, any person relying on the

exemption in this paragraph (b)(8) shall provide to the Commission such

information concerning the person's claim for exemption. Upon notice

and opportunity for the affected person to respond, the Commission may

amend, suspend, terminate, or otherwise modify a person's aggregation

exemption for failure to comply with the provisions of this section.

(c) Notice filing for exemption. (1) Persons seeking an aggregation

exemption under paragraph (b)(1)(ii), (b)(2), (b)(3), (b)(4), or (b)(7)

of this section shall file a notice with the Commission, which shall be

effective upon submission of the notice (or earlier, as provided in

paragraph (c)(2) of this section), and shall include:

(i) A description of the relevant circumstances that warrant

disaggregation; and

(ii) A statement of a senior officer of the entity certifying that

the conditions set forth in the applicable aggregation exemption

provision have been met.

(2) If a person newly acquires an ownership or equity interest in

an owned entity of 10 percent or greater and is eligible for the

aggregation exemption under paragraph (b)(2) of this section, the

person may elect that a notice filed under this paragraph (c) shall be

effective as of the date of such acquisition if such notice is filed no

later than 60 days after such acquisition.

(3) Upon call by the Commission, any person claiming an aggregation

exemption under this section shall provide such information

demonstrating that the person meets the requirements of the exemption,

as is requested by the Commission. Upon notice and opportunity for the

affected person to respond, the Commission may amend, suspend,

terminate, or otherwise modify a person's aggregation exemption for

failure to comply with the provisions of this section.

(4) In the event of a material change to the information provided

in any notice filed under this paragraph (c), an updated or amended

notice shall promptly be filed detailing the material change.

(5) Any notice filed under this paragraph (c) shall be submitted in

the form and manner provided for in paragraph (d) of this section.

(6) If a person is eligible for an aggregation exemption under

paragraph (b)(1)(ii), (b)(2), (b)(3), (b)(4), or (b)(7) of this

section, a failure to timely file a notice under this paragraph (c)

shall not constitute a violation of paragraph (a)(1) of this section or

any position limit set forth in Sec. 150.2 if such notice is filed no

later than five business days after the person is aware, or should be

aware, that such notice has not been timely filed.

(d) Form and manner of reporting and submitting information or

filings. Unless otherwise instructed by the Commission or its

designees, any person submitting reports under this section shall

submit the corresponding required filings and any other information

required under this part to the Commission using the format, coding

structure, and electronic data transmission procedures approved in

writing by the Commission. Unless otherwise provided in this section,

the notice shall be effective upon filing.

[[Page 91492]]

When the reporting entity discovers errors or omissions to past

reports, the entity shall so notify the Commission and file corrected

information in a form and manner and at a time as may be instructed by

the Commission or its designee.

(e) Delegation of authority to the Director of the Division of

Market Oversight. (1) The Commission hereby delegates, until it orders

otherwise, to the Director of the Division of Market Oversight or such

other employee or employees as the Director may designate from time to

time, the authority:

(i) In paragraph (b)(8)(iv) of this section to call for additional

information from a person claiming the exemption in paragraph (b)(8) of

this section.

(ii) In paragraph (c)(3) of this section to call for additional

information from a person claiming an aggregation exemption under this

section.

(iii) In paragraph (d) of this section for providing instructions

or determining the format, coding structure, and electronic data

transmission procedures for submitting data records and any other

information required under this part.

(2) The Director of the Division of Market Oversight may submit to

the Commission for its consideration any matter which has been

delegated in this section.

(3) Nothing in this section prohibits the Commission, at its

election, from exercising the authority delegated in this section.

Issued in Washington, DC, on December 6, 2016, by the

Commission.

Christopher J. Kirkpatrick,

Secretary of the Commission.

Note: The following appendix will not appear in the Code of

Federal Regulations.

Appendix to Aggregation of Positions--Commission Voting Summary

On this matter, Chairman Massad and Commissioners Bowen and

Giancarlo voted in the affirmative. No Commissioner voted in the

negative.

[FR Doc. 2016-29582 Filed 12-15-16; 8:45 am]

BILLING CODE 6351-01-P

 

Last Updated: December 16, 2016