2020-25332

Federal Register, Volume 86 Issue 9 (Thursday, January 14, 2021) 
[Federal Register Volume 86, Number 9 (Thursday, January 14, 2021)]
[Rules and Regulations]
[Pages 3236-3493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25332]

 

[[Page 3235]]

Vol. 86

Thursday,

No. 9

January 14, 2021

Part II

 

 

Commodity Futures Trading Commission

 

 

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

 

 

17 CFR Parts 1, 15, 17, et al.

 

 

Position Limits for Derivatives; Final Rule

Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 /
Rules and Regulations

[[Page 3236]]


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

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 15, 17, 19, 40, 140, 150 and 151

RIN 3038-AD99


Position Limits for Derivatives

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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

SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is adopting amendments in this final rule (``Final Rule'') to
conform regulations concerning speculative position limits to the
relevant Wall Street Transparency and Accountability Act of 2010
(``Dodd-Frank Act'') amendments to the Commodity Exchange Act
(``CEA''). Among other regulatory amendments, the Commission is
adopting: New and amended Federal spot-month limits for 25 physical
commodity derivatives; amended single month and all-months-combined
limits for most of the agricultural contracts currently subject to
Federal position limits; new and amended definitions for use throughout
the position limits regulations, including a revised definition of
``bona fide hedging transaction or position'' and a new definition of
``economically equivalent swaps''; amended rules governing exchange-set
limit levels and grants of exemptions therefrom; a new streamlined
process for bona fide hedging recognitions for purposes of Federal
position limits; new enumerated bona fide hedges; and amendments to
certain regulatory provisions that would eliminate Form 204 while also
enabling the Commission to leverage and receive cash-market reporting
submitted directly to the exchanges by market participants.

DATES:
    Effective date: This Final Rule will become effective on March 15,
2021.
    Compliance date: Compliance dates for this Final Rule shall be as
follows:
     January 1, 2022 in connection with the Federal speculative
position limits for the 16 non-legacy core referenced futures contracts
subject to Federal position limits for the first time under this Final
Rule. This compliance date also applies to any associated referenced
contracts other than economically equivalent swaps. Such swaps are
subject to a separate compliance date noted below.
     January 1, 2022 in connection with an exchange's
requirements under Sec.  150.5, as adopted in this Final Rule.
     January 1, 2023 in connection with Federal speculative
position limits for economically equivalent swaps, as defined under
this Final Rule.
     January 1, 2023 in connection with the elimination of
previously-granted risk management exemptions described in Sec. 
150.3(c), as adopted in this Final Rule.

FOR FURTHER INFORMATION CONTACT: Dorothy DeWitt, Director, (202) 418-
6057, [email protected]; Rachel Reicher, Chief Counsel, (202) 418-6233,
[email protected]; Steven A. Haidar, Assistant Chief Counsel, (202)
418-5611, [email protected]; Aaron Brodsky, Senior Special Counsel,
(202) 418-5349, [email protected]; Steven Benton, Industry Economist,
(202) 418-5617, [email protected]; Lillian Cardona, Assistant Chief
Counsel, (202) 418-5012, [email protected]; Jeanette Curtis, Assistant
Chief Counsel, (202) 418-5669, [email protected]; Harold Hild, Policy
Advisor, (202) 418-5376, [email protected]; Division of Market Oversight,
in each case, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581; Michael Ehrstein,
Special Counsel, (202) 418-5957, [email protected]; Chang Jung,
Special Counsel, (202) 418-5202, [email protected]; Division of Swap
Dealer and Intermediary Oversight, in each case, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581; Rachel Hayes, Trial Attorney, (816) 960-7741,
[email protected]; Division of Enforcement, Commodity Futures Trading
Commission, 4900 Main Street, Suite 500, Kansas City, MO 64112; or
Brigitte Weyls, Trial Attorney, (312) 596-0547, [email protected];
Division of Enforcement, Commodity Futures Trading Commission, 525 West
Monroe Street, Suite 1100, Chicago, IL 60661.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Introduction
    B. Executive Summary
    C. Section-by-Section Summary of Final Rule
    D. Effective Date and Compliance Period
    E. The Commission Construes CEA Section 4a(a) To Require the
Commission To Make a Necessity Finding Before Establishing Position
Limits for Physical Commodities Other Than Excluded Commodities
    F. The Commission's Use of Certain Terminology
    G. Recent Volatility in the WTI Contract
    H. Brief Summary of Comments Received
II. Final Rule
    A. Sec.  150.1--Definitions
    B. Sec.  150.2--Federal Position Limit Levels
    C. Sec.  150.3--Exemptions From Federal Position Limits
    D. Sec.  150.5--Exchange-Set Position Limits and Exemptions
Therefrom
    E. Sec.  150.6--Scope
    F. Sec.  150.8--Severability
    G. Sec.  150.9--Process for Recognizing Non-Enumerated Bona Fide
Hedging Transactions or Positions With Respect to Federal
Speculative Position Limits
    H. Part 19 and Related Provisions--Reporting of Cash-Market
Positions
    I. Removal of Part 151
III. Legal Matters
    A. Interpretation of Statute Regarding Whether Necessity Finding
Is Required for Position Limits Established Pursuant to CEA 4a(a)(2)
    B. Legal Standard for Necessity Finding
    C. Necessity Finding as to the 25 Core Referenced Futures
Contracts
    D. Necessity Finding as to Linked Contracts
    E. Necessity Finding for Spot/Non-Spot Month Position Limits
IV. Related Matters
    A. Cost-Benefit Considerations
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
    D. Antitrust Considerations

I. Background

A. Introduction

    The Commission has long established and enforced speculative
position limits for futures contracts and options on futures contracts
on nine agricultural commodities as authorized by the CEA.\1\ These
nine agricultural commodity contracts, which have been subject to
Federal position limits for decades, are generally referred to as the
``nine legacy agricultural contracts.'' Under this Final Rule, the
Commission additionally will establish Federal speculative position
limits for certain commodity derivatives contracts associated with 16
additional commodities. The Commission refers to these 16 new
commodities and their associated commodity derivatives contracts
throughout this release as the ``non-legacy'' contracts since they are
subject to Federal position limits for the first time under this Final
Rule. Accordingly, under the Final Rule, certain commodity derivatives
contracts associated with 25 commodities are subject to Federal
position limits.
---------------------------------------------------------------------------

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

    The Commission's existing position limits regulations \2\ in
existing part 150

[[Page 3237]]

of the Commission's regulations include three components:
---------------------------------------------------------------------------

    \2\ 17 CFR part 150. Part 150 of the Commission's regulations
establishes Federal position limits (that is, position limits
established by the Commission) on the nine legacy agricultural
contracts. The nine legacy agricultural contracts are: CBOT Corn
(and Mini-Corn) (C), CBOT Oats (O), CBOT Soybeans (and Mini-
Soybeans) (S), CBOT Wheat (and Mini-Wheat) (W), CBOT Soybean Oil
(SO), CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat (MWE), CBOT
KC Hard Red Winter Wheat (KW), and ICE Cotton No. 2 (CT). See 17 CFR
150.2. The Federal position limits on these agricultural contracts
are referred to as ``legacy'' limits because these contracts have
been subject to Federal position limits for decades.
---------------------------------------------------------------------------

    First, the Commission's existing regulations establish separate
position limit levels for each of the nine legacy agricultural
contracts. These Federal position limit levels set the maximum
speculative positions in each of the nine legacy agricultural contracts
that a person may hold in the spot month, individual month, and all-
months-combined.\3\
---------------------------------------------------------------------------

    \3\ See 17 CFR 150.2.
---------------------------------------------------------------------------

    Second, the existing Federal position limits framework provides
exemptions to the Federal position limit levels for positions that
constitute ``bona fide hedging transactions or positions'' and for
certain ``spread or arbitrage'' positions.\4\
---------------------------------------------------------------------------

    \4\ See 17 CFR 150.3.
---------------------------------------------------------------------------

    Third, the Commission's existing regulations determine which
accounts and positions a person must aggregate for the purpose of
determining compliance with the Federal position limit levels.\5\
---------------------------------------------------------------------------

    \5\ See 17 CFR 150.4.
---------------------------------------------------------------------------

    The existing Federal speculative position limits function in
parallel to exchange-set position limits and/or exchange-set position
accountability required by designated contract market (``DCM'') Core
Principle 5.\6\ As a result, the nine legacy agricultural contracts are
subject to both Federal and exchange-set limits, whereas other
exchange-traded futures contracts and options on futures contracts are
subject only to DCM-set limits and/or position accountability.
---------------------------------------------------------------------------

    \6\ 7 U.S.C. 7(d)(5); 17 CFR 38.300. Paragraph (A) of DCM Core
Principle 5 provides: To reduce the potential threat of market
manipulation or congestion (especially during trading in the
delivery month), the board of trade shall adopt for each contract of
the board of trade, as is necessary and appropriate, position
limitations or position accountability for speculators. Position
limits generally cannot be exceeded absent an exemption, whereas
position accountability allows an exchange to establish a level at
which market participants, including those participants who do not
qualify for an exemption, are required to: Provide position
information to the exchange prior to increasing a position above the
accountability level; halt further position increases; and/or reduce
positions in an orderly manner. Core Principle 6 in part 37 of the
Commission's regulations for swap execution facilities (``SEFs'')
contains similar language. 17 CFR 38.600.
---------------------------------------------------------------------------

    As part of the Dodd-Frank Act, Congress amended the CEA's position
limits provisions, which since 1936 have authorized the Commission (and
its predecessor) to impose limits on speculative positions to prevent
the harms caused by excessive speculation. As discussed below, the
Commission interprets these amendments as, among other things, tasking
the Commission with establishing such position limits as it finds are
``necessary'' for the purpose of ``diminishing, eliminating, or
preventing'' excessive speculation causing sudden or unreasonable
fluctuations or unwarranted changes in the price of such commodity.\7\
The Commission also interprets these amendments as tasking the
Commission with establishing position limits on any ``economically
equivalent'' swaps.\8\
---------------------------------------------------------------------------

    \7\ 7 U.S.C. 6a(a)(1); see infra Section III.C. (discussion of
the necessity finding).
    \8\ 7 U.S.C. 6a(a)(5); see also infra Section II.B.1.iii.
---------------------------------------------------------------------------

    The Commission previously issued proposed and final rules in 2011
(``2011 Final Rulemaking'') to implement the provisions of the Dodd-
Frank Act regarding position limits and the bona fide hedge
definition.\9\ A September 28, 2012 order of the U.S. District Court
for the District of Columbia vacated the 2011 Final Rulemaking, with
the exception of the rule's amendments to 17 CFR 150.2.\10\
---------------------------------------------------------------------------

    \9\ Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011)
(``2011 Proposal''); Position Limits for Futures and Swaps, 76 FR
71626 (Nov. 18, 2011) (``2011 Final Rulemaking'').
    \10\ Int'l Swaps & Derivatives Ass'n v. U.S. Commodity Futures
Trading Comm'n, 887 F. Supp. 2d 259 (D.D.C. 2012) (``ISDA'').
---------------------------------------------------------------------------

    Subsequently, the Commission proposed position limits regulations
in 2013 (``2013 Proposal''), in June of 2016 (``2016 Supplemental
Proposal''), and again in December of 2016 (``2016 Reproposal'').\11\
The 2016 Reproposal would have amended part 150 of the Commission's
regulations to, among other things: Establish Federal position limits
for 25 physical commodity futures contracts and their linked futures
contracts, options on futures contracts, and ``economically
equivalent'' swaps; revise the existing exemptions from such limits,
including for bona fide hedges; and establish a framework for exchanges
\12\ to recognize certain positions as bona fide hedges and thus exempt
from position limits.
---------------------------------------------------------------------------

    \11\ Position Limits for Derivatives, 78 FR 75680 (Dec. 12,
2013) (``2013 Proposal''); Position Limits for Derivatives: Certain
Exemptions and Guidance, 81 FR 38458 (June 13, 2016) (``2016
Supplemental Proposal''); and Position Limits for Derivatives, 81 FR
96704 (Dec. 30, 2016) (``2016 Reproposal'').
    \12\ Unless indicated otherwise, the use of the term
``exchanges'' throughout this release refers to DCMs and SEFs.
---------------------------------------------------------------------------

    To date, the Commission has not issued any final rulemaking based
on the 2013 Proposal, 2016 Supplemental Proposal, or 2016 Reproposal.
The 2016 Reproposal generally addressed comments received in response
to the 2013 Proposal and the 2016 Supplemental Proposal. In a separate
2016 proposed rulemaking, the CFTC also proposed, and later adopted in
2016, amendments to rules in Sec.  150.4 of the Commission's
regulations governing aggregation of positions for purposes of
compliance with Federal position limits.\13\ These aggregation rules
currently apply only to the nine legacy agricultural contracts subject
to existing Federal position limits. Going forward, these aggregation
rules will apply to all commodity derivative contracts that are subject
to Federal position limits under this Final Rule.
---------------------------------------------------------------------------

    \13\ Aggregation of Positions, 81 FR 91454 (Dec. 16, 2016)
(``Final Aggregation Rulemaking''); see 17 CFR 150.4. Under the
Final Aggregation Rulemaking, unless an exemption applies, a
person's positions must be aggregated with positions for which the
person controls trading or for which the person holds a 10% or
greater ownership interest. The Division of Market Oversight has
issued time-limited no-action relief from some of the aggregation
requirements contained in that rulemaking. See CFTC Letter No. 19-19
(July 31, 2019), available at https://www.cftc.gov/csl/19-19/download.
---------------------------------------------------------------------------

    The Commission published a notice of a proposed rulemaking in the
Federal Register on February 27, 2020 for a new position limits
proposal (``2020 NPRM''). After reconsidering the prior proposals,
including reviewing the comments responding thereto, the Commission in
the 2020 NPRM withdrew from further consideration the 2013 Proposal,
the 2016 Supplemental Proposal, and the 2016 Reproposal.\14\
---------------------------------------------------------------------------

    \14\ Because the earlier proposals were withdrawn in the 2020
NPRM, comments on the earlier proposals are not part of the
administrative record with respect to the 2020 NPRM nor with respect
to this Final Rule, except where expressly referenced herein. In the
2020 NPRM, the Commission stated that commenters to the 2016
Reproposal should resubmit comments relevant to the subject
proposal; commenters who wish to reference prior comment letters
should cite those prior comment letters as specifically as possible.
(85 FR at 11597). Accordingly, this Final Rule will not discuss
comments submitted in connection with the 2016 Reproposal unless
such comments were resubmitted for the 2020 NPRM.
---------------------------------------------------------------------------

    In the 2020 NPRM, the Commission intended to: (1) Recognize
differences across commodities and contracts, including differences in
commercial hedging and cash-market reporting practices; (2) focus on
commodity derivative contracts that are critical to price discovery and
distribution of the underlying commodities such that the burden of
excessive speculation in the commodity derivative contracts may have a
particularly acute impact on interstate commerce for the underling
commodities; and (3) reduce duplication and inefficiency by leveraging
existing expertise and processes at DCMs.
    The public comment period for the 2020 NPRM ended May 15, 2020,\15\
and

[[Page 3238]]

the Commission received approximately 75 public comment letters.\16\
After reviewing these public comment letters, and for the general
reasons discussed in this release, the Commission is adopting the 2020
NPRM with certain modifications in this Final Rule.\17\
---------------------------------------------------------------------------

    \15\ Comments were originally due by April 29, 2020. Due to the
COVID-19 pandemic, the Commission extended the deadline to May 15,
2020.
    \16\ The Commission states ``approximately 75 relevant comment
letters'' since several commenters submitted additional, or
supplemental, comments. As a result, the total could change slightly
depending on whether one includes these supplemental comment letters
in the total. Thus, for the avoidance of doubt, the Commission uses
``approximately.'' The Commission received comments from: American
Cotton Shippers Association (``ACSA''); American Feed Industry
Association (``AFIA''); American Gas Association (``AGA''); AQR
Capital Management, LLC (``AQR''); Archer Daniels Midland (``ADM'');
AMCOT; Americans for Financial Reform (``AFR''); Arthur Dunavant
Investments (``Dunavant''); ASR Group International, Inc. (``ASR'');
Atlantic Cotton Association (``ACA''); Barnard, Chris (Individual);
Better Markets, Inc. (``Better Markets''); Cargill, Inc.
(``Cargill''); Castleton Commodities International LLC (``CCI'');
Chevron USA Inc. (``Chevron''); Choice Cotton Company, Inc.
(``Choice Cotton''); CHS Inc. (``CHS Inc.'') and CHS Hedging, LLC
(``CHS Hedging'') (collectively, ``CHS''); Citadel; CME Group Inc.
(``CME Group''); Commodity Markets Council (``CMC''); DECA Global
LLC (``DECA''); East Cotton Company (``East Cotton''); Ecom
Agroindustrial (``Ecom''); Edison Electric Institute (``EEI'') and
Electric Power Supply Association (``EPSA'') (collectively, the
``Joint Associations'' or ``EEI/EPSA''); Futures Industry
Association (``FIA''); Glencore Agriculture Limited, Glencore
Agriculture B.V. (collectively, ``Glencore''); ICE Futures U.S.
(``IFUS''); IMC Companies (``IMC''); Industrial Energy Consumers of
America; Institute for Agriculture & Trade Policy (``IATP'');
Intercontinental Exchange, Inc. (``ICE''); International Energy
Credit Association (``IECA''); International Swaps and Derivatives
Association, Inc. (``ISDA''); Jess Smith & Sons (``Jess Smith'');
Lawson/O'Neill Global Institutional Commodity (LOGIC) Advisors
(``Lawson/O'Neill''); Long Island Power Authority (``LIPA''); Louis
Dreyfus Company (``LDC''); Mallory Alexander International Logistics
(``Mallory Alexander''); Managed Funds Association and Alternative
Investment Management Association (collectively, the
``Associations'' or ``MFA/AIMA''); Marshal, Gerald (Independent
Trader); Matsen, Eric (Individual--Physical Commodity Risk
Management Consultant); McMeekin Cotton LLC (``McMeekin''); Memtex
Cotton Marketing, LLC (``Memtex''); Minneapolis Grain Exchange, Inc.
(``MGEX''); Moody Compress & Warehouse Company (``Moody Compress'');
Namoi Cotton Alliance (``Namoi''); National Cotton Council
(``NCC''); National Council of Farmer Cooperatives (``NCFC'');
National Council of Textile Organizations (``NCTO''); National
Energy & Fuels Institute (``NEFI''); National Grain and Feed
Association (``NGFA''); National Oilseed Processors Association
(``NOPA''); National Rural Electric Cooperative; Association
American Public Power Association; and American Public Gas
Association (collectively, ``NRECA''); Natural Gas Supply
Association (``NGSA''); Olam International Limited (``Olam'');
Omnicotton Inc. (``Omnicotton''); Pacific Investment Management
Company LLC (``PIMCO''); Parkdale Mills (``Parkdale''); Petroleum
Marketers Association of America (``PMAA''); Public Citizen; Robert
Rutkowski (``Rutkowski''); S. Canale Cotton Co. (``Canale Cotton'');
Shell Energy North America (US), L.P. and Shell Trading (US) Company
(collectively, ``Shell''); SIFMA Asset Management Group (``SIFMA
AMG''); Skylar Capital Management LP (``SCM''); Southern Cotton
Association (``Southern Cotton''); Southwest Ag Sourcing (``SW
Ag''); Suncor Energy Marketing Inc. and Suncor Energy USA Marketing
Inc. (collectively, ``SEMI''); Texas Cotton Association (``Texas
Cotton''); The Coalition of Physical Energy Companies; The
Commercial Energy Working Group (``CEWG''); The Walcot Trading
Company, LLC (``Walcot''); Toyo Cotton Company (``Toyo''); VLM
Commodities (``VLM''); Western Cotton Shippers Association
(``WCSA''); White Gold Cotton Marketing, LLC (``White Gold'').
    \17\ The Final Rule's regulations are discussed in detail
throughout this release.
---------------------------------------------------------------------------

    Before addressing the specifics of the Final Rule, the Commission
outlines several themes underscoring the Commission's approach in the
Final Rule.
    First, the Commission believes that any position limits regime must
take into account differences across commodities and contract types.
The existing Federal position limits regulations apply only to the nine
legacy agricultural contracts, all of which are physically-settled
futures on agricultural commodities. Limits on these nine legacy
agricultural contracts have been in place for decades, as have the
Federal rules governing both the exemptions from these Federal position
limits and the exchange-set position limits on the nine legacy
agricultural contracts. The existing framework is largely a historical
remnant of an approach that predates cash-settled futures contracts,
institutional-investor interest in commodity indexes, highly liquid
energy markets, and the Commission's jurisdiction over certain swaps.
    Congress has tasked the Commission with establishing such limits as
it finds are ``necessary'' for the purpose of preventing the burdens
associated with excessive speculation causing sudden or unreasonable
fluctuations or unwarranted changes in the price of an underlying
commodity; and establishing limits on swaps that are ``economically
equivalent'' to any futures contracts or options on futures contracts
subject to Federal position limits. An approach that is flexible enough
to accommodate potential future, unpredictable developments in
commercial hedging practices is well-suited for the current derivatives
markets by accommodating differences in commodity types, contract
specifications, hedging practices, cash-market trading practices,
organizational structures of hedging participants, and liquidity
profiles of individual markets.
    The Commission is building this flexibility into several parts of
the Final Rule, including: (1) Exchange-set limits or accountability
levels outside of the spot month for referenced contracts based on
commodities other than the nine legacy agricultural contracts; (2) the
ability for exchanges to use more than one formula when setting their
own limit levels; (3) an updated formula for Federal non-spot month
position limit levels on the nine legacy agricultural contracts that is
calibrated to recently observed open interest, which has generally
increased over time; (4) a bona fide hedging definition that is broad
enough to accommodate common commercial hedging practices, including
unfixed-price transactions as well as anticipatory hedging practices,
such as anticipatory merchandising; (5) a simplified process for market
participants to submit a single application to obtain non-enumerated
bona fide hedge recognitions for purposes of Federal and exchange-set
position limits that are in line with common commercial hedging
practices; (6) the elimination of a restriction for purposes of Federal
position limits on holding positions during the last trading days of
the spot month; and (7) broader discretion for market participants to
measure risk in the manner most suitable for their businesses.
    Second, the Final Rule establishes position limits with respect to
16 additional commodities during the spot month, for a total of 25 core
referenced futures contracts, and certain derivative contracts linked
thereto, for which the Commission finds that speculative position
limits are necessary.\18\ As described below, this necessity finding
for the 25 core referenced futures contracts is based on two
interrelated factors: (1) The importance of the 25 core referenced
futures contracts to their respective underlying cash markets,
including that they require physical delivery of the underlying
commodity; and (2) the particular importance to the national economy of
the commodities underlying the 25 contracts.\19\
---------------------------------------------------------------------------

    \18\ See infra Section III.C.2.
    \19\ Id.
---------------------------------------------------------------------------

    Third, there is an opportunity for greater collaboration between
the Commission and the exchanges within the statutorily created
parallel Federal and exchange-set position limit regimes. Given the
exchanges' obligations to carry out self-regulatory responsibilities,
resources, deep knowledge of their markets and trading practices, close
interactions with market participants, existing programs for addressing
exemption requests, and direct ability to leverage these resources to
generally act more quickly than the Commission, the Commission believes
that cooperation between the Commission and the exchanges on position
limits should not only be continued, but enhanced. For

[[Page 3239]]

example, exchanges are particularly well-positioned to: Provide the
Commission with estimates of deliverable supply in connection with
their commodity contracts that require physical delivery; recommend
limit levels for the Commission's consideration; and help administer
the program for recognizing bona fide hedges. Further, given that the
Final Rule requires exchanges to collect, and provide to the Commission
upon request, cash-market information from market participants
requesting recognition of bona fide hedges, the Commission is
eliminating the Form 204 and part of the Form 304, which market
participants with bona fide hedging positions in excess of position
limits currently file each month with the Commission to demonstrate
cash-market positions justifying such overages. Under enhanced
collaboration, the Commission will maintain its access to such
information from the exchanges, which will result in a more efficient
administrative process, in part by reducing duplication of efforts.

B. Executive Summary

    This executive summary provides an overview of the key components
of the Final Rule. The summary only highlights certain aspects of the
final regulations and generally uses shorthand to summarize complex
topics. The executive summary is neither intended to be a comprehensive
recitation of the Final Rule nor intended to supplement, modify, or
replace any interpretive or other language contained herein. Section II
of this release includes a more detailed and comprehensive discussion
of all of the final regulations. The final regulations and related
appendices and guidance follow Section IV (Related Matters) of this
release.
1. Contracts Subject to Federal Speculative Position Limits
    Federal position limits apply to ``referenced contracts,'' which,
as described in turn below, include: (i) 25 ``core referenced futures
contracts'' (i.e., the nine legacy agricultural contracts together with
the new 16 non-legacy contracts); (ii) futures contracts and options on
futures contracts directly or indirectly linked to a core referenced
futures contract; and (iii) ``economically equivalent swaps.''
i. Core Referenced Futures Contracts
    Federal position limits under the Final Rule will apply to the
following 25 \20\ physically-settled core referenced futures contracts:
---------------------------------------------------------------------------

    \20\ Reference to, or discussion of, derivatives contracts
listed on IFUS, the DCM and subsidiary of ICE, will be referred to
herein as ``ICE [Commodity] [IFUS Commodity Code]'' (e.g., ICE Sugar
No. 16 (SF)). Additionally, ``CBOT'' refers to the DCM Board of
Trade of the City of Chicago, Inc.; ``CME'' refers to the DCM
Chicago Mercantile Exchange, Inc.; ``COMEX'' refers to the DCM
Commodity Exchange, Inc.; and ``NYMEX'' refers to the DCM New York
Mercantile Exchange, Inc.

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

[[Page 3240]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.000

ii. Futures Contracts and Options on Futures Contracts Linked to a Core
Referenced Futures Contract
    The term ``referenced contract'' encompasses any core referenced
futures contract as well as any futures contract and any option on a
futures contract that is: (1) Directly or indirectly linked to the
price of a core referenced futures contract; or (2) directly or
indirectly linked to the price of the same commodity underlying the
applicable core referenced futures contract, for delivery at the same
location as specified in that core referenced futures
contract.22 The term ``referenced contract,'' however,
explicitly excludes location basis contracts, commodity index
contracts, contracts that are based on prices across a month (i.e.,
contracts commonly referred to as calendar month average contracts,
trade month average contracts, or balance of month contracts), outright
contracts that are based on a price reporting agency index price, swap
guarantees, and trade options that meet certain requirements.
---------------------------------------------------------------------------

    \21\ While the Final Rule includes Federal non-spot month limits
only for referenced cintracts on the nine legacy agricultural
contracts, the Final Rule requires exchanges to establish,
consistent with Commission standards set forth in this Final Rule,
exchange-set position limits and/or position accountability levels
in the non-spot months for the 16 non-legacy core referenced futures
contracts and for any associated referenced contracts.
    \22\ For clarity, clause (2) is intended to encompass potential
physically-settled ``look-alike'' contracts that do not directly
reference a core referenced futures contract but that are
nonetheless based on the same commodity and delivery location as a
core referenced futures contract.
---------------------------------------------------------------------------

iii. Economically Equivalent Swaps
    The term referenced contracts also includes economically equivalent
swaps, defined as swaps with ``identical material'' contractual
specifications, terms, and conditions to a referenced contract. Swaps
in a commodity other than natural gas that have identical material
specifications, terms, and conditions to a referenced contract are
still deemed economically equivalent swaps even if they differ from the
referenced contract with respect to one or more of the following: (a)
Lot size specifications or notional amounts, (b) delivery dates
diverging by less than one calendar day for physically-settled swaps,
or (c) post-trade risk management arrangement (e.g., uncleared swaps
versus cleared futures contracts).
    The same general definition applies to natural gas swaps, except
that the definition is expanded to include swaps with delivery dates
diverging from the corresponding core referenced futures contract by
less than two calendar days.
    Instruments that are exempt from Commission jurisdiction or
otherwise not deemed to be swaps under the Commission's regulations
(e.g., instruments that are excluded by the CEA's ``swap'' definition
or Commission regulations as physically-settled forward contracts) are
not ``economically equivalent swaps'' even if they otherwise fall
within the ``economically equivalent swap'' definition.
2. Federal Position Limit Levels During the Spot Month

[[Page 3241]]

    Federal spot month position limits apply to all 25 core referenced
futures contracts and their associated referenced contracts. The Final
Rule establishes the spot month position limit levels summarized in the
table below. Each spot month limit is set at or below 25% of
deliverable supply, as estimated using recent data provided by the DCM
listing the core referenced futures contract, and verified by the
Commission. The Federal spot month position limits apply on a futures-
equivalent basis based on the size of the unit of trading of the
relevant core referenced futures contract.
BILLING CODE 6351-01-P
[GRAPHIC] [TIFF OMITTED] TR14JA21.001


[[Page 3242]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.002

BILLING CODE 6351-01-C
    
---------------------------------------------------------------------------

    \23\ As of October 15, 2020.
    \24\ The Federal spot month limit for Live Cattle adopted herein
features a step-down limit similar to the CME's existing Live Cattle
step-down exchange-set limit. The Federal spot month step-down limit
is: (1) 600 at the close of trading on the first business day
following the first Friday of the contract month; (2) 300 at the
close of trading on the business day prior to the last five trading
days of the contract month; and (3) 200 at the close of trading on
the business day prior to the last two trading days of the contract
month.
    \25\ ICE technically does not have an exchange-set spot month
position limit level for ICE Sugar No. 16 (SF). However, it does
have a single-month position limit level of 1,000 contracts, which
effectively operates as a spot month position limit.
    \26\ As discussed below, the NYMEX Henry Hub Natural Gas (NG)
Federal spot month limit for cash-settled look-alike referenced
contracts will apply on a per-exchange and per-OTC swaps market
basis rather than on an aggregate basis across exchanges.
    \27\ Currently, the cash-settled natural gas contracts are
subject to an exchange-set spot month position limit level of 1,000
equivalent-sized contracts per exchange. As of publication of the
Final Rule, there are three exchanges that list cash-settled natural
gas contracts: NYMEX, IFUS, and Nodal. As a result, a market
participant may hold up to 3,000 equivalent-sized cash-settled
natural gas contracts under existing exchange-set limits.
    The exchanges also have a conditional position limit framework
for natural gas contracts. This exchange-set conditional spot month
position limit permits up to 5,000 cash-settled NYMEX NG equivalent-
sized referenced contracts per exchange that lists such contracts,
provided that the market participant does not hold positions in the
physically-settled NYMEX NG referenced contract.
    \28\ The Federal spot month limit for Light Sweet Crude Oil
adopted herein features the following step-down limit: (1) 6,000
contracts as of the close of trading three business days prior to
the last trading day of the contract; (2) 5,000 contracts as of the
close of trading two business days prior to the last trading day of
the contract; and (3) 4,000 contracts as of the close of trading one
business day prior to the last trading day of the contract.

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

[[Page 3243]]

i. Application of Federal Spot Month Limits to Commodities Other Than
Natural Gas
    With the exception of natural gas, the Federal spot month position
limit levels apply in the aggregate across exchanges and the over-the-
counter (``OTC'') swap markets.
    During the spot month, Federal position limits apply ``separately''
to physically-settled and cash-settled referenced contracts.\29\
Accordingly, during the spot month, a market participant is required to
aggregate its net physically-settled positions, and separately its net
cash-settled positions, across exchanges and the OTC swaps markets, but
may not net cash-settled referenced contracts with physically-settled
referenced contracts.
---------------------------------------------------------------------------

    \29\ As discussed further under Section II.B.3.vi, cash-settled
NYMEX NG referenced contracts under the Final Rule are subject to
per-exchange and per-OTC swaps market Federal position limits. As a
result, market participants are not required to aggregate their
positions in natural gas referenced contracts across different
exchanges and the OTC swaps markets but also may not net such
positions across different exchanges or the OTC swaps market.
---------------------------------------------------------------------------

ii. Application of Federal Spot Month Limits to Natural Gas
    For the NYMEX Henry Hub Natural Gas (``NYMEX NG'') physically-
delivered core referenced futures contract and its associated cash-
settled referenced contracts, the Final Rule modifies the 2020 NPRM by
providing that Federal position limits apply to NYMEX NG cash-settled
referenced contracts on a per-exchange and per-OTC swaps market basis
(i.e., cash-settled positions are not aggregated across different
exchanges and the OTC swaps market).
    Specifically, a market participant may hold up to 2,000 cash-
settled NYMEX NG referenced contracts (i.e., the NYMEX NG Federal spot
month position limit) on each exchange that lists for trading a cash-
settled NYMEX NG referenced contract as well as the OTC swap market.
Currently, three exchanges (NYMEX, IFUS, and Nodal) \30\ list cash-
settled ``look-alike'' NYMEX NG referenced contracts. Thus, a market
participant is able to hold 2,000 cash-settled NYMEX NG referenced
futures contracts on each exchange, which is 6,000 cash-settled look-
alike NYMEX NG referenced contracts in total. In addition, a market
participant is able to hold a position of 2,000 cash-settled NYMEX NG
equivalent-sized economically equivalent swaps in the OTC swaps markets
for a total position of 8,000 cash-settled NYMEX NG referenced
contracts across the four markets (i.e., NYMEX, IFUS, Nodal, and the
OTC swaps market).
---------------------------------------------------------------------------

    \30\ ``Nodal'' refers to the Nodal Exchange, LLC.
---------------------------------------------------------------------------

    As noted above, because Federal spot month position limit levels
apply ``separately'' to cash-settled and physically-settled referenced
contracts, a market participant further is able to hold an additional
position of 2,000 physically-settled NYMEX NG referenced contracts for
a total position of 10,000 NYMEX NG referenced contracts.
    As discussed further below, market participants may hold additional
cash-settled NYMEX NG referenced contracts under the Final Rule's
Federal spot month conditional position limit exemption as long as the
market participant satisfies certain requirements. However, for the
avoidance of doubt, the Commission notes that the per-exchange 2,000
contract Federal spot month position limit level for cash-settled NYMEX
NG referenced contracts discussed above is not part of the Federal spot
month conditional position limit exemption but rather constitutes the
default speculative Federal spot month position limit.
3. Federal Position Limit Levels Outside of the Spot Month
    Under the Final Rule, Federal position limits outside of the spot
month (``non-spot month'' position limits) apply only to the nine
legacy agricultural contracts and their associated referenced
contracts.
    In contrast, referenced contracts based on the 16 core referenced
futures contracts subject to Federal position limits for the first time
under the Final Rule are only subject to Federal position limits during
the spot month, and are otherwise only subject to exchange-set limits
or position accountability outside of the spot month.
    The following Federal non-spot month position limit levels,
summarized in the table below, are set at 10% of open interest for the
first 50,000 contracts, with an incremental increase of 2.5% of open
interest thereafter, and apply on a futures-equivalent basis based on
the size of the unit of trading of the relevant core referenced futures
contract:

[[Page 3244]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.003

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

    \31\ With the exception of the ICE Cotton No. 2 (CT) contract
discussed below, for each of the legacy agricultural contracts, the
single month limit is equal to the all-months-combined limit under
the Final Rule.
    \32\ As of October 15, 2020.
    \33\ The single month limit for ICE Cotton No. 2 (CT) is set at
50% of the all-months-combined limit, or 5,950 contracts, as
discussed more fully below.
---------------------------------------------------------------------------

4. Exchange-Set Limits and Exemptions Therefrom
i. Contracts Subject to Federal Position Limits
    An exchange that lists a contract subject to Federal position
limits, as specified above, is required to set its own limits for such
contracts at a level that is no higher than the Federal level.
Exchanges may grant exemptions from their own limits to a level that
exceeds the applicable Federal limit, provided the exemption is self-
effectuating (e.g., an enumerated bona fide hedge or a spread that
satisfies the ``spread transaction'' definition) or provided the
exemption is recognized by the Commission for purposes of Federal
position limits (pursuant to an application submitted either directly
to the Commission under Sec.  150.3 or indirectly to the Commission
through an exchange under Sec.  150.9, as applicable). Exchanges may
grant exemptions that are not recognized by the Final Rule; however,
such exemptions must be capped at a level that is not higher than the
applicable Federal position limit level.
ii. Physical Commodity Contracts Not Subject to Federal Position Limits
    For physical commodity contracts, for which no necessity finding
was supported, and which are therefore not subject to Federal position
limits, an exchange is generally required to set spot month position
limit levels at no greater than 25% of deliverable supply, but has
flexibility to submit other approaches for review by the Commission,
provided the approach results in spot month position limit levels that
are ``necessary and appropriate to reduce the potential threat of
market manipulation or price distortion of the contract's or the
underlying commodity's price or index'' and complies with all other
applicable regulations.
    Outside of the spot month, an exchange has additional flexibility
to set either position limits or position accountability levels,
provided the levels are ``necessary and appropriate to reduce the
potential threat of market manipulation or price distortion of the
contract's or the underlying commodity's price or index.'' Non-
exclusive Acceptable Practices are included in new Appendix F to part
150 under the Final Rule and provide several examples of formulas that
the Commission has determined meet this standard, but an exchange has
flexibility to develop other approaches.
    An exchange has flexibility to grant a variety of exemption types.
Exchanges must take into account whether the exemption results in a
position that is

[[Page 3245]]

``not in accord with sound commercial practices'' in the market for
which the exchange is considering the application, and/or ``exceed[s]
an amount that may be established and liquidated in an orderly fashion
in that market.''
5. Limits on ``Pre-Existing Positions''
    As discussed above, only swaps that qualify as ``economically
equivalent swaps'' are subject to Federal position limits under the
Final Rule. However, economically equivalent swaps entered into in good
faith prior to the Final Rule's Effective Date, including both ``Pre-
Enactment Swaps,'' which are swaps entered into prior to the Dodd-Frank
Act whose terms have not expired, and ``Transition Period Swaps,''
which are swaps entered into between July 22, 2010 and the Final Rule's
effective date, are not subject to Federal position limits. Other pre-
existing positions (i.e., pre-existing positions that are futures
contracts or options on futures contracts) will be subject to the Final
Rule's Federal position limits.\34\
---------------------------------------------------------------------------

    \34\ However, as discussed further below, the Commission is
providing for a compliance period until January 1, 2022 for the 16
non-legacy referenced contracts that will be subject to Federal
position limits for the first time under this Final Rule. Similarly,
the Commission is providing for a compliance period for any
economically equivalent swaps, as well as in connection with the
elimination of the risk management exemption, until January 1, 2023.
---------------------------------------------------------------------------

    Market participants may net down their post-Effective Date
positions in commodity derivatives contracts with any pre-existing
swaps (as long as such swaps qualify as economically equivalent swaps)
for purposes of complying with non-spot month Federal position limits.
In contrast, during the spot month, market participants may not apply
these pre-existing swap positions to net down their positions so as to
avoid rendering Federal spot month position limits ineffective. The
Commission is particularly concerned about protecting the spot month in
physically-delivered futures from price distortions or potential
manipulation and consequent disruption of the hedging and price
discovery utility of the related futures contract.
6. Legal Standards for Exemptions From Federal Position Limits
i. Bona Fide Hedge Recognition
    A bona fide hedging transaction or position may exceed Federal
position limits if the hedge position satisfies all three elements of
the Final Rule's ``general'' bona fide hedging definition. That is, (1)
the position represents a substitute for transactions or positions made
or to be made at a later time in a physical marketing channel
(``temporary substitute test''); (2) the position is economically
appropriate to the reduction of price risks in the conduct and
management of a commercial enterprise (``economically appropriate
test''); and (3) the position arises from the potential change in value
of actual or anticipated assets, liabilities, or services (``change in
value requirement'').
    The Final Rule makes several changes to the existing bona fide
hedging definition, including those described immediately below:
    First, the Commission is expanding the existing list of
``enumerated'' bona fide hedges to cover additional hedging practices,
including adding a bona fide hedge for anticipated merchandising.\35\
To provide greater certainty, the list of enumerated bona fide hedges
is now incorporated into the regulation. In contrast, in the 2020 NPRM,
this list of enumerated bona fide hedges was proposed in the form of
non-binding acceptable practices in Appendix A to part 150. While the
enumerated bona fide hedges will remain listed in Appendix A under the
Final Rule, Appendix A to part 150 is now explicitly incorporated into
Commission regulations and is part of the regulatory text rather than
acceptable practices.
---------------------------------------------------------------------------

    \35\ The existing definition of ``bona fide hedging transactions
and positions'' enumerates the following hedging transactions or
positions: (1) Hedges of inventory and cash commodity fixed-price
purchase contracts under 1.3(z)(2)(i)(A); (2) hedges of unsold
anticipated production under 1.3(z)(2)(i)(B); (3) hedges of cash
commodity fixed-price sales and (4) hedges of fixed price sales of
their cash products and byproducts contracts under 1.3(z)(2)(ii)(A)
and (B); (5) hedges of unfilled anticipated requirements under
1.3(z)(2)(ii)(C); (6) hedges of offsetting unfixed price cash
commodity sales and purchases under 1.3(z)(2)(iii); and (7) cross-
commodity hedges under 1.3(z)(2)(iv). The following additional
hedging practices are not enumerated in the existing regulation, but
are included as enumerated hedges in the Final Rule: (1) Hedges of
anticipated merchandising; (2) hedges by agents; (3) hedges of
anticipated royalties; (4) hedges of services; and (5) offsets of
commodity trade options.
---------------------------------------------------------------------------

    A person who holds a position that qualifies as a bona fide hedge
and that is one of the enumerated hedges in Appendix A to part 150 is
not required to request prior approval from the Commission to hold such
bona fide hedge position above the Federal position limit. That is, the
enumerated bona fide hedges are ``self-effectuating'' for purposes of
Federal position limits. A person with an enumerated bona fide hedge
position, however, would still need to request an exemption from the
relevant exchange for any exchange-set limits.\36\
---------------------------------------------------------------------------

    \36\ The processes for obtaining bona fide hedge recognitions
and non-enumerated bona fide hedge recognitions are summarized in
Section 7 below of this executive summary (Processes for Requesting
Bona Fide Hedge Recognitions and Spread Exemptions).
---------------------------------------------------------------------------

    Second, with respect to the treatment of unfixed-price forward
transactions and bona fide hedging under the Final Rule, the Commission
clarifies that a commercial market participant may qualify for one of
the Final Rule's enumerated anticipatory bona fide hedges (i.e.,
enumerated bona fide hedges for unsold anticipated production, unfilled
anticipated requirements, and anticipated merchandising) with respect
to an unfixed-price forward transaction. The Commission believes that
an unfixed-price forward transaction should not preclude a commercial
market participant from qualifying for one of these enumerated
anticipatory bona fide hedges, because such unfixed-price forward
transactions do not give rise to outright price risk for a commercial
market participant and do not otherwise fix an outright price.
Accordingly, unfixed-price transactions do not ``fill'' or ``address''
the hedging need for which the enumerated anticipatory bona fide hedges
are predicated.
    The Commission notes that an unfixed-price forward transaction does
not itself allow a market participant to qualify for one of these
enumerated anticipatory bona fide hedges, and that a market participant
must still satisfy the requirements of the applicable anticipatory bona
fide hedge to qualify (e.g., as an initial matter, by the commercial
market participant being able to demonstrate its anticipated unsold
production, anticipated unfilled requirements, and/or anticipated
merchandising).
    Third, the Final Rule clarifies whether and when market
participants may measure risk on a gross basis rather than on a net
basis. Instead of only being permitted to hedge on a ``net basis''
except in a narrow set of circumstances, a market participant is also
able to generally hedge positions on a ``gross basis,'' provided that
the participant has done so over time in a consistent manner and is not
doing so to evade Federal position limits. Among other items, the Final
Rule differs from the 2020 NPRM in that the Final Rule: (1) Eliminates
the requirement that exchanges document their justifications when
allowing gross hedging; (2) clarifies that market participants are not
required to develop written policies or procedures that set forth when
gross

[[Page 3246]]

versus net hedging is appropriate; and (3) clarifies that gross hedging
is permissible for both enumerated and non-enumerated hedges.
    Fourth, market participants are permitted to hold bona fide hedges
in excess of Federal position limits during the last five days of the
spot period (or during the time period for the spot month if less than
five days). While the Final Rule does not include a Federal restriction
on holding bona fide hedging positions in excess of Federal position
limits during the spot period, exchanges continue to have the
discretion to adopt such restrictions (commonly referred to by market
participants as the ``Five-Day Rule''), or similar restrictions, for
purposes of exchange-set limits. The Final Rule also includes guidance
on the application of spot-period restrictions, including factors for
exchanges with such restrictions to consider when determining to grant
exemptions that are not subject to any such restrictions for purposes
of their own limits.
    Finally, the Final Rule modifies the ``temporary substitute test''
to require that a bona fide hedging transaction or position in a
physical commodity must always, and not just normally, be connected to
the production, sale, or use of a physical cash-market commodity.
Therefore, a market participant is generally no longer allowed to treat
positions entered into for ``risk management purposes'' \37\ as a bona
fide hedge, unless the position qualifies as either: (i) An offset of a
pass-through swap, where the offset reduces price risk attendant to the
pass-through swap executed opposite a counterparty for whom the swap
qualifies as a bona fide hedge; or (ii) a ``swap offset,'' where the
offset is used by a counterparty to reduce price risk attendant to a
swap that qualifies as a bona fide hedge and that was previously
entered into by that counterparty.
---------------------------------------------------------------------------

    \37\ The phrase ``risk management'' as used in this instance
refers to derivatives positions, typically held by a swap dealer,
used to offset a swap position, such as a commodity index swap, with
another entity for which that swap is not a bona fide hedge.
---------------------------------------------------------------------------

ii. Spread Exemption
    A transaction or position may also exceed Federal position limits
if it qualifies as a ``spread transaction,'' which includes the
following common types of spreads: Intra-market spreads; inter-market
spreads; intra-commodity spreads; inter-commodity spreads; calendar
spreads; quality differential spreads; processing spreads (such as
energy ``crack'' or soybean ``crush'' spreads); product and by-product
differential spreads; and futures-options spreads.\38\
---------------------------------------------------------------------------

    \38\ The Final Rule expands the 2020 NPRM's list of exempt
spread transactions by also including intra-market spreads, inter-
market spreads, and intra-commodity spreads.
---------------------------------------------------------------------------

    Spread exemptions may be granted using the process described in
Section 7 below of this executive summary (Processes for Requesting
Bona Fide Hedge Recognitions and Spread Exemptions).
iii. Financial Distress Exemption
    This exemption allows a market participant to exceed Federal
position limits if necessary to take on the positions and associated
risk of another market participant during a potential default or
bankruptcy situation. This exemption is available on a case-by-case
basis, depending on the facts and circumstances involved.
iv. Conditional Spot Month Limit Exemption in Natural Gas
    As long as a market participant holds no physically-settled NYMEX
NG contracts, the Final Rule allows that market participant to exceed
the NYMEX NG Federal spot month position limit level of 2,000 cash-
settled referenced contracts per exchange (and an additional 2,000
equivalent-sized economically equivalent OTC swaps) by holding 10,000
cash-settled NYMEX NG referenced contracts per DCM that lists cash-
settled NYMEX NG referenced contracts, as well as an additional 10,000
equivalent-sized cash-settled economically equivalent NYMEX NG swaps.
The Final Rule clarifies that market participants may not use a spread
exemption to exceed the aforementioned conditional spot month limit for
natural gas.
7. Processes for Requesting Bona Fide Hedge Recognitions and Spread
Exemptions
i. Self-Effectuating Enumerated Bona Fide Hedges
    A position that complies with the bona fide hedging definition in
Sec.  150.1 and falls within one of the enumerated bona fide hedges is
self-effectuating for purposes of Federal position limits, provided the
market participant separately applies to the relevant exchange for an
exemption from exchange-set limits. Such market participants are no
longer required to file Form 204/304 with the Commission on a monthly
basis to demonstrate cash-market positions justifying Federal position
limit overages. Instead, the Commission will have access to cash-market
information that such market participants submit as part of their
applications to an exchange for an exemption from exchange-set limits,
typically filed on an annual basis.
ii. Bona Fide Hedges That Are Not Self-Effectuating
    The Commission may consider adding to the list of enumerated bona
fide hedges at a later time, as the Commission may find appropriate.
Until that time, all bona fide hedge positions that are not enumerated
in Appendix A to part 150 must be granted pursuant to one of the
processes for requesting a non-enumerated bona fide hedge recognition,
as explained below.
    A market participant seeking to exceed Federal position limits for
a non-enumerated bona fide hedging transaction or position is able to
choose whether to apply directly to the Commission or, alternatively,
apply indirectly to the Commission through the applicable exchange
using a new streamlined process. If applying directly to the
Commission, the market participant must also separately apply to the
relevant exchange for relief from exchange-set position limits. If
applying to an exchange using the new streamlined process, a market
participant may file an application with an exchange, generally at
least annually, which will be valid both for purposes of Federal and
exchange-set position limits.
    Under this streamlined process, if the exchange determines to grant
a non-enumerated bona fide hedge recognition for purposes of its
exchange-set position limits, the exchange must notify the Commission
and the applicant simultaneously. Then, 10 business days (or two
business days in the case of retroactive applications filed late due to
sudden or unforeseen bona fide hedging needs) after the exchange issues
such a determination, the bona fide hedge exemption may be deemed
approved for purposes of Federal position limits unless the Commission
(and not Commission staff) notifies the market participant otherwise.
That is, after the 10 (or two) business days expire, the bona fide
hedge exemption is considered approved for purposes of Federal position
limits. Under the Final Rule, once the exchange notifies the Commission
and the applicant of the exchange's determination to approve the
application, the applicant may, at its own risk, exceed Federal
position limits during the Commission's 10 business-day review period.
    If the Commission determines to deny an exemption application, the
applicant will not be subject to any Federal position limits violation,
provided the

[[Page 3247]]

person filed the application in good faith and brings the position into
compliance with the applicable Federal position limit within a
commercially reasonable amount of time, as applicable.
    The Final Rule also allows a market participant with sudden or
unforeseen hedging needs to file a request for a bona fide hedge
exemption within five business days after exceeding the Federal limit
(i.e., commonly referred to as a ``retroactive'' exemption
application). If the Commission denies such application, the market
participant will not be subject to a Federal position limit violation,
provided the market participant filed the application in good faith and
brings the position into compliance with the applicable Federal
position limit within a commercially reasonable amount of time, as
applicable.
    Among other changes, market participants are no longer required to
file Forms 204 or 304, as applicable, with the Commission on a monthly
basis to demonstrate cash-market positions justifying position limit
overages. Under the Final Rule, the Commission will instead leverage
cash-market information submitted directly to the exchanges.
iii. Spread Exemptions
    For a referenced contract on any commodity, a spread exemption is
self-effectuating for purposes of Federal position limits, provided
that (1) the position falls within one of the categories set forth in
the ``spread transaction'' definition, and (2) the market participant
separately applies to the applicable exchange for a spread exemption
from exchange-set position limits.\39\
---------------------------------------------------------------------------

    \39\ The Commission understands that certain exchanges may
distinguish between the terms ``spread,'' ``arbitrage,'' and
``straddle.'' For the purposes of the Commission's discussion and
the Final Rule in general, the Commission's use of the term
``spread'' is meant to include all of these related trading
strategies, and any Commission reference to ``spread'' rather than
``arbitrage'' or ``straddle'' is not intended to suggest a
substantive difference in meaning.
---------------------------------------------------------------------------

    A market participant with a spread position that does not fit
within the ``spread transaction'' definition with respect to any of the
commodities subject to Federal position limits may apply directly to
the Commission, and must also separately apply to the applicable
exchange.
8. Compliance Date and Effective Date
i. Summary
    The Final Rule's effective date is March 15, 2021 (the ``Effective
Date''). This means that all aspects of the Final Rule will be
effective as of the Effective Date, including the new enumerated bona
fide hedges (e.g., anticipated merchandising) as well as the higher
Federal position limits for the nine legacy agricultural contracts.
However, as discussed below, the Commission is also providing for
compliance dates that extend beyond the Effective Date in connection
with several of the Final Rule's requirements.
    The Final Rule provides market participants with a compliance date
of January 1, 2022 for purposes of compliance with the Federal position
limits for the 16 non-legacy core referenced futures contracts that are
subject to Federal position limits for the first time under this Final
Rule. This compliance date also applies to any referenced contracts
(other than economically equivalent swaps, which have a separate
compliance date as discussed further below) related to these 16 non-
legacy core referenced futures contracts.
    The Final Rule also provides exchanges with a compliance date of
January 1, 2022 for purposes of establishing exchange-set position
limits and provisions associated with exemptions therefrom, including
certain obligations to collect cash-market information from market
participants in connection with market participants' applications for
bona fide hedging exemptions to exchange-set limits, and to share the
same with the Commission, consistent with the requirements under the
Final Rule.
    Additionally, the Final Rule provides a compliance date of January
1, 2023 with respect to (i) the elimination of previously-granted risk
management exemptions,\40\ and (ii) Federal position limits for
economically equivalent swaps.
---------------------------------------------------------------------------

    \40\ As discussed above in Section 6 of this executive summary
(Legal Standards for Exemptions from Federal Position Limits), the
Commission is no longer recognizing risk management exemptions as
bona fide hedges under the Final Rule.
---------------------------------------------------------------------------

    Because the nine legacy agricultural contracts are currently
subject to Federal position limits under the existing Federal
framework, the Final Rule does not provide a compliance date for the
new Federal position limits under the Final Rule for such contracts, or
a formal phase-in period. Therefore, such limits go into effect on the
Effective Date. Thus, as of the Effective Date, market participants
will be able to avail themselves of the Federal position limits under
the Final Rule for the nine legacy agricultural contracts, all of which
are higher than the existing Federal position limits (except for CBOT
Oats, which will maintain the existing Federal position limit levels).
However, the Commission notes that exchange-set position limits will
remain at current levels unless and until the relevant exchange submits
a rule amendment pursuant to part 40 of the Commission's regulations to
amend the relevant exchange-set position limit.
    Furthermore, the Commission is delaying implementation of exchange-
set position limits on swaps since exchanges cannot view market
participants' positions in swap positions across the various places
they trade, including on competitor exchanges.\41\ However, after the
January 1, 2023 compliance date for economically equivalent swaps
(discussed above), the Commission underscores that it will enforce
Federal position limits in connection with swaps.
---------------------------------------------------------------------------

    \41\ In two years, the Commission will reevaluate the ability of
exchanges to establish and implement appropriate surveillance
mechanisms to implement DCM Core Principle 5 and SEF Core Principle
6 with respect to swaps.
---------------------------------------------------------------------------

    For convenience, the Commission is providing a table below
identifying the Final Rule's Effective Date and compliance dates for
market participants and exchanges in connection with certain
obligations.
BILLING CODE 6351-01-P

[[Page 3248]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.004


[[Page 3249]]


[GRAPHIC] [TIFF OMITTED] TR14JA21.005

BILLING CODE 6351-01-C

C. Section-by-Section Summary of Final Rule
---------------------------------------------------------------------------

    \42\As noted above, under the Final Rule the Federal position
limit levels for all of the nine legacy agricultural contracts will
increase, other than CBOT Oats. However, the Commission notes that
exchange-set position limits will remain at current levels unless
and until the relevant exchange submits a rule amendment pursuant to
part 40 of the Commission's regulations to amend the relevant
exchange-set position limit.
    \43\As discussed further in this release, the Commission will no
longer recognize risk management exemptions under the Final Rule.
However, positions that are entered into based on a market
participant's previously-granted risk management exemptions will be
subject to an extended compliance date until January 1, 2023 with
respect to Federal position limits. That is, a market participant
with a previously granted risk management exemption will have a
compliance date of January 1, 2023 with respect to the elimination
of such risk management exemption.
    \44\Form 204 (for all nine legacy agricultural contracts other
than cotton) and Parts I and II of Form 304 (for cotton) are
submitted by a market participant to the Commission under the
existing Federal position limits regulations in connection with
Federal enumerated bona fide hedges employed by the market
participants.
---------------------------------------------------------------------------

    The Commission is adopting revisions to Sec. Sec.  150.1, 150.2,
150.3, 150.5, and 150.6 and to parts 1, 15, 17, 19, 40, and 140, as
well as adding Sec. Sec.  150.8, 150.9, and Appendices A-G to part
150.\45\ Most noteworthy, the Commission is adopting the following
amendments to the foregoing rule sections, each of which, along with
all other changes in the Final Rule, is discussed in greater detail in
Section II of this release. The following summary is not intended to
provide a substantive overview of this Final Rule, but rather is
intended to provide a guide to the rule sections that address each
topic. For an overview of this Final Rule organized by topic (rather
than by section number), please see the executive summary above.
---------------------------------------------------------------------------

    \45\ The 2020 NPRM proposed to remove and reserve part 151. It
did not propose to amend current Sec.  150.4 dealing with
aggregation of positions for purposes of compliance with Federal
position limits, which was amended in 2016 in a prior rulemaking.
See Final Aggregation Rulemaking, 81 FR at 91454.
---------------------------------------------------------------------------

     The Commission finds that Federal speculative position
limits are necessary for 25 core referenced futures contracts, and for
any futures contracts and options on futures contracts linked thereto.
The Commission adopts Federal position limits on physically-settled and
linked cash-settled futures contracts, options on futures contracts,
and ``economically equivalent swaps'' for such commodities. The 25 core
referenced futures contracts include the nine ``legacy'' agricultural
contracts currently subject to Federal position limits and 16
additional non-legacy contracts, which include: Seven additional
agricultural contracts, four energy contracts, and five metals
contracts.\46\ Federal spot and non-spot

[[Page 3250]]

month limits apply to the nine ``legacy'' agricultural contracts
currently subject to Federal position limits,\47\ and only Federal
spot-month limits apply to the additional 16 non-legacy contracts.
Outside of the spot month, these 16 non-legacy contracts are subject to
exchange-set limits and/or accountability levels if listed on an
exchange.
---------------------------------------------------------------------------

    \46\ The seven additional agricultural contracts that are
subject to Federal spot month limits are: CME Live Cattle (LC), CBOT
Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), ICE FCOJ-A (OJ),
ICE Sugar No. 11 (SB), and ICE Sugar No. 16 (SF). The four energy
contracts that are subject to Federal spot month limits are: NYMEX
Light Sweet Crude Oil (CL), NYMEX New York Harbor ULSD Heating Oil
(HO), NYMEX New York Harbor RBOB Gasoline (RB), and NYMEX Henry Hub
Natural Gas (NG). The five metals contracts that are subject to
Federal spot month limits are: COMEX Gold (GC), COMEX Silver (SI),
COMEX Copper (HG), NYMEX Palladium (PA), and NYMEX Platinum (PL). As
discussed below, any contracts for which the Commission is adopting
Federal position limits only during the spot month are subject to
exchange-set limits and/or accountability levels outside of the spot
month.
    \47\ The Commission currently sets and enforces speculative
position limits with respect to certain enumerated agricultural
products. The ``enumerated'' agricultural products refer to the list
of commodities contained in the definition of ``commodity'' in CEA
section 1a; 7 U.S.C. 1a. These agricultural products consist of the
following nine currently traded contracts: CBOT Corn (and Mini-Corn)
(C), CBOT Oats (O), CBOT Soybeans (and Mini-Soybeans) (S), CBOT
Wheat (and Mini-Wheat) (W), CBOT Soybean Oil (SO), CBOT Soybean Meal
(SM), MGEX HRS Wheat (MWE), CBOT KC HRW Wheat (KW), and ICE Cotton
No. 2 (CT). See 17 CFR 150.2.
---------------------------------------------------------------------------

     Amendments to Sec.  150.1 add or revise several
definitions for use throughout part 150, including: New definitions of
the terms ``core referenced futures contract'' (pertaining to the 25
physically-settled futures contracts explicitly listed in the
regulations) and ``referenced contract'' (pertaining to futures
contracts and options on futures contracts that have certain direct
and/or indirect linkages to the core referenced futures contracts, and
to ``economically equivalent swaps'') to be used as shorthand to refer
to contracts subject to Federal position limits; an expanded ``spread
transaction'' definition; and a ``bona fide hedging transaction or
position'' definition that is broad enough to accommodate hedging
practices in a variety of contract types, including hedging practices
that may develop over time.
     Amendments to Sec.  150.2 list the 25 core referenced
futures contracts which, along with any associated referenced
contracts, are subject to Federal position limits; and specify the
Federal spot and non-spot month position limit levels. Federal spot
month position limit levels are set at or below 25 percent of estimated
deliverable supply, whereas Federal non-spot month limit levels are set
at 10% of open interest for the first 50,000 contracts of open
interest, with an incremental increase of 2.5% of open interest
thereafter.
     Amendments to Sec.  150.3 specify the types of positions
for which exemptions from Federal position limit requirements may be
granted, and set forth and/or reference the processes for requesting
such exemptions, including recognitions of bona fide hedges and
exemptions for spread positions, financial distress positions, certain
natural gas positions held during the spot month, and pre-enactment and
transition period swaps. For all contracts subject to Federal position
limits, bona fide hedge exemptions listed in Appendix A to part 150 as
an enumerated bona fide hedge are self-effectuating for purposes of
Federal position limits. For non-enumerated bona fide hedges, market
participants must submit an application either directly to the
Commission under Sec.  150.3 or indirectly through an exchange for
Federal position limit purposes under new Sec.  150.9 (discussed
below).
     Amendments to Sec.  150.5 refine the process, and
establish non-exclusive methodologies, by which exchanges may set
exchange-level limits and grant exemptions therefrom with respect to
futures and options on futures, including separate methodologies for
contracts subject to Federal position limits and physical commodity
derivatives not subject to Federal position limits.\48\ While the
Commission will oversee compliance with Federal position limits on
swaps, the Commission has also determined to delay the enforcement of
exchange-set position limits on swaps otherwise required in amended
Sec.  150.5 because exchanges cannot view market participants'
positions in swaps across the various places they trade, including on
competitor exchanges.\49\
---------------------------------------------------------------------------

    \48\ Rule Sec.  150.5 addresses exchange-set position limits and
exemptions therefrom, whereas Sec.  150.3 addresses exemptions from
Federal position limits, and Sec.  150.9 addresses a streamlined
process for recognizing non-enumerated bona fide hedges for purposes
of Federal position limits. Exchange rules typically refer to
``exemptions'' in connection with bona fide hedging and spread
positions, whereas the Commission uses the nomenclature
``recognition'' with respect to bona fide hedges, and ``exemption''
with respect to spreads.
    \49\ With respect to exchange-set position limits on swaps, in
two years the Commission will reevaluate the ability of exchanges to
establish and implement appropriate surveillance mechanisms to
implement DCM Core Principle 5 and SEF Core Principle 6.
---------------------------------------------------------------------------

     New Sec.  150.9 establishes a streamlined process for
addressing requests for bona fide hedging recognitions for purposes of
Federal position limits, and leveraging exchange expertise and
resources. This process will be used by market participants with non-
enumerated bona fide hedge positions. Under the Final Rule, market
participants can provide one application for a non-enumerated bona fide
hedge to a DCM or SEF, as applicable, and receive approval of such
request based on the same application from both the exchange for
purposes of exchange-set limits and from the Commission for purposes of
Federal position limits.
     New Appendix A to part 150 contains a list of enumerated
bona fide hedges. Positions that comply with the bona fide hedging
transaction or position definition in Sec.  150.1 and that are
enumerated in Appendix A may exceed Federal position limits to the
extent that all applicable requirements in part 150 are met. Persons
holding such positions enumerated in Appendix A may exceed Federal
position limits without being required to request prior approval under
Sec.  150.3 or Sec.  150.9. Positions that do not fall within any of
the enumerated hedges could still potentially be recognized as bona
fide hedging positions, provided the positions otherwise comply with
the proposed bona fide hedging definition and all other applicable
requirements, including the approval process under Sec.  150.3 or Sec. 
150.9.
     Amendments to part 19 and related provisions eliminate
Form 204 (and corresponding Parts I and II of Form 304 for cotton),
enabling the Commission to leverage cash-market reporting submitted
directly to the exchanges under Sec. Sec.  150.5 and 150.9. The Final
Rule maintains Part III of Form 304, related to the cotton on-call
report.

D. Effective Date and Compliance Period

    The 2020 NPRM included proposed Sec.  150.2(e), which provided that
the Federal position limit levels for the 25 core referenced futures
contracts would have a compliance date 365 days after publication of
the final position limits regulations in the Federal Register.
Additionally, proposed Sec.  150.3(c) provided that previously-granted
risk management exemptions shall not be effective after the Final
Rule's effective date.
    The Commission is removing from the Final Rule the compliance date
requirements in proposed Sec. Sec.  150.2(e) and 150.3(c) and instead
addressing the effective and compliance dates together within this
Federal Register release. The Commission is making two modifications
from the 2020 NPRM relating to the effective date and compliance period
of the Final Rule.
    First, as noted above in the executive summary, the Commission is
providing a general compliance date of January 1,

[[Page 3251]]

2022 for both market participants and exchanges. In contrast, the 2020
NPRM did not provide a specific date as the compliance date but rather
stated 365 days after publication in the Federal Register.\50\
---------------------------------------------------------------------------

    \50\ The Commission is adopting calendar dates for compliance to
provide clarity rather than the 2020 NPRM's approach of stating that
the compliance period ends 365 days after publication in the Federal
Register since the Commission believes that providing a set calendar
date provides greater clarity to market participants. Based on the
timing of the Final Rule, the Commission believes that the January
1, 2022 general compliance date will not reduce the compliance
period compared to the 2020 NPRM's approach and may provide slightly
more time prior to the commencement of the compliance period.
---------------------------------------------------------------------------

    This compliance date of January 1, 2022 applies to (i) the Federal
position limits set forth in Appendix E to part 150 for only the 16
non-legacy core referenced futures contracts that are subject to
Federal position limits for the first time under this Final Rule, and
(ii) exchange obligations under final Sec.  150.5. This compliance date
also applies to referenced contracts for any of the 16 non-legacy core
referenced futures contracts (other than economically equivalent swaps,
which have a separate compliance date as discussed immediately below).
In contrast, the 2020 NPRM's compliance date applied only to market
participants' compliance with the new Federal position limit levels.
However, as discussed below, the Final Rule does not provide a separate
compliance date for the nine legacy agricultural contracts since they
are already subject to existing Federal position limits.
    Second, the Commission is establishing a separate compliance date
of January 1, 2023 in connection with (i) economically equivalent swaps
and (ii) the elimination of previously-granted risk management
exemptions (i.e., market participants may continue to rely on their
previously-granted risk management exemptions until January 1, 2023).
As noted above, the 2020 NPRM only had a single general compliance date
and did not provide a separate compliance date for economically
equivalent swaps or related to previously-granted risk management
exemptions.
    In this section, the Commission will discuss the following related
issues: (i) Compliance with Federal position limits for the nine legacy
agricultural contracts; (ii) compliance by exchanges with Sec.  150.5
under the Final Rule and market participants' related obligation to
temporarily continue providing Forms 204/304 in connection with bona
fide hedges; (iii) exchanges' voluntary implementation of Sec.  150.9
under the Final Rule; and (iv) comments received in connection with the
compliance date proposed in the 2020 NPRM.
i. Compliance With Federal Position Limits for the Nine Legacy
Agricultural Contracts
    With respect to the nine legacy agricultural contracts, the
Commission is not providing a compliance date with respect to the spot
month and non-spot month Federal position limit levels. Accordingly,
the new Federal position limit levels under the Final Rule will become
effective on the Effective Date. The nine legacy agricultural contracts
are currently subject to Federal position limits and will continue to
be subject under the Final Rule, which, as noted above, is increasing
the Federal position limit levels for the nine legacy agricultural
contracts (other than CBOT Oats, which will maintain the existing
Federal position limit levels). The Commission has determined not to
provide a separate compliance date for the nine legacy agricultural
contracts since market participants trading in these markets already
are familiar with Federal position limits and have established the
necessary monitoring and compliance oversight processes, in connection
with these legacy contracts.
    With respect to exchange-set position limits, the Final Rule does
not require exchanges to increase their respective exchange-set
position limit levels. Rather, the Final Rule only requires that
exchange-set position limits are established at a level no higher than
the corresponding Federal position limits. As a result, in response to
the Final Rule, an exchange may: (1) Raise its exchange-set limits to
be as high as (or lower than) the corresponding Federal position limits
immediately on the Effective Date or anytime thereafter; (2) implement
a phase-in period where exchange-set position limits increase from
existing exchange-set levels over time; or (3) not increase the
exchange-set position limit levels at all, in each case as the exchange
may determine appropriate for its markets.
ii. Exchange Implementation of Sec.  150.5 and Market Participants'
Obligations To Continue Providing Forms 204 and 304, as Applicable, in
Connection With Federal Enumerated Bona Fide Hedges
    For clarity, in connection with the nine legacy agricultural
contracts, market participants may avail themselves of the new
enumerated bona fide hedges (e.g., anticipatory merchandising)
immediately upon the Effective Date (market participants will not need
to be concerned with availing themselves of bona fide hedge
recognitions for the 16 non-legacy contracts upon the Effective Date
since these contracts will have a compliance date of January 1, 2022).
To the extent that market participants seek to rely on any Federal
enumerated bona fide hedges, market participants must continue to
provide, as applicable, the Commission with Forms 204/304, which are
otherwise eliminated by the Final Rule upon the Effective Date, until
the relevant exchange that lists the applicable referenced contract
implements Sec.  150.5 under the Final Rule. As discussed below, final
Sec.  150.5 governs, among other things, exchange rules and procedures,
including (i) the exchange's collection of certain cash-market
information from market participants in connection with their bona fide
hedge applications for exchange-set limits and (ii) the exchange's
sharing of related information with the Commission. As discussed
further below, the Final Rule predicates the elimination of Forms 204/
304 on the relevant exchange's sharing of the information with the
Commission under final Sec.  150.5 (which provides for a new process
for the exchange to share data with the Commission similar to data that
the Commission previously obtained through Forms 204/304 under the
Federal framework existing prior to the Final Rule).\51\ Exchanges must
implement final Sec.  150.5 by the Final Rule's general compliance date
of January 1, 2022.
---------------------------------------------------------------------------

    \51\ For further discussion of the elimination of Form 204 and
Parts I and II of Form 304, see Section II.H.2, infra.
---------------------------------------------------------------------------

iii. Exchange Implementation of Sec.  150.9 in Connection With the
Market Participants' Applications Through Exchanges for Non-Enumerated
Bona Fide Hedges for Purposes of Federal Position Limits
    As discussed above, the Final Rule establishes a streamlined
process for market participants to apply through exchanges for non-
enumerated bona fide hedges for purposes of Federal position limits.
That is, a market participant may submit a single non-enumerated bona
fide hedge exemption application to an exchange for purposes of both
Federal and exchange-set position limits, and the Commission will
review, and make a determination based on, the application that the
market participant submitted to the exchange. For clarity, the
Commission notes that the Final Rule does not require exchanges to
participate in such process.
    However, if an exchange chooses to do so, the Commission is
clarifying, for

[[Page 3252]]

the avoidance of doubt, that the exchange may implement this
streamlined process for non-enumerated bona fide hedge applications as
soon as the Effective Date, or anytime thereafter (or not at all). In
response to certain concerns by market participants and exchanges,
discussed immediately below, the Commission believes that, to the
extent an exchange chooses to participate in this streamlined
application process, the implementation of Sec.  150.9 soon after the
Effective Date may help ensure minimal disruption to market
participants' existing trading strategies as well as avoid having the
potentially unfeasible situation of requiring the exchanges to process
a number of non-enumerated bona fide hedge applications simultaneously
at the end of the general compliance period on January 1, 2022.
Furthermore, the Commission clarifies in Section II.G.3.iii that market
participants with existing Commission-granted non-enumerated or
anticipatory bona fide hedge recognitions in connection with the nine
legacy agricultural contracts under the existing framework are not
required to reapply to the Commission for a new recognition under the
Final Rule.
iv. Comments--Compliance Period
    Generally, commenters supported the proposed compliance date,
noting that an adequate compliance period would afford sufficient time
to make necessary business adjustments (e.g., time to build compliance
systems, develop technology, train personnel, etc.).\52\ The Commission
agrees with these observations and believes that a general compliance
date of January 1, 2022, except for economically equivalent swaps and
positions based on a previously-granted risk management exemption, will
provide exchanges and market participants sufficient time to adjust
their operations and compliance and monitoring systems.
---------------------------------------------------------------------------

    \52\ CME Group at 8; FIA at 2-3; ISDA at 2, 8; Shell at 4; and
SIFMA AMG at 2, 9-10.
---------------------------------------------------------------------------

    Some commenters also requested an extended compliance date (beyond
the general compliance date) for economically equivalent swaps to
mitigate the numerous legal, operational, and compliance challenges of
implementing position limits for swaps for the first time.\53\ Unlike
exchange-listed contracts that are currently subject to either Federal
position limits or exchange-set limits, commenters noted that exchanges
do not have existing compliance and monitoring resources for
economically equivalent swaps from which to leverage. The Commission
agrees with commenters that additional time for economically equivalent
swaps is warranted, and, as discussed above, is thus delaying the
compliance date for economically equivalent swaps for an additional
year, until January 1, 2023.
---------------------------------------------------------------------------

    \53\ MFA/AIMA at 8; NCFC at 6; NGSA at 15-16; SIFMA AMG at 9-10;
and Citadel at 9-10.
---------------------------------------------------------------------------

    CME Group expressed concern that it may receive an influx of
exemption applications at the end of the compliance period, and
therefore suggested a rolling process where market participants are
grandfathered into their current exemptions, permitting them to file
for those exemptions on the same annual schedule.\54\ The Commission
believes this concern is mitigated since exchanges, at their
discretion, may implement final Sec.  150.9 as soon as the Effective
Date, which will allow exchanges to review non-enumerated bona fide
hedge applications on a rolling basis between the Effective Date and
the end of the compliance period rather than having to process a large
number of applications at once. Furthermore, as noted above, market
participants with existing Commission-granted non-enumerated or
anticipatory bona fide hedge recognitions are not required to reapply
to the Commission for a new recognition under the Final Rule.
---------------------------------------------------------------------------

    \54\ CME Group at 8.
---------------------------------------------------------------------------

E. The Commission Construes CEA Section 4a(a) To Require the Commission
To Make a Necessity Finding Before Establishing Position Limits for
Physical Commodities Other Than Excluded Commodities

    The Commission is required by ISDA to determine whether CEA section
4a(a)(2)(A) requires the Commission to find, before establishing a
position limit, that such limit is ``necessary.'' \55\ The provision
states in relevant part that ``the Commission shall'' establish
position limits ``as appropriate'' for futures contracts in physical
commodities other than excluded commodities ``[i]n accordance with the
standards set forth in'' the preexisting section 4a(a)(1).\56\ That
preexisting provision requires the Commission to establish position
limits as it ``finds are necessary to diminish, eliminate, or prevent''
certain enumerated burdens on interstate commerce.\57\ In the 2011
Final Rulemaking, the Commission interpreted this language as an
unambiguous mandate to establish position limits without first finding
that such limits are necessary, but with discretion to determine the
``appropriate'' levels for each.\58\ In ISDA, the U.S. District Court
for the District of Columbia disagreed and held that section
4a(a)(2)(A) is ambiguous as to whether the ``standards set forth in
paragraph (1)'' include the requirement of an antecedent finding that a
position limit is necessary.\59\ The court vacated the 2011 Final
Rulemaking and directed the Commission to apply its experience and
expertise to resolve that ambiguity.\60\ The Commission has done so and
determines that section 4a(a)(2)(A) should be interpreted to require
that before establishing position limits, the Commission must determine
that limits are necessary.\61\ A full legal analysis is set forth infra
at Sections III.C.-E.
---------------------------------------------------------------------------

    \55\ ISDA, 887 F.Supp.2d at 281.
    \56\ 7 U.S.C. 6a(a)(2)(A).
    \57\ 7 U.S.C. 6a(a)(1).
    \58\ 76 FR at 71626, 71627.
    \59\ ISDA, 887 F.Supp.2d at 279-280.
    \60\ Id. at 281.
    \61\ See infra Section III.B.
---------------------------------------------------------------------------

    The Commission finds that position limits are necessary for the 25
core referenced futures contracts, including certain commodity
derivative contracts that are directly or indirectly linked to a core
referenced futures contract. The Commission's finding with respect to
the 25 core referenced futures contracts is based on two interrelated
factors: The particular importance of the 25 core referenced futures
contracts to their respective underlying cash markets, including that
they require physical delivery of the underlying commodity, and, the
commodities' particular importance to the national economy. Separately,
the Commission finds that position limits are necessary during the spot
month for all 25 core referenced futures contracts and outside of the
spot month only for the nine legacy agricultural commodity contracts
(in each instance including certain commodity derivative contracts that
are directly or indirectly linked to a core referenced futures
contract). A full discussion of the necessity findings is set forth
infra at Sections III.C.-E.

F. The Commission's Use of Certain Terminology

    The Commission is aware that this Final Rule will likely be
reviewed by a diverse range of members of the public from varied
backgrounds and industries and with different levels of knowledge and
experience with derivatives markets. Furthermore, even among
experienced market participants, terminology may differ by industry,
commodity, or exchange. The Commission also recognizes that certain

[[Page 3253]]

terms commonly referenced by market participants may differ from the
technical legal terms used in the Commission's regulations and/or the
CEA.
    Accordingly, unless otherwise noted, the Commission will attempt to
use terms and phrases in their ordinary, plain English sense. When
required, the Commission will explicitly identify technical or nuanced
legal/regulatory or industry ``terms of art.'' The Commission wishes to
briefly review certain terms and phrases used throughout this release
below, as follows:
     Bona fide hedges. The CEA uses the legal term ``bona fide
hedging transaction or position'' in both the singular and plural. The
Commission currently defines the term in existing Sec.  1.3 in the
plural as ``bona fide hedging transactions or positions'' while the
Final Rule now incorporates the singular ``bona fide hedging
transaction or position.'' The Commission understands that most market
participants simply refer to ``bona fide hedge(s)'' (in both the
singular and the plural). Accordingly, for short hand throughout this
release, the Commission may refer to ``bona fide hedges,'' ``bona fide
hedge positions,'' ``bona fide hedge transactions,'' ``bona fide
hedges,'' ``bona fide hedging positions,'' and similar phrasing.
    These terms are meant to apply as short hand and are not intended
to imply a substantive difference either with the defined legal term
``bona fide hedging transaction or position'' or with one another.
    Similarly, the plural term in the existing Commission regulations
and the singular in the Final Rule, as discussed below, are not
intended to reflect a substantive difference.
     Federal position limits. The Final Rule creates a new
defined term, ``speculative position limit,'' in part 150 of the
Commission's regulations to refer to the maximum position, net long or
net short, that a market participant may maintain in a referenced
contract. Throughout this release, the Commission will use as a general
term either ``position limits'' or ``Federal position limits'' to refer
to the general Federal position limits framework and related
regulations, including the defined term ``speculative position limit.''
When discussing the individual ``speculative position limit'' levels
for each commodity derivative contract, as opposed to the Final Rule's
general Federal regulatory framework, the Commission instead may refer
to the ``Federal position limit levels,'' although all these phrases
are intended to refer to the same general concept. The Commission may
also specifically refer to exchange-set position limits when referring
to the general framework, process, or specific position limit levels
established by the respective exchanges.
     Exchanges. This Final Rule applies to both DCMs and SEFs.
Unless otherwise distinguished, the Commission will refer to
``exchanges'' throughout this release to refer to any relevant DCM or
SEF.
     Cash-Settled and Physically-Settled. The Commission
throughout this release refers to ``cash-settled'' and ``physically-
settled'' commodity derivative contracts.
    When a futures contract expires, all open futures contract
positions in such contract are settled by either: (1) Physical
delivery, which the Commission refers to as a ``physically-settled''
contract, or (2) cash settlement, which the Commission refers to as a
``cash-settled'' contract, in each case depending on the contract terms
set by the exchange. Deliveries on ``physically-settled'' futures
contracts are made through the exchange's clearinghouse, and the
delivery of the physical commodity must be consummated between the
buyer and seller per the exchange rules and contract specifications. On
the other hand, other futures contracts are ``cash-settled'' because
they do not involve the transfer of physical commodity ownership and
require that all open positions at expiration be settled by a transfer
of cash to or from the clearinghouse based upon the final settlement
price of the contracts.
    The Commission further notes that some market participants may
instead use the terms ``physical-delivery'' contracts or ``financially-
settled'' contracts instead of the Commission's terms ``physically-
settled'' contracts and ``cash-settled'' contracts, respectively. The
Commission does not intend a substantive difference in meaning with the
choice of its terms.
     Spread Positions. The Commission views its use of the term
``spread'' to mean the same as ``arbitrage'' or ``straddle'' as those
terms are used in CEA section 4a(a) and existing Sec.  150.3(a)(3) of
the Commission's regulations. Consistent with existing regulations, the
Commission's sole use of the term ``spread'' in this Final Rule is
intended to also capture arbitrage or straddle strategies referred to
in CEA section 4a(a) and existing Sec.  150.3(a)(3), and referring to
``spread'' rather than ``arbitrage'' or ``straddle'' is not intended to
be a substantive difference. The Commission notes that certain
exchanges may distinguish between ``spread'' and ``arbitrage''
positions for purposes of exchange exemptions, but the Commission does
not make that distinction here for purposes of its ``spread
transaction'' definition as used in this release.
     Unfixed Price Forward Transactions. Throughout this
release, the Commission will use as general terms either ``unfixed
price forward transactions,'' ``unfixed price transactions,'' ``unfixed
price forward contracts,'' and/or ``unfixed price contracts'' to refer
to transactions that are either purchases or sales of a cash commodity
where the purchase or sales price, as applicable, is determined based
on the settlement price of a benchmark, such as the settlement price of
a commodity derivative contract on a certain date (e.g., the price on
the settlement date of a core referenced futures contract) or other
index price (e.g., a spot index price). Market participants may also
refer to unfixed price transactions as ``floating price'' transactions,
and the Commission does not intend a substantive difference in meaning
with the choice of these terms.

G. Recent Volatility in the WTI Contract

    Several commenters noted the volatility in the NYMEX Light Sweet
Crude Oil (CL) contract, also known as the West Texas Intermediate
crude oil contract (``WTI contract''), that occurred in April 2020
(subsequent to the issuance of the 2020 NPRM) in their comments to the
2020 NPRM. Some commenters suggested that the volatility may have been
caused, in part, by excessive speculation \62\ or highly leveraged
traders,\63\ or both. Better Markets suggested that a combination of
passive exchange-traded funds,\64\ the use of trading-at-settlement
(``TAS'') orders,\65\ automated trading,\66\ and, according to Better
Markets, a lack of ``meaningful position limits,'' \67\ may have
contributed to the volatility. Other commenters suggested that this
event could have been mitigated through additional liquidity provided
by financial end users during the critical

[[Page 3254]]

time period, among other measures.\68\ Commenters also pointed to the
event to bolster arguments for and against Commission deference to
exchanges in implementing position limits.\69\ A few commenters
requested that the Commission refrain from finalizing the rule until it
better understands this event and other issues.\70\
---------------------------------------------------------------------------

    \62\ PMAA at 2.
    \63\ NEFI at 3-4.
    \64\ Better Markets at 9.
    \65\ Better Markets at 13. A TAS order is an order that is
placed during the trading session but is executed at the settlement
price (or with a small price range around the settlement price).
Trading at Settlement (TAS), https://www.cmegroup.com/trading/trading-at-settlement.html (last visited Aug. 29, 2020); TRADE AT
SETTLEMENT (TAS) FREQUENTLY ASKED QUESTIONS July 2020, https://www.theice.com/publicdocs/futures_us/TAS_FAQ.pdf (last visited Aug.
29, 2020).
    \66\ Better Markets at 14-17.
    \67\ Better Markets at 10.
    \68\ AQR at 5-7 (``The inability of position limits themselves
to eliminate the unpredictability of commodity futures markets
highlights the importance of existing Commission and exchange
oversight of these markets and the dangers of overreliance on a
single regulatory tool to address market dynamics for which it may
not have been designed . . . [W]e encourage the Commission to
consider not only concerns around potential manipulation, but also
the potential unintended consequences of such limits and the need
for liquidity during sensitive time periods for commodity futures
markets.''); SCM at 2-3 (``This liquidity, provided by financial
trading firms and hedge funds . . ., is essential to balance, check
and smooth the otherwise uncontrollable trading that can occur when
only commercial firms and unsophisticated trading participants are
active in a market.'').
    \69\ IATP suggested that the event demonstrates the problems of
Commission deference to DCMs' ``experience and capacity'' on many of
the provisions in the 2020 NPRM. See IATP at 18. Conversely, SEMI
stated that a final rule should not be overly restrictive in
response to the recent market conditions in WTI oil markets, given
that it is the exchanges that ``have the expertise, experience and
existing tools to effectively manage the orderly expiration of
futures contracts that are in the spot month under such
circumstances.'' SEMI at 13.
    \70\ AFR at 3; Rutkowski at 2; IATP at 2-3.
---------------------------------------------------------------------------

    The Commission has been closely examining the circumstances
surrounding the volatility in the WTI contract since it occurred in
April 2020. The Commission will continue to analyze the events of April
2020 to evaluate whether any changes to the position limits regulations
may be warranted in light of the circumstances surrounding the
volatility in the WTI contract. Any proposed changes that the
Commission finds may be warranted would be subject to public comment
pursuant to the requirements of the Administrative Procedure Act.

H. Brief Summary of Comments Received

    As stated previously, the Commission received approximately 75
relevant comment letters in response to the 2020 NPRM.\71\ Though
several commenters did not support the Commission adopting the 2020
NPRM and requested its withdrawal,\72\ most of the 75 comments received
generally supported the 2020 NPRM, or supported specific elements of
the 2020 NPRM. However, many of these commenters suggested
modifications to portions of the 2020 NPRM, which are discussed in the
relevant sections discussing the Final Rule below. In addition, several
commenters requested Commission action beyond the scope of the 2020
NPRM, also discussed in the relevant sections below.
---------------------------------------------------------------------------

    \71\ See supra, n.16.
    \72\ E.g. AFR; Better Markets; IATP; Eric Matsen; NEFI; Public
Citizen; Robert Rutkowski; SCM; and VLM.
---------------------------------------------------------------------------

II. Final Rule

A. Sec.  150.1--Definitions

    Definitions relevant to the existing position limits regime
currently appear in both Sec. Sec.  1.3 and 150.1 of the Commission's
regulations.\73\ The Commission proposed to update and supplement the
definitions in Sec.  150.1, including moving a revised definition of
``bona fide hedging transactions and positions'' from Sec.  1.3 into
Sec.  150.1. The proposed changes were intended, among other things, to
conform the definitions to certain of the Dodd-Frank Act amendments to
the CEA.\74\ Each proposed defined term is discussed in alphabetical
order below.
---------------------------------------------------------------------------

    \73\ 17 CFR 1.3 and 150.1, respectively.
    \74\ In addition to the amendments described below, the
Commission proposed to re-order the defined terms so that they
appear in alphabetical order, rather than in a lettered list, so
that terms can be more quickly located. Moving forward, any new
defined terms would be inserted in alphabetical order, as
recommended by the Office of the Federal Register. See Document
Drafting Handbook, Office of the Federal Register, National Archives
and Records Administration, 2-31 (Revision 5, Oct. 2, 2017)
(stating, ``[i]n sections or paragraphs containing only definitions,
we recommend that you do not use paragraph designations if you list
the terms in alphabetical order. Begin the definition paragraph with
the term that you are defining.'').
---------------------------------------------------------------------------

1. ``Bona Fide Hedging Transaction or Position''
i. Background--Bona Fide Hedging Transaction or Position
    Under CEA section 4a(c)(1), position limits shall not apply to
transactions or positions that are shown to be bona fide hedging
transactions or positions, as such terms shall be defined by the
Commission.\75\ The Dodd-Frank Act directed the Commission, for
purposes of implementing CEA section 4a(a)(2), to adopt a bona fide
hedging definition consistent with CEA section 4a(c)(2).\76\ The
existing definition of ``bona fide hedging transactions and
positions,'' which first appeared in Sec.  1.3 of the Commission's
regulations in the 1970s,\77\ is inconsistent, in certain ways
described below, with the revised statutory definition in CEA section
4a(c)(2).
---------------------------------------------------------------------------

    \75\ 7 U.S.C. 6a(c)(1).
    \76\ 7 U.S.C. 6a(c)(2).
    \77\ See, e.g., Definition of Bona Fide Hedging and Related
Reporting Requirements, 42 FR 42748 (Aug. 24, 1977). Previously, the
Secretary of Agriculture, pursuant to section 404 of the Commodity
Futures Trading Commission Act of 1974 (Pub. L. 93-463), promulgated
a definition of bona fide hedging transactions and positions.
Hedging Definition, Reports, and Conforming Amendments, 40 FR 11560
(Mar. 12, 1975). That definition, largely reflecting the statutory
definition previously in effect, remained in effect until the newly-
established Commission defined that term. Id.
---------------------------------------------------------------------------

    Accordingly, and for the reasons outlined below, the Commission
proposed to remove the existing bona fide hedging definition from Sec. 
1.3 and replace it with a revised bona fide hedging definition that
would appear alongside all of the other position limits related
definitions in proposed Sec.  150.1.\78\ This definition would be
applied in determining whether a position in a commodity derivative
contract is a bona fide hedge that may exceed Federal position limits
set forth in Sec.  150.2.
---------------------------------------------------------------------------

    \78\ In a 2018 rulemaking, the Commission amended Sec.  1.3 to
replace the sub-paragraphs that had for years been identified with
an alphabetic designation for each defined term with an alphabetized
list. See Definitions, 83 FR 7979 (Feb. 23, 2018). The bona fide
hedging definition, therefore, is now a paragraph, located in
alphabetical order, in Sec.  1.3, rather than in Sec.  1.3(z).
Accordingly, for purposes of clarity and ease of discussion, when
discussing the Commission's existing version of the bona fide
hedging definition, this release will refer to the bona fide hedging
definition in Sec.  1.3.
    Further, the version of Sec.  1.3 that appears in the Code of
Federal Regulations applies only to excluded commodities and is not
the version of the bona fide hedging definition currently in effect.
The version currently in effect, the substance of which remains as
it was amended in 1987, applies to all commodities, not just to
excluded commodities. See Revision of Federal Speculative Position
Limits, 52 FR 38914 (Oct. 20, 1987). While the 2011 Final Rulemaking
amended the Sec.  1.3 bona fide hedging definition to apply only to
excluded commodities, that rulemaking was vacated, as noted
previously, by a September 28, 2012 order of the U.S. District Court
for the District of Columbia, with the exception of the rule's
amendments to 17 CFR 150.2. Although the 2011 Final Rulemaking was
vacated, the 2011 version of the bona fide hedging definition in
Sec.  1.3, which applied only to excluded commodities, has not yet
been formally removed from the Code of Federal Regulations. The
currently-in-effect version of the Commission's bona fide hedging
definition thus does not currently appear in the Code of Federal
Regulations. The closest to a ``current'' version of the definition
is the 2010 version of Sec.  1.3, which, while substantively
current, still includes the ``(z)'' denomination that was removed in
2018. The Commission proposed to address the need to formally remove
the incorrect version of the bona fide hedging definition as part of
the 2020 NPRM.
---------------------------------------------------------------------------

    This section of the release discusses the bona fide hedging
definition and the substantive standards for bona fide hedges. The
process for granting bona fide hedge recognitions is discussed later in
this release in connection with Sec. Sec.  150.3 and 150.9.\79\
---------------------------------------------------------------------------

    \79\ See infra Section II.C. (discussing Sec.  150.3) and
Section II.G. (discussing Sec.  150.9).
---------------------------------------------------------------------------

    The discussion in this section is organized as follows:
    i. This background section discussion;

[[Page 3255]]

    ii. An overview of the existing ``general'' elements of the bona
fide hedging definition and the specific ``enumerated'' bona fide
hedges listed in the existing bona fide hedge definition;
    iii. A discussion of each of the elements of the existing
``general'' bona fide hedging definition, including the (a) temporary
substitute test (and the related elimination of the risk management
exemption), (b) economically appropriate test, (c) change in value
requirement, (d) incidental test, and (e) orderly trading requirement;
    iv. The treatment of unfixed-price transactions under the Final
Rule;
    v. A discussion of each enumerated bona fide hedge in the Final
Rule;
    vi. A discussion of the elimination of the Five-Day Rule;
    vii. A discussion of the guidance on measuring risk (i.e., gross
versus net hedging);
    viii. A discussion of the Final Rule's implementation of the CEA's
statutory pass-through swap and pass-through swap offset provisions;
and
    ix. A discussion of the form, location, and organization of the
enumerated bona fide hedges.
ii. Overview of the Commission's Existing Bona Fide Hedging Definition
in Sec.  1.3
    Paragraph (1) of the existing bona fide hedging definition in
Commission regulation Sec.  1.3 contains what is currently labeled the
``general definition'' of bona fide hedging. This ``general'' bona fide
hedging definition comprises five key elements which require that in
order for a position to be deemed a bona fide hedge for Federal
position limits, the position must:
     ``normally'' represent a substitute for transactions to be
made or positions to be taken at a later time in a physical marketing
channel (``temporary substitute test'');
     be economically appropriate to the reduction of risks in
the conduct and management of a commercial enterprise (``economically
appropriate test'');
     arise from the potential change in value of (1) assets
which a person owns, produces, manufactures, processes, or merchandises
or anticipates owning, producing, manufacturing, processing, or
merchandising, (2) liabilities which a person owns or anticipates
incurring, or (3) services which a person provides, purchases, or
anticipates providing or purchasing (``change in value requirement'');
     have a purpose to offset price risks incidental to
commercial cash or spot operations (``incidental test''); and
     be established and liquidated in an orderly manner
(``orderly trading requirement'').\80\
---------------------------------------------------------------------------

    \80\ 17 CFR 1.3.
---------------------------------------------------------------------------

    As discussed more fully below, the Dodd-Frank Act's amendments to
the CEA included the first three factors in the amended CEA, but did
not include the last two factors.
    Additionally, paragraph (2) of the bona fide hedging definition in
existing Sec.  1.3 currently sets forth a non-exclusive list of seven
total enumerated bona fide hedges, contained in four general bona fide
hedging transaction categories, that comply with the general bona fide
hedging definition in paragraph (1). These bona fide hedge categories
that are explicitly listed in existing Sec.  1.3's bona fide hedging
definition are generally referred to as the ``enumerated'' bona fide
hedges, a term the Commission uses throughout in this release. Market
participants thus need not seek approval from the Commission of such
positions as bona fide hedges prior to exceeding limits for such
positions. Rather, market participants must simply report any such
positions on the monthly Form 204 (or Form 304 for cotton), as required
by part 19 of the Commission's existing regulations.\81\
---------------------------------------------------------------------------

    \81\ 17 CFR part 19.
---------------------------------------------------------------------------

    The seven existing enumerated hedges fall into the following four
categories: (1) Sales of futures contracts to hedge (i) ownership or
fixed-price cash commodity purchases and (ii) unsold anticipated
production; (2) purchases of futures contracts to hedge (i) fixed-price
cash commodity sales of the same commodity, (ii) fixed-price sales of
the cash commodity's cash products and by-products, and (iii) unfilled
anticipated requirements; (3) offsetting sales and purchases of futures
contracts to hedge offsetting unfixed-price cash commodity sales and
purchases; and (4) cross-commodity hedges.\82\
---------------------------------------------------------------------------

    \82\ 17 CFR 1.3.
---------------------------------------------------------------------------

    As discussed further below, market participants may not use either
the existing enumerated bona fide hedges for unsold anticipated
production or unfilled anticipated requirements to hedge more than
twelve-months' unsold production or unfilled requirements, respectively
(the ``twelve-month restriction''). Further, the existing enumerated
bona fide hedges for unsold production and for offsetting sales and
purchases of unfixed price transactions do not apply during the five
last trading days. Similarly, the existing enumerated bona fide hedge
for unfilled anticipated requirements has a modified version of the
Five-Day Rule and provides that during the ``five last trading days'' a
market participant may not maintain a position that exceeds the market
participant's unfilled anticipated requirement for ``that month and for
the next succeeding month.''
    Paragraph (3) of the current bona fide hedging definition states
that the Commission may recognize ``non-enumerated'' bona fide hedging
transactions and positions pursuant to a specific request by a market
participant using the process described in Sec.  1.47 of the
Commission's regulations.\83\
---------------------------------------------------------------------------

    \83\ Id.
---------------------------------------------------------------------------

iii. Amended Bona Fide Hedge Definition for Physical Commodities in
Sec.  150.1; ``General'' Elements of the Bona Fide Hedge Definition
Under the Final Rule
    The Commission is adopting the proposed general elements currently
found in the bona fide hedging definition in Sec.  1.3 that conform to
the revised statutory bona fide hedging definition in CEA section
4a(c)(2), as amended by the Dodd-Frank Act, and is eliminating the
general elements that do not conform.\84\ In particular, the Commission
is adopting updated versions of the temporary substitute test,
economically appropriate test, and change in value requirements that
are described below, and eliminating the incidental test and orderly
trading requirement, which are not included in the revised statutory
text. Each of these changes is discussed in more detail below.\85\
---------------------------------------------------------------------------

    \84\ The Commission is also making a non-substantive change to
the introductory language of Sec.  150.3 by referring in the proviso
to ``such person's transactions or positions.'' The Commission views
this as a clarifying edit, and does not intend a substantive
difference in meaning with the choice of these terms.
    \85\ Bona fide hedge recognition is determined based on the
particular circumstances of a position or transaction and is not
conferred on the basis of the involved market participant alone.
Accordingly, while a particular position may qualify as a bona fide
hedge for a given market participant, another position held by that
same participant may not. Similarly, if a participant holds
positions that are recognized as bona fide hedges, and holds other
positions that are speculative, only the speculative positions would
be subject to position limits.
---------------------------------------------------------------------------

a. Temporary Substitute Test
(1) Background--Temporary Substitute Test
    The language of the temporary substitute test in the Commission's
existing bona fide hedging definition is inconsistent with the language
of the temporary substitute test that appears in the CEA, as amended by
the Dodd-Frank Act. Specifically, the Commission's existing regulatory
definition currently provides that a bona fide hedging

[[Page 3256]]

position normally represents a substitute for transactions to be made
or positions to be taken at a later time in a physical marketing
channel.\86\ Prior to the enactment of the Dodd-Frank Act, the
temporary substitute test in section 4a(c)(2)(A)(i) of the CEA also
contained the word ``normally,'' so that the Commission's existing bona
fide hedging definition mirrored the previous section 4a(c)(2)(A)(i) of
the CEA prior to the Dodd-Frank Act. The word ``normally'' acted as a
qualifier for the instances in which a position must be a temporary
substitute for transactions or positions made at a later time in a
physical marketing channel. However, the Dodd-Frank Act removed that
qualifier by deleting the word ``normally'' from the temporary
substitute test in CEA section 4a(c)(2)(A)(i).\87\
---------------------------------------------------------------------------

    \86\ 17 CFR 1.3. As noted earlier in this release, the
currently-in-effect version of the Commission's bona fide hedging
definition does not currently appear in the current Code of Federal
Regulations. The closest to a ``current'' version of the definition
is the 2010 version of Sec.  1.3, which, while substantively
current, still includes the ``(z)'' denomination that was removed in
2018. The Commission proposed to address the need to formally remove
the incorrect version of the bona fide hedging definition as part of
the 2020 NPRM. See supra n.74.
    \87\ 7 U.S.C. 6a(c)(2)(A)(i).
---------------------------------------------------------------------------

    In a 1987 interpretation, the Commission stated that, among other
things, the inclusion of the word ``normally'' in connection with the
pre-Dodd-Frank-Act version of the temporary substitute language
indicated that the bona fide hedging definition should not be construed
to apply only to firms using futures to reduce their exposures to risks
in the cash market.\88\ Instead, the 1987 interpretation took the view
that to qualify as a bona fide hedge, a transaction in the futures
market did not necessarily need to be a temporary substitute for a
later transaction in the cash market.\89\ In other words, that
interpretation took the view that a futures position could still
qualify as a bona fide hedging position even if it was not in
connection with the production, sale, or use of a physical commodity.
---------------------------------------------------------------------------

    \88\ See Clarification of Certain Aspects of the Hedging
Definition, 52 FR 27195, 27196 (July 20, 1987).
    \89\ Id.
---------------------------------------------------------------------------

    Commission staff has previously granted so-called ``risk management
exemptions'' on such grounds. In connection with physical commodities,
the phrase ``risk management exemption'' has historically been used by
Commission staff to refer to non-enumerated bona fide hedge
recognitions granted under Sec.  1.47 to allow swap dealers and others
to hold agricultural futures positions in excess of Federal position
limits in order to offset their positions in commodity index swaps or
related exposure.\90\ Risk management exemptions were granted outside
of the spot month, and the related swap exposure that was being offset
(i.e., hedged by the futures or options position entered into based on
the risk management exemption) was typically opposite an institutional
investor for which the swap was not a bona fide hedge.
---------------------------------------------------------------------------

    \90\ As described below, due to differences in statutory
language, the phrase ``risk management exemption'' often has a
broader meaning in connection with excluded commodities than with
physical commodities. See infra Section II.A.1.x. (discussing
proposed pass-through language).
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Temporary Substitute Test
    As described above, the Dodd-Frank Act clearly and unambiguously
removed the word ``normally'' from the temporary substitute test in CEA
section 4a(c)(2)(A)(i), as amended by the Dodd-Frank Act. As such, in
the 2020 NPRM, the Commission interpreted the Dodd-Frank Act's removal
of the word ``normally'' as reflecting Congressional statutory
direction that a bona fide hedging position in physical commodities
must always (and not just ``normally'') be in connection with the
production, sale, or use of a physical cash-market commodity.\91\ The
Commission interpreted this change to signal that the Commission should
cease to recognize ``risk management'' positions as bona fide hedges
for physical commodities, unless the positions satisfy the pass-through
swap/swap offset requirements in section 4a(c)(2)(B) of the CEA,
further discussed below.\92\
---------------------------------------------------------------------------

    \91\ 85 FR at 11596.
    \92\ 7 U.S.C. 6a(c)(2)(B).
---------------------------------------------------------------------------

    In order to implement that statutory change, the Commission: (1)
Proposed a narrower bona fide hedging definition for physical
commodities in proposed Sec.  150.1 that did not include the word
``normally'' currently found in the temporary substitute regulatory
language in paragraph (1) of the existing Sec.  1.3 bona fide hedging
definition; and (2) proposed to eliminate all previously-granted risk
management exemptions that did not otherwise qualify for pass-through
treatment.\93\ Under the 2020 NPRM, any such previously-granted risk
management exemption would generally no longer apply 365 days after
publication of final position limits rules in the Federal Register.\94\
---------------------------------------------------------------------------

    \93\ See final Sec.  150.3(c). See also infra Section
II.A.1.x.b. (discussing proposed pass-through language). Excluded
commodities, as described in further detail below, are not subject
to the statutory bona fide hedging definition. Accordingly, the
statutory restrictions on risk management exemptions that apply to
physical commodities subject to Federal position limits do not apply
to excluded commodities.
    \94\ See infra Section II.A.1.iii.a(5) (discussing of revoking
existing risk management exemptions).
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Temporary Substitute Test
    As proposed, the Final Rule eliminates the word ``normally'' from
the Commission's temporary substitute test and eliminates the risk
management exemption for contracts subject to Federal position limits.
However, as described below, the Final Rule is extending the compliance
date for existing risk management exemption holders.
(4) Comments--Temporary Substitute Test
    Commenters were divided regarding the proposed elimination of the
risk management exemptions. Some public interest groups and the
agricultural industry supported the proposed removal of the word
``normally'' and/or the accompanying rescission of risk management
exemptions.\95\ These commenters argued that risk management positions
are harmful to the market and can adversely impact price dynamics.\96\
---------------------------------------------------------------------------

    \95\ AMCOT at 1; Ecom at 1; White Gold at 1-2; Walcot at 2; East
Cotton at 2; CMC at 11 (stating that the increased limits and
allowances for pass-through exemptions will limit any potential loss
of liquidity); NCFC at 7 (noting that it supports the elimination in
light of the increased limits); NGFA at 3; LDC at 2; PMAA at 4; ACSA
at 2, 4; IMC at 2; Mallory at 1; McMeekin at 1-2; Memtex at 2;
Omnicotton at 2; NCC at 1; S Canale Cotton at 2; Texas Cotton at 2;
SW Ag at 2; Jess Smith at 2; Choice Cotton at 1; Olam at 1-2; Better
Markets at 4, 51-54 (agreeing with the proposed interpretation that
the Dodd-Frank Act requires the change and stating that the
elimination of the risk management exemption may mean very little in
light of the increased limits); ACA at 2; Moody Compress at 2; Toyo
at 2; and DECA at 1.
    \96\ See, e.g., Mallory Alexander at 1; DECA at 1; Ecom at 2;
Southern Cotton at 2; Canale Cotton at 2; ACA at 2; IMC at 2; Olam
at 1-2; Moody Compress at 1; SW Ag at 2; East Cotton at 2; Toyo at
2; Jess Smith at 2; McMeekin at 1-2; Omnicotton at 2; Texas Cotton
at 2; Walcot at 2; White Gold at 1-2; and PMAA at 3-4 (arguing that
risk management positions have the potential to create significant
volatility); Better Markets at 9, 17 (noting the distortive effects
of risk management positions).
---------------------------------------------------------------------------

    Commenters from the financial industry, ICE, and MGEX opposed the
proposed removal of ``normally'' and/or the proposed elimination of the
risk management exemption.\97\ These commenters contended that the
elimination of the risk management

[[Page 3257]]

exemption will harm the market, including by reducing liquidity,\98\
and that even though Congress removed ``normally'' from the statute,
Congress did not use the term ``always.'' \99\ One commenter opposed to
the ban claimed that the European Commission is considering revising
MiFID II \100\ to address a ``failure to include an appropriate hedge
exemption for financial risks.'' \101\
---------------------------------------------------------------------------

    \97\ ICE at 5-8 (noting that risk management positions are non-
speculative and arguing that the pass-through provision is not an
adequate substitute for such positions); FIA at 10, 21-24; ISDA at
6; PIMCO at 5-6; SIFMA AMG at 8; MGEX at 2.
    \98\ FIA at 23-24 (contending that the 2020 NPRM may harm
pension funds and create a bifurcated liquidity pool since dealers
may need to move their hedges from physically-settled to
financially-settled contracts earlier than they would otherwise);
ISDA at 6, 11; PIMCO at 5-6; and ICE at 5-6.
    \99\ ISDA at 6; FIA at 21-22; and ICE at 5, 8.
    \100\ According to the European Securities and Market Authority,
``MiFID is the Markets in Financial Instruments Directive (2004/39/
EC). It has been applicable across the European Union since November
2007. It is a cornerstone of the EU's regulation of financial
markets seeking to improve their competitiveness by creating a
single market for investment services and activities and to ensure a
high degree of harmonised protection for investors in financial
instruments.'' MiFID sets out: conduct of business and
organisational requirements for investment firms; authorisation
requirements for regulated markets; regulatory reporting to avoid
market abuse; trade transparency obligation for shares; and rules on
the admission of financial instruments to trading.''
    ``On 20 October 2011, the European Commission adopted a
legislative proposal for the revision of MiFID which took the form
of a revised Directive and a new Regulation. After more than two
years of debate, the Directive on Markets in Financial Instruments
repealing Directive 2004/39/EC and the Regulation on Markets in
Financial Instruments, commonly referred to as MiFID II and MiFIR,
were adopted by the European Parliament and the Council of the
European Union. They were published in the EU Official Journal on 12
June 2014.'' European Securities and Market Authority website at
https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir.
    \101\ SIFMA AMG at 8.
---------------------------------------------------------------------------

    Finally, several commenters noted that even if the Commission
finalizes the ban as proposed, the Commission should: (i) Revoke the
exemptions gradually so as to avoid disruption; \102\ (ii) clarify that
the Commission maintains the authority under CEA section 4a(a)(7) to
grant risk management exemptions in the future; \103\ and (iii) allow
exchanges to grant risk management exemptions.\104\
---------------------------------------------------------------------------

    \102\ ISDA at 7.
    \103\ ICE at 6; FIA at 3, 22, 24; ISDA at 6-7; and IECA at 12.
    \104\ FIA at 3, 22; ISDA at 6-7; and ICE at 5-6.
---------------------------------------------------------------------------

(5) Discussion of Final Rule--Temporary Substitute Test
    The Commission is eliminating the word ``normally'' from the
Commission's temporary substitute test and eliminating the existing
risk management exemption for contracts subject to Federal position
limits as proposed. However, as described below, the Commission is
extending the compliance date by which positions based on existing risk
management exemptions must be reduced to levels that comply with the
applicable Federal position limits. While the Commission appreciates
commenter concerns regarding the elimination of the risk management
exemption, the Commission interprets the Dodd-Frank Act's removal of
the word ``normally'' from the CEA's statutory temporary substitute
test as signaling Congressional intent to reverse the flexibility
afforded by the presence of the word ``normally'' prior to the Dodd-
Frank Act. As such, even were the Commission inclined to retain the
status quo of risk management exemptions, the Commission's statutory
interpretation prevents it from doing so.
    Further, retaining such exemptions for swap intermediaries, without
regard to the purpose of their counterparties' swaps, would not only be
inconsistent with the post-Dodd-Frank Act version of the temporary
substitute test, but would also be inconsistent with the statutory
restrictions on pass-through swap offsets. In particular, the statutory
pass-through provision requires that the swap position being offset
qualify as a bona fide hedging position.\105\ Many risk management
exemptions have been used to offset swap positions that would not
qualify as bona fide hedging positions.
---------------------------------------------------------------------------

    \105\ See 7 U.S.C. 6a(c)(2)(B)(i) (was executed opposite a
counterparty for which the transaction would qualify as a bona fide
hedging transaction). The pass-through swap offset language in the
Final Rule's bona fide hedging definition is discussed in greater
detail below.
---------------------------------------------------------------------------

    In response to the comment regarding a potential expansion of MiFID
II to accommodate activity akin to risk management exemptions, the
Commission believes that the European Commission's stated posture does
not appear to contemplate a blanket exemption for financial risks as
suggested by the commenter. Instead, the European Commission's approach
appears to be largely consistent with the narrower pass-through
approach adopted by the Commission in this Final Rule.\106\
---------------------------------------------------------------------------

    \106\ See MiFID II Review report on position limits and position
management (April 1, 2020), available at https://www.esma.europa.eu/sites/default/files/library/esma70-156-2311_mifid_ii_review_report_position_limits.pdf. The exemption under
consideration for financial counterparties appears to be in line
with the Final Rule's pass-through provision, in that the
``exemption would apply to the positions held by that financial
counterparty that are objectively measurable as reducing risks
directly related to the commercial activities of the non-financial
entities of the group . . . . this hedging exemption should not be
considered as an additional exemption to the position limit regime
but rather as a `transfer' to the financial counterparty of the
group of the hedging exemption otherwise available to the commercial
entities of the group.'' Id. at 32-33.
---------------------------------------------------------------------------

    The Commission is, however, making several changes and
clarifications to address commenter concerns:
    First, the Commission is extending the compliance date by which
risk management exemption holders must reduce their risk management
exemption positions to comply with Federal position limits under the
Final Rule to January 1, 2023.\107\ This provides approximately two
years beyond the Effective Date for the nine legacy agricultural
contracts.\108\ The Commission believes that this will provide
sufficient time for existing positions to roll off and/or be replaced
with positions that conform with the Federal position limits adopted in
this Final Rule, without adversely affecting market liquidity.
---------------------------------------------------------------------------

    \107\ For clarity, a risk management exemption holder may enter
into new positions based on, and in accordance with, its previously-
granted risk management exemption, during this compliance period,
until January 1, 2023.
    \108\ For further discussion of the Final Rule's compliance and
effective dates, see Section I.D. Both existing risk management
exemptions, as discussed herein, and swap positions, will be subject
to the extended compliance data to January 1, 2023.
---------------------------------------------------------------------------

    Second, including pass-through swaps and pass-through swap offsets
within the definition of a bona fide hedge will mitigate some of the
potential impact resulting from the rescission of the risk management
exemption. The Final Rule's pass-through provisions should help address
certain of the hedging needs of persons seeking to offset the risk from
swap books, allowing for sufficient liquidity in the marketplace for
both bona fide hedgers and their counterparties.
    Third, although the Commission will no longer recognize risk
management positions as bona fide hedges under this Final Rule, the
Commission maintains other authorities, including the authority under
CEA section 4a(a)(7), to exempt risk management positions from Federal
position limits.
    Finally, consistent with existing industry practice, exchanges may
continue to recognize risk management positions for contracts that are
not subject to Federal position limits, including for excluded
commodities.
b. Economically Appropriate Test
(1) Background--Economically Appropriate Test
    The statutory and regulatory bona fide hedging definitions in
section 4a(c)(2)(A)(ii) of the CEA and in existing Sec.  1.3 of the
Commission's regulations both provide that a bona fide hedging position
must be economically

[[Page 3258]]

appropriate to the reduction of risks in the conduct and management of
a commercial enterprise.\109\ The Commission has, when defining bona
fide hedging, historically focused on transactions that offset price
risk.\110\
---------------------------------------------------------------------------

    \109\ 7 U.S.C. 6a(c)(2)(A)(ii) and 17 CFR 1.3.
    \110\ For example, in promulgating existing Sec.  1.3, the
Commission explained that a bona fide hedging position must, among
other things, be economically appropriate to risk reduction, such
risks must arise from operation of a commercial enterprise, and the
price fluctuations of the futures contracts used in the transaction
must be substantially related to fluctuations of the cash-market
value of the assets, liabilities or services being hedged. Bona Fide
Hedging Transactions or Positions, 42 FR 14832, 14833 (Mar. 16,
1977) (emphasis added). ``Value'' is generally understood to mean
price times quantity. The Dodd-Frank Act added CEA section 4a(c)(2),
which copied the economically appropriate test from the Commission's
definition in Sec.  1.3. See also 78 FR at 75702, 75703 (stating
that the core of the Commission's approach to defining bona fide
hedging over the years has focused on transactions that offset a
recognized physical price risk).
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Economically Appropriate Test
    In the 2020 NPRM, the Commission proposed to amend the economically
appropriate prong of the bona fide hedge definition with one
clarification: Consistent with the Commission's longstanding practice
regarding what types of risk may be offset by bona fide hedging
positions in excess of Federal position limits,\111\ the Commission
made explicit in the proposed bona fide hedging definition that the
word ``risks'' refers to, and is limited to, ``price risk.'' This
proposed clarification did not reflect a change in policy, as the
Commission has a longstanding policy that hedges of non-price risk
alone cannot be recognized as bona fide hedges.\112\
---------------------------------------------------------------------------

    \111\ See, e.g., 78 FR at 75709, 75710.
    \112\ See supra n.109 for further discussion on the Commission's
longstanding policy regarding ``price'' risk.
---------------------------------------------------------------------------

    As stated in the 2020 NPRM, the Commission clarified its view that
risk must be limited to price risk for purposes of the economically
appropriate test due to the difficulty that the Commission or exchanges
may face in objectively evaluating whether a particular derivatives
position is economically appropriate to the reduction of non-price
risks. For example, the Commission or an exchange's staff can
objectively evaluate whether a particular derivatives position is an
economically appropriate hedge of a price risk arising from an
underlying cash-market transaction, including by assessing the
correlations between the risk and the derivatives position. It would be
more difficult, if not impossible, to objectively determine whether an
offset of non-price risk is economically appropriate for the underlying
risk.
    Finally, the Commission requested comment on whether price risk is
attributable to a variety of factors, including political and weather
risk, and could therefore allow hedging political, weather, or other
risks, or whether price risk is something narrower in the application
of bona fide hedging.\113\
---------------------------------------------------------------------------

    \113\ 85 FR at 11622.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Economically Appropriate
Test
    The Commission is adopting the economically appropriate prong of
the bona fide hedge definition as proposed. However, as discussed
below, the Commission is clarifying in response to commenter requests
that while the Commission is explicitly limiting ``risks'' to ``price
risks'' as used in the economically appropriate test, the Commission
recognizes that price risk can be informed and impacted by various
other types of non-price risk.
(4) Comments--Economically Appropriate Test
    The Commission received comments from market participants seeking
greater clarity with respect to the Commission's proposed reference to
``price risk'' in the context of applying the ``economically
appropriate'' test in the bona fide hedging definition. Many commenters
stated that the economically appropriate test should include offsets of
non-price risk.\114\ Other commenters stated that a variety of non-
price risk factors (i) actually affect price risk and therefore are
objective,\115\ or (ii) are simply another form of price risk and
therefore should be permitted.\116\
---------------------------------------------------------------------------

    \114\ MGEX at 2; NGSA at 5-6; CHS at 3; NCFC at 2; FIA at 10-11;
CMC at 3; LDC at 2; ICE at 4; IFUS at Exhibit 1 RFC (6).
    \115\ FIA at 10-11 (Stating that, ``[T]he Commission should
recognize that the statutory definition of a bona fide hedging
position encompasses the reduction of all risks that affect the
value of a cash-market position, including time risk, location risk,
quality risk, execution and logistics risk, counterparty credit
risk, weather risk, sovereign risk, government policy risk (e.g., an
embargo), and any other risks that affect price. These are
objective, rather than subjective, risks that commercial enterprises
incur on a regular basis in connection with their businesses as
producers, processors, merchants handling, and users of commodities
that underlie the core referenced futures contracts'').
    \116\ ADM at 5.
---------------------------------------------------------------------------

    For example, ADM stated that when market participants discuss
``risks'' such as political, weather, delivery, transportation, and
more, they are discussing the impact these factors may have on the
price.\117\ Hence the risk being hedged is price risk as influenced by
these factors.\118\ Other commenters stated that market participants
should have the flexibility to measure risk in the manner most suitable
for their business.\119\ In addition, commenters also stated they were
not opposed to ``price risk'' so long as the Commission clarified that
price risk is not static or an absolute objective measure, and
consequently that the term ``price risks'' incorporates a commercial
hedger's independent assessment of price risk.\120\
---------------------------------------------------------------------------

    \117\ Id.
    \118\ ADM at 5.
    \119\ LDC at 2.
    \120\ CMC at 3.
---------------------------------------------------------------------------

    In contrast, Better Markets supported the 2020 NPRM's rationale to
permit only ``price risk.'' \121\ Better Markets also suggested that
the Commission clarify that the term ``commercial enterprise'' refers
to ``solely [a] transaction or position that would be directly and
demonstrably risk reducing to `cash or spot operations' for physical
commodities underlying the contracts'' to be hedged.\122\
---------------------------------------------------------------------------

    \121\ Better Markets at 52-53.
    \122\ Better Markets at 53.
---------------------------------------------------------------------------

    Finally, ICE, MGEX, and FIA requested that if the Commission adopts
the proposed economically appropriate prong, the Commission should
permit market participants to use the non-enumerated bona fide hedge
process to receive recognition of bona fide hedges of non-price risk on
a case-by-case basis.\123\
---------------------------------------------------------------------------

    \123\ MGEX at 2; FIA at 11.
---------------------------------------------------------------------------

(5) Discussion of the Final Rule--The Bona Fide Hedging Definition's
``Economically Appropriate Test''
    The Commission is adopting the economically appropriate prong of
the bona fide hedging definition as proposed, codifying existing
practice, as well as existing Sec.  1.3's treatment of price risk, by
making it explicit in the rule text that the word ``risks'' refers to,
and is limited to, ``price risk.''
    The Commission emphasizes that the Final Rule is not intended to
represent a change to the Commission's existing interpretation of the
economically appropriate prong of bona fide hedging, but rather is
maintaining the application of the economically appropriate test in
connection with bona fide hedges on the nine legacy agricultural
contracts to the 16 new non-legacy core referenced futures contracts.
    In promulgating existing Sec.  1.3, the Commission explained that a
bona fide hedging position must, among other things, ``be economically
appropriate to risk reduction, such risks must arise from operation of
a commercial

[[Page 3259]]

enterprise, and the price fluctuations of the futures contracts used in
the transaction must be substantially related to fluctuations of the
cash-market value of the assets, liabilities or services being
hedged.'' \124\ (emphasis added). Consistent with this longstanding
policy of the Commission to recognize hedges of price risk of an
underlying commodity position as bona fide hedges (and consistent with
the Commission's existing application of bona fide hedging to the nine
legacy agricultural contracts under the existing Federal position limit
regulations), the Commission is also clarifying further below that
price risk can be informed and impacted by various other types of
risks.
---------------------------------------------------------------------------

    \124\ Bona Fide Hedging Transactions or Positions, 42 FR 14832,
14833 (Mar. 16, 1977) (emphasis added). ``Value'' is generally
understood to mean price times quantity. The Dodd-Frank Act added
CEA section 4a(c)(2), which copied the economically appropriate test
from the Commission's definition in Sec.  1.3. See also 78 FR at
75702, 75703 (stating that the ``core of the Commission's approach
to defining bona fide hedging over the years has focused on
transactions that offset a recognized physical price risk'').
---------------------------------------------------------------------------

    As the Commission stated in the 2020 NPRM and continues to believe,
for any given non-price risk, such as geopolitical turmoil, weather, or
counterparty credit risks, there could be multiple commodities,
directions, and contract months which a particular market participant
may subjectively view as an economically appropriate offset for that
non-price risk. Moreover, multiple market participants faced with the
same non-price risk might take different views on which offset is the
most effective.\125\ A system of allowing for bona fide hedges based
solely by reference to such non-price risks would be difficult to
administer on a pragmatic and consistently fair basis.
---------------------------------------------------------------------------

    \125\ 85 FR at 11606.
---------------------------------------------------------------------------

    Further, it also would be difficult to evaluate whether a
particular commodity derivative contract would be the proper offset as
a bona fide hedge, as defined in this Final Rule, to a potential non-
price risk, or would remove exposure to the potential change in value
to the market participant's cash positions resulting from the non-price
risk. Thus, hedging solely to protect against changes in value of non-
price risks would fall outside the category of a bona fide hedge which
offsets the ``price risk'' of an underlying commodity cash position.
    However, the Commission agrees with commenters who stated that
market participants form independent economic assessments of how
different possible events might create potential risk exposures for
their business.\126\ Such risks that create or impact the price risk of
underlying cash commodities may include, but are not limited to,
geopolitical turmoil, weather, or counterparty credit risks. The
Commission recognizes that these risks can create price risks and
understands that firms may manage these potential risks to their
businesses differently and in the manner most suitable for their
business. As noted above, by limiting the economically appropriate
prong to price risk, the Commission is reiterating its historical
practice, which has applied well to the legacy agricultural contracts
for decades, to recognize hedges of price risk of an underlying
commodity position as bona fide hedges while acknowledging that price
risk may itself be impacted by non-price risks.
---------------------------------------------------------------------------

    \126\ CMC at 3.
---------------------------------------------------------------------------

    The foregoing discussion of price risk is limited to the question
of whether a position in a referenced contract meets the economically
appropriate test to satisfy the bona fide hedge requirements. Market
participants may thus continue to manage non-price risks in a variety
of ways, which may include participation in the futures markets or
exposure to other financial products. In fact, market participants may
decide to use futures contracts that are not subject to Federal
position limits (e.g., location basis contracts), if they determine
such contracts will help them manage non-price risks faced by their
businesses.\127\ For example, a market participant seeking to manage
risk, including non-price risk, with positions in contracts that are
not referenced contracts, such as freight or weather derivatives, would
not be subject to Federal speculative position limits and thus would
not need to comply with the economically appropriate test in connection
with such positions in non-referenced contracts.
---------------------------------------------------------------------------

    \127\ The enumerated cross-commodity hedge provision adopted
herein and discussed below offers may also offer additional
flexibility to those market participants using referenced contracts
to manage risk, by allowing market participants to hedge price risk
associated with a particular commodity using a derivative contract
based on a different commodity, assuming all applicable requirements
of the cross-commodity enumerated bona fide hedge are met.
---------------------------------------------------------------------------

    To satisfy the economically appropriate test, a position must
ultimately offset the price risk of an underlying cash commodity.\128\
Non-price risk may also be a consideration in hedging decisions, but
cannot be a substitute for price risk associated with the cash
commodity underlying the derivatives position. The foregoing view
precludes the Commission from adopting commenter suggestions to permit
market participants to use the non-enumerated hedge process to receive
recognition of hedges of non-price risk on a case-by-case basis
because, while the Commission acknowledges that price risk can be
informed and impacted by non-price risk, price risk is required to
satisfy the economically appropriate test.
---------------------------------------------------------------------------

    \128\ This view is consistent with the spirit of Better Market's
comment suggesting a focus on reducing risks associated with a cash-
market position in a physical commodity. See Better Markets at 53.
---------------------------------------------------------------------------

c. Change in Value Requirement
(1) Background--Change in Value Requirement
    CEA section 4a(c)(2)(A)(iii) and existing Sec.  1.3 include the
``change in value requirement,'' which provides that the bona fide
hedging position must arise from the potential change in the value of:
(I) Assets that a person owns, produces, manufactures, processes, or
merchandises or anticipates owning, producing, manufacturing,
processing, or merchandising; (II) liabilities that a person owns or
anticipates incurring; or (III) services that a person provides,
purchases, or anticipates providing or purchasing.\129\
---------------------------------------------------------------------------

    \129\ 7 U.S.C. 6a(c)(2)(A)(iii), 17 CFR 1.3.
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Change in Value Requirement
    The Commission proposed to retain the substance of the change in
value requirement in existing Sec.  1.3, with some non-substantive
technical modifications, including modifications to correct a
typographical error.\130\ Aside from the typographical error, the
proposed Sec.  150.1 change in value requirement mirrors the Dodd-Frank
Act's change in value requirement in CEA section 4a(c)(2)(A)(iii).
---------------------------------------------------------------------------

    \130\ The Commission proposed to replace the phrase
``liabilities which a person owns,'' which appears in the statute
erroneously, with ``liabilities which a person owes,'' which the
Commission believed was the intended wording (emphasis added). The
Commission interpreted the word ``owns'' to be a typographical
error. A person may owe on a liability, and may anticipate incurring
a liability. If a person ``owns'' a liability, such as a debt
instrument issued by another, then such person owns an asset. The
fact that assets are included in CEA section 4a(c)(2)(A)(iii)(I)
further reinforces the Commission's interpretation that the
reference to ``owns'' means ``owes.'' The Commission also proposed
several other non-substantive modifications in sentence structure to
improve clarity.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Change in Value
Requirement
    For the same reasons set out in the 2020 NPRM, the Commission is
adopting the change in value

[[Page 3260]]

requirement of the bona fide hedge definition as proposed.
(4) Comments--Change in Value Requirement
    No specific comments on the change in value requirement were
received.
d. Incidental Test and Orderly Trading Requirement
(1) Background--Incidental Test and Orderly Trading Requirement
    Two general requirements contained in the existing Sec.  1.3
definition of bona fide hedging position include: (I) The incidental
test and (II) the orderly trading requirement. For a position to be
recognized as a bona fide hedging position, the incidental test
requires that the purpose is to offset price risks incidental to
commercial cash, spot, or forward operations.
    Under the orderly trading requirement, such position is established
and liquidated in an orderly manner in accordance with sound commercial
practices. Notably, Congress in the Dodd-Frank Act did not include the
incidental test or the orderly trading requirement in the statutory
bona fide hedging definition in CEA section 4a(c)(2).\131\
---------------------------------------------------------------------------

    \131\ 7 U.S.C. 6a(c)(2).
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Incidental Test and Orderly Trading
Requirement
    While the Commission proposed to maintain the substance of the
three core elements of the existing bona fide hedging definition
described above, with some modifications, the Commission also proposed
to eliminate two elements contained in the existing Sec.  1.3
definition: The incidental test and orderly trading requirement that
currently appear in paragraph (1)(iii) of the Sec.  1.3 bona fide
hedging definition.\132\
---------------------------------------------------------------------------

    \132\ 17 CFR 1.3.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Incidental Test and
Orderly Trading Requirement
    The Commission is eliminating the incidental test and orderly
trading requirement from the bona fide hedge definition as proposed.
(4) Comments--Incidental Test and Orderly Trading Requirement
    NGSA supported elimination of the incidental test and orderly
trading requirement, claiming that the changes will facilitate
hedging,\133\ while IATP and Better Markets opposed the removal of
these provisions, contending that the provisions are important for
preventing market disruption.\134\
---------------------------------------------------------------------------

    \133\ NGSA at 4.
    \134\ IATP at 14-15; Better Markets at 53.
---------------------------------------------------------------------------

(5) Discussion of the Final Rule--Incidental Test and Orderly Trading
Requirement
    The Commission is eliminating the incidental test and orderly
trading requirement from the bona fide hedge definition as proposed. As
noted above, neither the incidental test nor orderly trading
requirement is part of the CEA's current statutory definition of bona
fide hedge. The Commission views the incidental test as redundant
because the Commission proposed to maintain both (1) the change in
value requirement (as noted above, the reference to ``value'' in the
change in value requirement is generally understood to mean price per
unit times quantity of units) as well as (2) the economically
appropriate test (which includes the concept of the offset of price
risks in the conduct and management of, i.e., incidental to, a
commercial enterprise).
    In response to IATP and Better Markets, the Commission does not
view the orderly trading requirement as needed to prevent market
disruption. The statutory bona fide hedging definition does not include
an orderly trading requirement,\135\ and the meaning of ``orderly
trading'' is unclear in the context of the OTC swap market and in the
context of permitted off-exchange transactions, such as exchange for
physicals. The elimination of the orderly trading requirement does not
diminish an exchange's obligation to prohibit any disruptive trading
practices, including a case where an exchange believes that a bona fide
hedge position may result in disorderly trading. Further, in
eliminating the orderly trading requirement from the definition in the
regulations, the Commission is not amending or modifying
interpretations of any other related requirements, including any of the
anti-disruptive trading prohibitions in CEA section 4c(a)(5),\136\ or
any other statutory or regulatory provisions.
---------------------------------------------------------------------------

    \135\ The orderly trading requirement was added as a part of the
regulatory definition of bona fide hedging in 1975; see Hedging
Definition, Reports, and Conforming Amendments, 40 FR 11560 (Mar.
12, 1975). Prior to 1974, the orderly trading requirement was found
in the statutory definition of bona fide hedging position; changes
to the CEA in 1974 removed the statutory definition from CEA section
4a(3).
    \136\ 7 U.S.C. 6c(a)(5).
---------------------------------------------------------------------------

    Taken together, the retention of the updated temporary substitute
test, economically appropriate test, and change in value requirement,
coupled with the elimination of the incidental test and orderly trading
requirement, should reduce uncertainty by eliminating provisions that
do not appear in the statute, and by clarifying the language of the
remaining provisions. By reducing uncertainty surrounding some parts of
the bona fide hedging definition for physical commodities, the
Commission anticipates that, as described in greater detail elsewhere
in this release, it would be easier going forward for the Commission,
exchanges, and market participants to address whether novel trading
practices or strategies may qualify as bona fide hedges.
iv. Treatment of Unfixed Price Transactions Under the Final Rule
a. Background and Summary of Commission Determination--Treatment of
Unfixed Price Transactions
    The Commission has a long history of recognizing fixed-price
commitments as the basis for a bona fide hedge.\137\ While the existing
bona fide hedging definition in Sec.  1.3 includes one enumerated hedge
that explicitly mentions ``unfixed'' prices,\138\ the availability of
this hedge is limited to circumstances where a market participant has
both an unfixed-price purchase and an unfixed-price sale on hand,
precluding a market participant with only an unfixed-price purchase or
an unfixed-price sale from qualifying for this particular enumerated
hedge. Further, the extent to which the other existing enumerated
hedges apply to unfixed-price commitments is ambiguous from the plain
reading of the text of the existing bona fide hedging definition.
---------------------------------------------------------------------------

    \137\ See, e.g., paragraphs (2)(i)(A) and (2)(ii)(A) of existing
Sec.  1.3.
    \138\ See paragraph (2)(iii) of existing Sec.  1.3 (Offsetting
sales and purchases for future delivery on a contract market which
do not exceed in quantity that amount of the same cash commodity
which has been bought and sold at unfixed prices basis different
delivery months of the contract market)
---------------------------------------------------------------------------

    However, Commission staff have previously considered the extent to
which market participants with unfixed-price commitments may qualify
for an enumerated hedge. Commission staff issued interpretive letter
12-07 in 2012 (``Staff Letter No. 12-07'') in response to a narrow
question submitted by a market participant regarding qualifying for the
existing enumerated unfilled anticipated requirements bona fide hedge
\139\ while entering into ``unfixed-

[[Page 3261]]

price transactions.'' \140\ In that interpretive letter, staff
clarified that a commercial entity may qualify for the existing
enumerated bona fide hedge for unfilled anticipated requirements even
if the commercial entity has entered into long-term, unfixed-price
supply or requirements contracts because, as staff explained, the
unfixed-price purchase contract does not ``fill'' the commercial
entity's anticipated requirements.\141\ As explained in Staff Letter
No. 12-07, the price risk of such ``unfilled'' anticipated requirements
is not offset by the unfixed-price forward contract because the price
risk remains with the commercial entity, even though the entity has
contractually assured a supply of the commodity.\142\ Instead, the
price risk continues until the unfixed-price contract's price is
fixed.\143\ Once the price is fixed on the supply contract, the
commercial entity no longer has price risk, and its derivative
position, to the extent the position is above an applicable position
limit, and unless the market participant qualifies for another
exemption (as discussed below), must be liquidated in an orderly manner
in accordance with sound commercial practices.\144\
---------------------------------------------------------------------------

    \139\ Paragraph (2)(ii)(C) of existing Sec.  1.3 provides in
relevant part that the bona fide hedging definition includes
purchases which do not exceed in quantity Twelve months' unfilled
anticipated requirements of the same cash commodity for processing,
manufacturing, or feeding by the same person.
    \140\ CFTC Staff Letter 12-07, issued August 16, 2012, https://www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm, title
search ``12-07.''
    \141\ CFTC Staff Letter 12-07 at 1.
    \142\ CFTC Staff Letter 12-07 at 1-2. In the 2016 Reproposal,
the Commission affirmed staff's interpretation articulated in Staff
Letter No. 12-07. See 81 FR at 96750.
    \143\ CFTC Staff Letter 12-07 at 2.
    \144\ Id. at 2-3.
---------------------------------------------------------------------------

    As discussed below, the Commission is affirming this narrow
interpretation for the Final Rule--that commercial entities that enter
into unfixed-price transactions may continue to qualify for the
enumerated bona fide hedge for unfilled anticipated requirements--and
the Commission is adopting this rationale to also apply to: (1) The
existing enumerated bona fide hedge for unsold anticipated production;
\145\ and (2) the new enumerated bona fide hedge for anticipated
merchandising.\146\ In other words, under this Final Rule, a commercial
market participant in the physical marketing channel that enters into
an unfixed-price transaction may qualify for one of these enumerated
anticipatory bona fide hedges, as long as the commercial market
participant otherwise satisfies all applicable requirements for such
anticipatory bona fide hedge.
---------------------------------------------------------------------------

    \145\ For further discussion regarding the enumerated bona fide
hedge for ``unsold anticipated production,'' see Section
II.A.1.vi.d.
    \146\ For further discussion regarding the new enumerated bona
fide hedge for ``anticipated merchandising,'' see Section
II.A.1.vi.f.
---------------------------------------------------------------------------

    For this section of the release, the Commission will refer to the
enumerated bona fide hedges for anticipated unfilled requirements,
anticipated unsold production, and anticipated merchandising,
collectively, as the ``anticipatory bona fide hedges.'' Additionally,
by using the term ``unfixed-price transaction,'' the Commission means a
forward contract (i.e., a firm commitment) at an open price or at a
price to be determined at a later date (for example, by reference to an
index based on the settlement price of a corresponding futures
contract).
    The Commission discusses the 2020 NPRM's general treatment of
unfixed price transactions below, followed by a summary of comments and
the Commission's determination on the issue of unfixed-price
transactions generally. A more detailed discussion of each specific
enumerated hedge, including the three anticipatory bona fide hedges,
appears further below.
b. Summary of the 2020 NPRM--Treatment of Unfixed Price Transactions
    Like the bona fide hedging definition in existing Sec.  1.3, the
proposed bona fide hedging definition in Sec.  150.1 of the 2020 NPRM
included one enumerated hedge addressing unfixed-price transactions,
which required offsetting unfixed-price purchase and sale
transactions.\147\ Aside from that one enumerated bona fide hedge, the
other proposed bona fide hedges did not specify whether a market
participant with an unfixed-price transaction could qualify for a bona
fide hedge exemption, including any of the proposed anticipatory bona
fide hedges.
---------------------------------------------------------------------------

    \147\ See proposed paragraph (a)(2) of Appendix A to part 150.
Like the existing enumerated hedge in paragraph (2)(iii) of Sec. 
1.3, this proposed enumerated hedge was limited to circumstances
where a market participant has both an unfixed-price purchase and an
unfixed-price sale in hand. This specific proposed enumerated bona
fide hedge, along with all other proposed enumerated hedges, is
described in detail further below.
---------------------------------------------------------------------------

    However, the 2020 NPRM did preliminarily and indirectly address
previous queries on the matter of unfixed-price transactions. In
particular, the 2020 NPRM addressed a petition for exemptive relief
submitted in response to the 2011 Final Rule. In that petition, the
Working Group of Commercial Energy Firms (which has since reconstituted
itself as the Commercial Energy Working Group, or ``CEWG'') requested
exemptive relief for transactions that are described by 10 examples set
forth therein as bona fide hedging transactions (``BFH
Petition'').\148\
---------------------------------------------------------------------------

    \148\ The Working Group BFH Petition is available at http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgbfhpetition012012.pdf. In the 2013 Proposal, the Commission
provided that the transactions contemplated under the working
group's examples Nos. 1, 2, 6, 7 (scenario 1), and 8 would be
permitted under the proposed definition of bona fide hedging. In the
2020 NPRM, the Commission preliminarily determined that transactions
described in four additional CEWG examples would comply with the
proposed expanded bona fide hedging definition in the 2020 NPRM:
examples #4 (Binding, Irrevocable Bids or Offers), #5 (Timing of
Hedging Physical Transactions), #9 (Holding a cross-commodity hedge
using a physical delivery contract into the spot month) and #10
(Holding a cross-commodity hedge using a physical delivery contract
to meet unfilled anticipated requirements).
---------------------------------------------------------------------------

    In the 2020 NPRM, the Commission preliminarily determined that
commodity derivative positions described in two examples related to
unfixed-price transactions did not fit within any of the proposed
enumerated hedges. Specifically, the Commission preliminarily
determined that the positions described in examples #3 (unpriced
physical purchase or sale commitments) and #7 (scenario 2) (use of
physical delivery referenced contracts to hedge physical transactions
using calendar month average pricing) of the BFH Petition did not fit
within any of the proposed enumerated bona fide hedges, but that market
participants could apply for a non-enumerated exemption.\149\
---------------------------------------------------------------------------

    \149\ 85 FR at 11612.
---------------------------------------------------------------------------

    The Commission requested comment on the extent to which the
proposed enumerated bona fide hedges should encompass the types of
positions discussed in examples #3 (unpriced physical purchase or sale
commitments) and #7 (scenario 2) (use of physical delivery reference
contracts to hedge physical transactions using calendar month averaging
pricing) of the CEWG's BFH Petition.\150\
---------------------------------------------------------------------------

    \150\ 85 FR at 11622.
---------------------------------------------------------------------------

c. Comments--Treatment of Unfixed Price Transactions
    In response to the 2020 NPRM, many commenters requested the
Commission either clarify or make explicit that the proposed bona fide
hedge definition would apply to commodity derivatives contracts used to
hedge exposure to price risk arising from unfixed-price
transactions.\151\
---------------------------------------------------------------------------

    \151\ See, e.g., Ecom at 1; ACA at 2; CEWG at 22-24; Chevron at
11; CME Group at 8-9; DECA at 2; East Cotton at 2; Gerald Marshall
at 2; IFUS at 5-7; IMC at 2; Jess Smith at 2; LDC at 2; Mallory
Alexander at 2; McMeekin at 2; Memtex at 2; Moody Compress 1; NCC at
1; NGFA at 7; Olam at 2; Omnicotton at 2; Canale Cotton at 2; Shell
at 7; Southern Cotton at 2; Suncor at 7; SW Ag at 2; Toyo at 2;
Texas Cotton at 2; Walcot at 2; White Gold at 2.

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

[[Page 3262]]

    Several commenters provided various examples in support of their
requests that the Commission recognize that unfixed price transactions
may serve as the basis for an enumerated bona fide hedge position for
purposes of Federal position limits.\152\
---------------------------------------------------------------------------

    \152\ CMC at 4; FIA at 16; ICE at 4-5; ACSA at 6-7; ADM at 3;
CME Group at 8-9; CEWG at 19-21.
---------------------------------------------------------------------------

    Comments on the treatment of unfixed price transactions often were
submitted in connection with discussions on the scope of the proposed
enumerated bona fide hedge for anticipated merchandising. As discussed
further below, under the Final Rule's enumerated anticipated
merchandising bona fide hedge section, many commenters requested the
Commission clarify whether the proposed enumerated hedge for
anticipated merchandising could be used to manage price risk arising
from unfixed-price physical commodity transactions.
    With regards to CEWG's BFH Petition example #3 (unpriced physical
purchase or sale commitments), many commenters disagreed with the
Commission's preliminary determination in the 2020 NPRM that this type
of transaction would not qualify for an enumerated bona fide hedge.
Generally, commenters expressed the view that unfixed-price
transactions for physical commodities are a common and standard market
practice. The CEWG indicated that unfixed physical purchase or sale
commitments are routinely conducted in numerous markets and commodities
on a daily basis.\153\
---------------------------------------------------------------------------

    \153\ CEWG at 20 (also providing a similar example as it
submitted in the original petition which included Example #3
(unpriced physical purchase and sale commitments)).
---------------------------------------------------------------------------

    Similar to the BFH Petition's example #3 (unpriced physical
purchase or sale commitments), ACSA provided examples intended to
demonstrate that merchants are exposed to calendar spread and supply
price risk because they typically fulfill sales contracts by selling a
commodity for future delivery in advance of purchasing the commodity
needed to fulfill the sale.\154\ ACSA, along with other
commenters,\155\ stated that unfixed-price transactions for the
purchase or sale of the physical commodities are common, where a market
participant buys the commodity at a price that is based on (i.e., is
``indexed'' to) the settlement price of the nearby (or spot) futures
month contract and later sells the commodity at a price that is indexed
to the deferred month futures contract. ACSA and other commenters
indicated that merchants do this to ``effectively bridge the gap
between timing mismatches of supply and demand in the global
marketplace.'' \156\
---------------------------------------------------------------------------

    \154\ ACSA at 12-14; Several commenters concurred with ACSA
regarding exposure to calendar spread. Mallory Alexander at 2; DECA
at 2; CMC at 4; IMC at 2; Olam at 2; SW Ag at 2; White Gold at 2;
Walcot at 2.
    \155\ ACSA at 4-7; CMC at 4; Mallory Alexander at 2; DECA at 2;
IMC at 2; Olam at 2; SW Ag at 2; White Gold at 2; Walcot at 2.
    \156\ ACSA at 5.
---------------------------------------------------------------------------

    Related to the BFH Petition example #7 (scenario 2) (use of
physical delivery reference contracts to hedge physical transactions
using calendar month averaging pricing ``CMA''), commenters requested
that the Commission clarify that hedges of underlying physical
transactions that utilize CMA pricing structures fall within the
enumerated bona fide hedge for anticipated merchandising.\157\ Chevron
requested the Commission clarify that commercial firms that price
commercial transactions to purchase or sell physical crude oil or
natural gas using a CMA pricing structure (whether they are solely
merchants or conduct merchant activities as part of an integrated
energy company), should receive bona fide hedge treatment for their
commodity derivative contract positions that offset the risks arising
from those CMA priced purchases or sales.\158\
---------------------------------------------------------------------------

    \157\ MGEX at 2; IMC at 2; Mallory Alexander at 2; Walcot at 2;
White Gold at 2; Olam at 2; LDC at 1; Canale at 2; Moody Compress at
1; Gerald Marshall at 2; SW Ag at 2; DECA at 2; Chevron at 12;
Suncor at 11; CEWG at 21.
    \158\ Chevron at 11.
---------------------------------------------------------------------------

    Similarly, other commenters asked for clarification regarding
whether the existing enumerated bona fide hedge for unfilled
anticipated requirement extends to scenarios that involve unfixed-price
contracts that many electric generators enter into to address their
anticipated supply requirements.\159\ These commenters asked for
clarification that unfixed-price purchase commitments do not ``fill''
an anticipated requirement such that the market participant would be
able to still qualify for the enumerated unfilled anticipated
requirement bona fide hedge.\160\
---------------------------------------------------------------------------

    \159\ EPSA at 5; IECA at 8.
    \160\ Id.
---------------------------------------------------------------------------

d. Discussion of Final Rule--Treatment of Unfixed Price Transactions
    As discussed above, the Commission is affirming and broadening the
application of the interpretation articulated in Staff Letter No. 12-
07. As a result, commercial market participants in the physical
marketing channel that enter into unfixed price transactions may
qualify for bona fide hedge treatment under the enumerated bona fide
hedges for anticipatory merchandising, anticipated unsold production,
or anticipated unfilled requirements because, as discussed below,
unfixed price transactions do not give rise to outright price risk and
do not otherwise fix an outright price.\161\
---------------------------------------------------------------------------

    \161\ As a result, based on this rationale, a commercial market
participant that has an unfixed-price commitment is treated the same
as a commercial market participant that has no unfixed-price
commitment for purposes of determining whether one qualifies for
these enumerated anticipatory bona fide hedges.
---------------------------------------------------------------------------

    Consistent with Staff Letter No. 12-07, commercial market
participants in the physical marketing channel that enter into unfixed-
price transactions may continue to qualify for the enumerated bona fide
hedge for unfilled anticipated requirements for those unfixed price
transactions. Further, the Commission is broadening this rationale to
additionally include the existing enumerated bona fide hedge for
``unsold anticipated production'' \162\ and the new enumerated bona
fide hedge for anticipated merchandising.\163\ A commercial market
participant that enters into an unfixed-price transaction may qualify
for one of these enumerated anticipatory bona fide hedges as long as
the commercial entity otherwise satisfies all requirements for such
anticipatory bona fide hedge, including demonstrating its anticipated
need in the physical marketing channel related to either its unsold
production, unfilled requirements, and/or merchandising, as
applicable.\164\
---------------------------------------------------------------------------

    \162\ For further discussion regarding the enumerated bona fide
hedge for ``unsold anticipated production,'' see Section
II.A.1.vi.d.
    \163\ For further discussion regarding the new enumerated bona
fide hedge for ``anticipated merchandising,'' see Section
II.A.1.vi.f.
    \164\ As such, merely entering into an unfixed-price transaction
is not alone sufficient to demonstrate compliance with one of the
enumerated anticipatory bona fide hedges. The specific requirements
associated with each enumerated bona fide hedge, including each
anticipatory bona fide hedge, are described in detail further below.
---------------------------------------------------------------------------

    Under this Final Rule, the Commission is clarifying that a
commercial market participant may still qualify for an enumerated
anticipatory bona fide hedge for an anticipated need, based on a good-
faith expectation of that need, even if the market participant has
entered into an unfixed-price transaction, since the Commission does
not deem the unfixed-price transaction to ``fill'' or ``address'' the
anticipated need. This rationale is predicated on the fact that an
unfixed-price commitment does not offset the price risk associated with
an anticipated need (i.e.,

[[Page 3263]]

anticipated unsold production, anticipated unfilled requirements, and/
or anticipated merchandising, as applicable). This is because unfixed-
price transactions do not give rise to outright price risk and
therefore do not alter the outright price risks faced by a commercial
market participant, even though the market participant has
contractually assured either a supply of the commodity (in the case of
anticipated unfilled requirements), the sale of its output (in the case
of anticipated unsold production), or the purchase or sale of the
commodity to be merchandised (in the case of anticipated
merchandising).\165\
---------------------------------------------------------------------------

    \165\ Consistent with the existing Federal position limits
framework, under the Final Rule, commercial market participants may
not qualify for any anticipatory bona fide hedge merely to offset
risks associated with non-commercial (i.e., financial) activities.
---------------------------------------------------------------------------

    In other words, a trader with an unfixed-price commitment still has
price risk related to its anticipated need until the price is fixed.
Once the price has become fixed, the market participant may no longer
avail itself of the enumerated anticipatory bona fide hedge, but may
potentially avail itself of another enumerated bona fide hedge, (such
as the bona fide hedges for fixed-price purchase contracts or for
fixed-price sales contracts, as applicable), provided all applicable
requirements of such other enumerated bona fide hedges are satisfied.
    Under the Final Rule, a commercial market participant must continue
to be able to demonstrate an anticipated need related to unsold
production, unfilled requirements, and/or merchandising.
    Accordingly, the Commission determines that the commercial market
participant engaged in unfixed-price transactions in the BFH Petition's
example #3 (unpriced physical purchase or sale commitments) and example
#7 (scenario 2) (use of physical delivery referenced contracts to hedge
physical transactions using calendar month average pricing) can qualify
for one of the enumerated anticipatory bona fide hedges under the Final
Rule to the extent the market participant otherwise complies with the
applicable conditions of the relevant enumerated anticipatory bona fide
hedge in connection with the market participant's commercial
activities.
    For clarity, the Commission also underscores that under the
Commission's existing portfolio hedging policy, market participants,
including vertically-integrated firms (i.e., those firms that may
qualify as more than one of a producer; processor, manufacturer, or
utility; and/or merchandiser), may continue to manage their price risks
by utilizing more than one enumerated bona fide hedge (including more
than one anticipatory bona fide hedge).
    The Commission recognizes that there are many ways in which market
participants both structure their organizations and engage in
commercial hedging practices. As such, market participants may manage
the price risk from their various commercial activities by utilizing
multiple enumerated bona fide hedge exemptions in the manner that is
most suitable to their particular circumstances. Nevertheless, for
illustrative purposes, the Commission provides a general example of how
market participants may utilize the enumerated anticipatory bona fide
hedges in connection with their unfixed price transactions:
    For example, Producer X has the physical capacity to produce
100,000 barrels of physical WTI crude oil on an annual basis. Producer
X agrees to sell 80,000 barrels of WTI crude oil to Merchandiser Y via
a floating/unfixed-price contract in which the delivery will be priced
at the NYMEX March 2020 WTI crude oil futures final settlement price.
Producer X still does not have a buyer for its remaining 20,000
barrels, but anticipates selling all of its production, as it has in
previous years. Under this scenario, Producer X may utilize the
enumerated unsold anticipated production enumerated hedge to offset the
price risk from its unsold production, which includes both the 80,000
barrels of oil sold to Merchandiser Y at an unfixed price, as well as
the unsold 20,000 barrels.\166\ On the other hand, Merchandiser Y may
utilize the enumerated hedge for anticipated merchandising to hedge its
anticipated merchandising transactions, which include the 80,000
barrels it purchased from Producer X at an unfixed price. Because
Merchandiser Y has a history of merchandising more than 80,000 barrels
a year, and it anticipates merchandising more than 80,000 barrels in
the next twelve months, Merchandiser Y's anticipated merchandising
hedge may include the 80,000 barrels it purchased from Producer X at an
unfixed price and its remaining anticipated twelve-months'
merchandising. Separately, assuming Merchandiser Y also has crude oil
it purchased at a fixed price in a storage tank, Merchandiser Y may
also utilize the enumerated hedge for inventory and cash-commodity
fixed-price purchase contracts to hedge the price risk from those fixed
price purchases of crude oil.
---------------------------------------------------------------------------

    \166\ In the case where Producer X fixes the price of its sale
before delivery, while it no longer holds an anticipatory hedge,
Producer X may qualify for the enumerated hedge for fixed price
sales, assuming all applicable requirements for that hedge are
satisfied.
---------------------------------------------------------------------------

    In response to commenters requesting that the Commission create a
new enumerated bona fide hedge for unfixed-price transactions, the
Commission does not believe that this is necessary because, as
described above, commercial market participants may qualify for the
enumerated anticipatory bona fide hedges while also entering into
unfixed-price transactions. Further, the Commission believes that it is
not suitable to create a new enumerated bona fide hedge expressly
covering all unfixed price transactions to accomplish the same since
there is an inherent difficulty in evaluating the propriety of a hedge
of an unfixed price obligation with a fixed-price futures contract as
there is basis risk until the unfixed price obligation is fixed. Given
differences among markets, creating a new enumerated bona fide hedge
for any unfixed price transaction could, under certain circumstances,
harm market integrity, enable potential market manipulation, and/or
allow excessive speculation by potentially affording bona fide hedging
treatment for speculative transactions.
    For example, assume a market participant enters into an unfixed-
price sales contract (e.g., priced at a fixed differential to a
deferred month futures contract), and immediately enters into a
calendar month spread to reduce the risk of the fixed basis moving
adversely. It may not be economically appropriate to recognize as bona
fide a long futures position in the spot (or nearby) month and a short
futures position in a deferred calendar month matching the market
participant's cash delivery obligation, in the event the spot (or
nearby) month price is higher than the deferred contract month price
(referred to as backwardation, and characteristic of a spot cash market
with supply shortages), because such a calendar month futures spread
would lock in a loss. A position locking in a loss generally is not
economically appropriate to the reduction of risk, as it increases risk
by generating a loss, and such a transaction may be indicative of an
attempt--or at the very least provides inappropriate incentives--to
manipulate the spot (or nearby) futures price.\167\
---------------------------------------------------------------------------

    \167\ See 81 FR at 96750.
---------------------------------------------------------------------------

    Finally, the Commission emphasizes that to the extent that a market
participant does not qualify for an enumerated anticipatory bona fide
hedge in connection with an unfixed-price transaction, the market
participant

[[Page 3264]]

could still avail itself of the process under Sec. Sec.  150.3 and
150.9 for requesting approval of non-enumerated bona fide hedges.
v. The Enumerated Bona Fide Hedge Exemptions, Generally
a. Background--Bona Fide Hedge Exemptions, Generally
    As discussed earlier in this release, the list of bona fide hedges
explicitly contained in paragraph (2) of the existing bona fide hedging
definition in Sec.  1.3 of the Commission's regulations lists (or
``enumerates'') seven bona fide hedges, which are generally referred to
as the ``enumerated bona fide hedges,'' in four general categories.
These four existing categories of enumerated hedges include: (1) Sales
of futures contracts to hedge (i) ownership or fixed-price cash
commodity purchases and (ii) unsold anticipated production; (2)
purchases of futures contracts to hedge (i) fixed-price cash commodity
sales and (ii) unfilled anticipated requirements; (3) offsetting sales
and purchases of futures contracts to hedge offsetting unfixed-price
cash commodity sales and purchases; and (4) cross-commodity
hedges.\168\
---------------------------------------------------------------------------

    \168\ 17 CFR 1.3.
---------------------------------------------------------------------------

    The list of enumerated bona fide hedges found in paragraph (2) of
the existing bona fide hedging definition was developed at a time when
only agricultural commodities were subject to Federal position limits,
and has not been updated since 1987.\169\ The Commission believes, as
discussed further below, that such list is too narrow to reflect common
commercial hedging practices, including for metal and energy contracts.
Numerous market and regulatory developments have taken place since
1987, including, among other things, increased futures trading in the
metals and energy markets, the development of the swaps markets, and
the shift in trading from pits to electronic platforms. In addition,
the Commodity Futures Modernization Act of 2000 \170\ and the Dodd-
Frank Act introduced various regulatory reforms, including the
enactment of position limits core principles.\171\ The Commission thus
proposed in the 2020 NPRM to update its bona fide hedging definition to
better conform to the current state of the law and to better reflect
market developments over time.
---------------------------------------------------------------------------

    \169\ See Revision of Federal Speculative Position Limits, 52 FR
38914 (Oct. 20, 1987).
    \170\ Commodity Futures Modernization Act of 2000, Public Law
106-554, 114 Stat. 2763 (Dec. 21, 2000).
    \171\ See 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b-3(f)(6).
---------------------------------------------------------------------------

b. Summary of the 2020 NPRM--Bona Fide Hedge Exemptions, Generally
    So as not to reduce any of the clarity provided by the existing
list of enumerated bona fide hedges, the Commission proposed to
maintain the existing enumerated bona fide hedges, with some
modifications, and to expand this list.
    The existing definition of ``bona fide hedging transactions and
positions'' enumerates the following hedging transactions:
    a. Hedges of inventory and cash commodity fixed-price purchase
contracts;
    b. hedges of cash commodity fixed-price sales
    c. hedges of the cash commodity's cash products and byproducts;
    d. hedges of offsetting unfixed price cash commodity sales and
purchases
    e. hedges of unsold anticipated production;
    f. hedges of unfilled anticipated requirements; and
    g. cross-commodity hedges.
    The following additional hedging practices are not enumerated in
the existing regulation, but were included in the 2020 NPRM as
additional enumerated bona fide hedges:
    a. Hedges by agents;
    b. short hedges of anticipated mineral royalties;
    c. hedges of anticipated services;
    d. offsets of commodity trade option; and
    e. hedges of anticipated merchandising.
    The Commission also proposed the elimination, for purposes of
Federal position limits, of both the Five-Day Rule and the twelve-month
restriction. However, under the 2020 NPRM, exchanges would be able to
establish their own five-day rule and/or twelve-month restriction, as
applicable for any or all of their respective referenced contracts.
c. Commission Determination--Bona Fide Hedge Exemptions, Generally
    First, the Commission is adopting the proposed expanded list of
enumerated bona fide hedges, with the modifications described, as
applicable, in the discussions of the relevant bona fide hedges below.
Second, the Commission is adopting, as proposed, the elimination of
both the existing Five-Day Rule and the twelve-month restriction.\172\
The comments received, and the Commission's corresponding responses, in
connection with these changes are discussed further below in the
corresponding section discussing the applicable enumerated bona fide
hedge.
---------------------------------------------------------------------------

    \172\ As discussed further below, the Final Rule eliminates the
existing twelve-month restriction with respect to the anticipatory
unsold production and the anticipated unfilled requirements bona
fide hedges. However, the new anticipated merchandising bona fide
hedge would be subject to its own twelve-month restriction.
---------------------------------------------------------------------------

    With respect to the treatment of the enumerated bona fide hedges
under the Final Rule, the Commission notes that positions in referenced
contracts subject to Federal position limits that meet any of the
enumerated bona fide hedges will, for purposes of Federal position
limits, be deemed to meet the bona fide hedging definition in CEA
section 4a(c)(2)(A), as well as the Commission's bona fide hedging
definition in Sec.  150.1 under the Final Rule. As a result, enumerated
bona fide hedges are self-effectuating for purposes of Federal position
limits, provided the market participant separately requests an
exemption from the applicable exchange-set limit established pursuant
to Sec.  150.5(a).\173\
---------------------------------------------------------------------------

    \173\ For further discussion of the exchange exemption process,
see Section II.D.3.i.b.
---------------------------------------------------------------------------

    The enumerated hedges are each described below, followed by a
discussion of the Five-Day Rule. When first proposed, the Commission
viewed the enumerated bona fide hedges as conforming to the general
definition of bona fide hedging ``without further consideration as to
the particulars of the case.'' \174\ Similarly, the list of enumerated
bona fide hedges under the Final Rule reflects categories of bona fide
hedges for which the Commission has determined, based on experience
over time, that no case-by-case determination or review of additional
details by the Commission is needed to determine that the position or
transaction is a bona fide hedge. This Final Rule does not foreclose
the recognition of other hedging practices as bona fide hedges, as
discussed below.
---------------------------------------------------------------------------

    \174\ Bona Fide Hedging Transactions or Positions, 42 FR 14832
(Mar. 16, 1977).
---------------------------------------------------------------------------

    While the enumerated bona fide hedges adopted herein are self-
effectuating for purposes of Federal position limits,\175\ the
Commission and the exchanges will continue to exercise close oversight
over such positions to confirm that market participants' claimed
exemptions are consistent with their cash-market activity. In
particular, because all contracts subject to Federal position limits
are also subject to exchange-set limits, all traders seeking to exceed
Federal position limits must request an exemption from the relevant
exchange for purposes of the exchange

[[Page 3265]]

position limit, regardless of whether the position falls within one of
the enumerated hedges. In other words, enumerated bona fide hedge
exemptions that are self-effectuating for purposes of Federal position
limits are not self-effectuating for purposes of exchange-set position
limits.
---------------------------------------------------------------------------

    \175\ See infra Section II.C. (discussing Sec.  150.3) and
Section II.G. (discussing Sec.  150.9).
---------------------------------------------------------------------------

    Exchanges have well-established programs for granting exemptions,
including, in some cases, experience granting exemptions for
anticipatory merchandising for certain traders in markets not currently
subject to Federal position limits. As discussed in greater detail
below, Sec.  150.5 as adopted herein helps ensure that such programs
conform to standards established by the Commission.\176\ The Commission
expects exchanges will continue to be thoughtful and deliberate in
granting exemptions, including anticipatory exemptions. The Commission
predicates this expectation on its decades of experience working
together with the relevant exchanges and observations generally of the
applicable exchange-traded futures markets.
---------------------------------------------------------------------------

    \176\ See infra Section II.D. For example, Sec.  150.5 requires,
among other things, that: Exemption applications filed with an
exchange include sufficient information to enable the exchange and
the Commission to determine whether the exchange may grant the
exemption, including an indication of whether the position qualifies
as an enumerated hedge for purposes of Federal limits and a
description of the applicant's activity in the underlying cash
markets; and the exchange provides the Commission with a monthly
report showing the disposition of all exemption applications,
including cash-market information justifying the exemption.
---------------------------------------------------------------------------

    The Commission and the exchanges also have a variety of other tools
designed to help prevent misuse of self-effectuating bona fide hedge
exemptions. For example, market participants who apply to an exchange
as required pursuant to Sec.  150.5 under the Final Rule are subject to
the Commission's false statements authority, which carries substantial
penalties under both the CEA and Federal criminal statutes. Similarly,
the Commission currently employs--and will continue to use under the
Final Rule--surveillance tools, special call authority, rule
enforcement reviews, and other formal and informal avenues for
obtaining additional information from exchanges and market participants
in order to distinguish between true bona fide hedging needs and
speculative trading masquerading as a bona fide hedge.
    While positions that fall within the enumerated bona fide hedges,
each discussed in further detail below, are the type of positions that
comply with the bona fide hedging definition, the Commission recognizes
that there may be other positions or hedging strategies that are not
``enumerated'' that similarly could satisfy the bona fide hedge
definition.\177\ These ``non-enumerated'' bona fide hedges may be
granted today under existing Sec. Sec.  1.47 and 1.48, and the
Commission can continue to recognize non-enumerated bona fide hedges
under the Final Rule. For further discussion of the recognition of non-
enumerated bona fide hedges, see infra Sections II.C. and II.G.
---------------------------------------------------------------------------

    \177\ See infra Section II.G. (discussing Sec.  150.9).
---------------------------------------------------------------------------

    With the exception of risk management positions previously
recognized as bona fide hedges, and assuming all regulatory
requirements continue to be satisfied, market participants' existing
bona fide hedging recognitions under existing Federal position limits
are grandfathered upon the Final Rule's Effective Date (i.e., bona fide
hedge exemptions that are currently recognized for purposes of Federal
position limits, other than risk management positions, will continue to
be recognized under the Final Rule).
    Last, before describing each individual enumerated hedge, the
Commission also notes that it is adopting certain non-substantive,
technical changes, and such changes are intended only to provide
clarifications. For example, the Commission is making a technical
change to the bona fide hedging definition by adopting the term in the
singular tense in order to conform to the phrasing in CEA section
4a(c)(2).\178\ The Commission is also re-ordering the enumerated bona
fide hedges to place related enumerated bona fide hedges closer
together.
---------------------------------------------------------------------------

    \178\ The existing definition in Sec.  1.3 of the Commission's
regulations is in the plural: ``bona fide hedging transactions and
positions.'' The 2020 NPRM's proposed definition was similarly
plural.
---------------------------------------------------------------------------

vi. Enumerated Bona Fide Hedge Exemptions for Physical Commodities
    This Final Rule adopts the list of enumerated bona fide hedge
exemptions as proposed in the 2020 NPRM, with certain amendments
discussed below.\179\
---------------------------------------------------------------------------

    \179\ Appendix A to part 150 lists the following enumerated bona
fide hedges: (a)(1) Hedges of Inventory and Cash Commodity Fixed-
Price Purchase Contracts; (a)(2) Hedges of Cash Commodity Fixed-
Price Sales Contracts; (a)(3) Hedges of Offsetting Unfixed Price
Cash Commodity Sales and Purchases; (a)(4) Hedges of Unsold
Anticipated Production; (a)(5) Hedges of Unfilled Anticipated
Requirements; (a)(6) Hedges of Anticipated Merchandising; (a)(7)
Hedges by Agents; (a)(8) Short Hedges of Anticipated Mineral
Royalties; (a)(9) Hedges of Anticipated Services; (a)(10) Offsets of
Commodity Trade Options; (a)(11) Cross-Commodity Hedges. As
previously mentioned, the Commission has also reorganized the order
of the list of enumerated hedges. The Final Rule reorders Appendix A
so that the bona fide hedges are listed by hedges of purchases,
sales, anticipated activities, or other new types of hedges.
---------------------------------------------------------------------------

a. Hedges of Inventory and Cash Commodity Fixed-Price Purchase
Contracts
(1) Background--Inventory and Cash Commodity Fixed-Price Purchase
Contracts
    Inventory and fixed-price cash commodity purchase contracts have
long served as the basis for a bona fide hedging position.\180\ This
bona fide hedge is enumerated in paragraph (2)(i)(A) of the existing
bona fide hedging definition in Sec.  1.3, and recognizes as a bona
fide hedge sales of any commodity for future delivery on a contract
market which do not exceed in quantity ownership (i.e., inventory) or
fixed-price purchase of the same commodity by the same person.
---------------------------------------------------------------------------

    \180\ See, e.g., 7 U.S.C. 6(a)(3) (1970). That statutory
definition of bona fide hedging included sales of, or short
positions in, any commodity for future delivery on or subject to the
rules of any contract market made or held by such person to the
extent that such sales or short positions are offset in quantity by
the ownership or purchase of the same cash commodity by the same
person.
---------------------------------------------------------------------------

    Since 2011, the Commission has included hedges of inventory and
cash commodity fixed-price purchase contracts in each of its position
limits rulemakings, with minor proposed modifications to improve
clarity.\181\
---------------------------------------------------------------------------

    \181\ 81 FR at 96964; 78 FR at 75713; 76 FR at 11609.
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Inventory and Cash Commodity Fixed-Price
Purchase Contracts
    This proposed enumerated bona fide hedge recognized that a
commercial enterprise is exposed to price risk if it has obtained
inventory in the normal course of business or has entered into a fixed-
price spot or forward purchase contract calling for delivery in the
physical marketing channel of a cash-market commodity (or a combination
of the two), and has not offset that price risk exposure (e.g., that
the market price of the inventory could decrease). In connection with
the proposed enumerated hedge, any such inventory, or a fixed-price
purchase contract, must be on hand, as opposed to a non-fixed purchase
contract or an anticipated purchase.
    An appropriate hedge to offset the price risk arising from
inventory or a fixed-price purchase contract under the 2020 NPRM would
be to establish a short position in a commodity derivative contract.
The Commission also stated in the 2020 NPRM that an exchange may
require such short position holders to demonstrate the ability to
deliver against the short

[[Page 3266]]

position in order to demonstrate a legitimate purpose for holding a
position deep into the spot month.\182\
---------------------------------------------------------------------------

    \182\ 85 FR at 11609-11610. For example, it would not appear to
be economically appropriate to hold a short position in the spot
month of a commodity derivative contract against fixed-price
purchase contracts that provide for deferred delivery in comparison
to the delivery period for the spot month commodity derivative
contract. This is because the commodity under the cash contract
would not be available for delivery on the commodity derivative
contract.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Inventory and Cash
Commodity Fixed-Price Purchase Contracts
    The Commission is adopting the enumerated bona fide hedge of
inventory and cash commodity fixed-price purchase contracts as
proposed.
(4) Comments--Inventory and Cash Commodity Fixed-Price Purchase
Contracts
    Aside from ASR, which expressed support for this enumerated hedge,
the Commission did not receive any other specific comments on this
enumerated hedge.\183\
---------------------------------------------------------------------------

    \183\ ASR at 2.
---------------------------------------------------------------------------

b. Hedges of Cash Commodity Fixed-Price Sales Contracts
(1) Background--Cash Commodity Fixed-Price Sales Contracts
    Fixed-price cash commodity sales have long served as the basis for
a bona fide hedging position.\184\ This bona fide hedge is enumerated
in paragraphs (2)(ii)(A) and (B) of the existing bona fide hedging
definition in Sec.  1.3. This enumerated bona fide hedge recognizes as
a bona fide hedging transaction or position hedges against purchases of
any commodity for future delivery on a contract market which do not
exceed in quantity: (A) The fixed price sale of the same cash commodity
by the same person; and (B) the quantity equivalent of fixed-price
sales of the cash products and by-products of such commodity by the
same person. Since 2011, the Commission has included hedges of cash
commodity fixed-price sales contracts in its position limits
rulemakings, with no substantive modifications.\185\
---------------------------------------------------------------------------

    \184\ See, e.g., 7 U.S.C. 6a(3) (1970). That statutory
definition of bona fide hedging includes purchases of, or long
positions in, any commodity for future delivery on or subject to the
rules of any contract market made or held by such person to the
extent that such purchases or long positions are offset by sales of
the same cash commodity by the same person.
    \185\ 81 FR at 96964; 78 FR at 75824; 76 FR at 71689.
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Cash Commodity Fixed-Price Sales
Contracts
    This proposed enumerated bona fide hedge made minor modifications
to the existing bona fide hedge, and recognized that a commercial
enterprise is exposed to price risk if it has entered into a spot or
forward fixed-price sales contract calling for delivery in the physical
marketing channel of a cash-market commodity, and has not offset that
price risk exposure (i.e., that the market price of a commodity might
be higher than the price of its fixed-price sales contract for that
commodity). Under the 2020 NPRM, an appropriate hedge of a fixed-price
sales contract would be to establish a long position in a commodity
derivative contract to offset such price risk.\186\
---------------------------------------------------------------------------

    \186\ 85 FR at 11610.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Cash Commodity Fixed-Price
Sales Contracts
    The Commission is adopting the enumerated hedge for hedges of cash
commodity fixed-price sales contracts as proposed.
(4) Comments--Cash Commodity Fixed-Price Sales Contracts
    Aside from ASR, which expressed support for this enumerated hedge,
the Commission did not receive any other specific comments on this
enumerated hedge.\187\
---------------------------------------------------------------------------

    \187\ ASR at 2.
---------------------------------------------------------------------------

c. Hedges of Offsetting Unfixed Price Cash Commodity Sales and
Purchases
(1) Background--Offsetting Unfixed Price Cash Commodity Sales and
Purchases
    Hedges of offsetting unfixed price cash commodity sales and
purchases is currently enumerated in paragraph (2)(iii) of the existing
bona fide hedging definition in Sec.  1.3 and is subject to the Five-
Day Rule. This enumerated hedge is the only existing enumerated hedge
that expressly recognizes hedging the price risk arising from cash
commodity unfixed-price transactions.
    This enumerated bona fide hedge allows a market participant to use
commodity derivatives in excess of Federal position limits to offset an
unfixed-price cash commodity purchase coupled with an unfixed-price
cash commodity sale. Specifically, this enumerated bona fide hedge
allows for ``offsetting sales and purchases'' for future delivery on a
contract market which do not exceed in quantity that amount of the same
cash commodity which has been bought and sold by the same person at
unfixed prices basis different delivery months of the contract market.
    While not part of the original regulatory bona fide hedge
definition, the Commission adopted this enumerated bona fide hedge in
1987 to ``remove any doubt'' that certain cotton and soybean crush
inter-month spreads were covered under the Commission's bona fide hedge
definition.\188\ Since 2011, the Commission has included this
enumerated bona fide hedge in each of its position limits
rulemakings.\189\
---------------------------------------------------------------------------

    \188\ The Commission stated when it proposed this enumerated
bona fide hedge, in particular, a cotton merchant may contract to
purchase and sell cotton in the cash market in relation to the
futures price in different delivery months for cotton, i.e., a basis
purchase and a basis sale. Prior to the time when the price is fixed
for each leg of such a cash position, the merchant is subject to a
variation in the two futures contracts utilized for price basing.
This variation can be offset by purchasing the future on which the
sales were based and selling the future on which the purchases were
based. Revision of Federal Speculative Position Limits, 51 FR 31648,
31650 (Sept. 4, 1986).
    \189\ 81 FR at 96964; 78 FR at 75714; 76 FR at 71689.
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Offsetting Unfixed Price Cash Commodity
Sales and Purchases
    The Commission proposed to maintain this bona fide hedge, with a
few modifications.
    The 2020 NPRM proposed to expand the existing bona fide hedge,
which currently requires the offsetting purchase and sale to be at
basis to different delivery months of the same commodity derivative
contract, to additionally permit hedges of offsetting unfixed sales and
unfixed purchases for different commodity derivative contracts in the
same commodity (e.g., Brent/WTI), regardless of whether the contracts
are in the same delivery month. This proposed change would permit the
cash commodity to be bought and sold at unfixed prices at a basis to
different commodity derivative contracts in the same commodity, even if
the commodity derivative contracts were in the same calendar month
(i.e., buy Brent in January; sell WTI in January).\190\ The Commission
proposed this change to allow a commercial enterprise to enter into the
described derivatives transactions to reduce the risk arising from
either (or both) a location differential or a time differential in
unfixed-price purchase and sale contracts in the same cash
commodity.\191\
---------------------------------------------------------------------------

    \190\ 85 FR at 11608.
    \191\ Id. In the case of reducing the risk of a location
differential, and where each of the underlying transactions in
separate derivative contracts may be in the same contract month, a
position in a basis contract would not be subject to position
limits, as discussed in connection with paragraph (3) of the
proposed definition of ``referenced contract.''

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

[[Page 3267]]

    To be eligible for this enumerated hedge, both an unfixed-price
cash commodity purchase ``and'' an offsetting unfixed-price cash
commodity sale would have to be in hand, because having both the
unfixed-price sale and purchase in hand would allow for an objective
evaluation of the hedge.\192\
---------------------------------------------------------------------------

    \192\ For example, in the case of a calendar spread, having both
the unfixed-price sale and purchase in hand would set the timeframe
for the calendar month spread being used as the hedge.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Offsetting Unfixed Price
Cash Commodity Sales and Purchases
    The Commission is adopting the enumerated bona fide hedge for
offsetting unfixed price cash commodity sales and purchases as
proposed.
(4) Comments--Offsetting Unfixed Price Cash Commodity Sales and
Purchases
    There were minimal comments on the proposed amendments to this
hedge. IFUS explicitly supported the allowance of hedges against cash
positions in the same delivery month.\193\ CMC and ACSA requested that
the Commission modify the language of this enumerated bona fide hedge
to include ``offsetting sales or purchases.''\194\ CMC and FIA stated
that because merchants often sell commodities well in advance of
purchasing them, such merchants are exposed to the exact same calendar
spread price risk as merchants that have executed both unfixed price
legs of a transaction, because any futures market calendar spread
convergence or divergence will ``affect both scenarios in exactly the
same manner.''\195\ These commenters contended that changing the
language of the enumerated hedge from ``and'' to ``or'' would allow
merchants to hedge against this exposure.\196\
---------------------------------------------------------------------------

    \193\ IFUS at 4.
    \194\ CMC at 4; ACSA at 6.
    \195\ CMC at 4; FIA at 16.
    \196\ Id.
---------------------------------------------------------------------------

    In addition, because this is the only existing enumerated hedge
that expressly recognizes hedging for unfixed price transactions,
several commenters cited to this hedge when requesting that the
Commission explicitly endorse that commercial transactions with
unfixed-prices may serve as the basis for, and satisfy, the bona fide
hedging definition.\197\
---------------------------------------------------------------------------

    \197\ The Commission's determination on the treatment of
unfixed-price transactions under this Final Rule is in Section
II.A.1.iv.
---------------------------------------------------------------------------

(5) Discussion of Final Rule--Offsetting Unfixed Price Cash Commodity
Sales and Purchases
    The Commission is adopting the enumerated bona fide hedge for
offsetting unfixed price cash commodity sales and purchases as
proposed. The Commission considered the comments requesting the
Commission to change this bona fide hedge's language from referring to
offsetting unfixed-price purchase ``and'' sale transactions (which
requires both an unfixed purchase price transaction and an unfixed sale
price transaction) to instead refer to unfixed-price purchase ``or''
sales transactions (which would require only either a single unfixed-
price purchase transaction or an unfixed-price sale transaction) to
facilitate hedging calendar spread price risk for those market
participants that have executed only one leg of an unfixed-price
physical transaction (i.e., only a physical purchase or a physical
sale).
    The Commission continues to believe that the enumerated bona fide
hedge for offsetting unfixed price cash commodity sales and purchases
should continue to require both an unfixed-price cash commodity
purchase and an offsetting unfixed-price cash commodity sale. For this
particular bona fide hedge, absent either the unfixed-price purchase
leg or the unfixed-price sale leg (or absent both legs), it would be
less clear, and require a facts and circumstances analysis, to
determine how the transaction could be classified as a bona fide hedge,
that is, a transaction that reduces price risk.\198\
---------------------------------------------------------------------------

    \198\ The contemplated derivative positions will offset the risk
that the difference in the expected delivery prices of the two
unfixed-price cash contracts in the same commodity will change
between the time the hedging transaction is entered and the time of
fixing of the prices on the purchase and sales cash contracts.
Therefore, the contemplated derivative positions are economically
appropriate to the reduction of risk.
---------------------------------------------------------------------------

    Under the Final Rule, a single-sided unfixed price physical
transaction (i.e., a physical transaction involving an unfixed price
purchase or an unfixed price sale, but not both) cannot be offset with
derivatives in excess of position limits using this particular
enumerated bona fide hedge. However, a market participant with an
unfixed price purchase in the absence of an unfixed-price sale, or vice
versa, could potentially qualify for one or more of the enumerated
anticipatory bona fide hedges.\199\ Additionally, depending on the
facts and circumstances, a single-sided unfixed price contract could
potentially be the basis for a non-enumerated bona fide hedge.
---------------------------------------------------------------------------

    \199\ Specifically, as discussed above, because the Commission
does not view an unfixed-price commitment as filling, or satisfying,
an anticipated need, market participants with unfixed-price
commitments may qualify for an enumerated anticipatory bona fide
hedge, provided the market participant meets all applicable
requirements and conditions. See Section II.A.1.iv.
---------------------------------------------------------------------------

    While the Commission acknowledges concerns from commenters that
market participants that have executed only one leg of a physical
transaction (i.e., only an unfixed-price purchase or an unfixed-price
sale) may need to hedge calendar spread price risk, the Commission
believes the Final Rule offers several avenues for hedging such
risks.\200\ For example, under the offsetting unfixed price cash
commodity sales and purchases enumerated bona fide hedge, upon fixing
the price of, or taking delivery on, the purchase contract, the owner
of the cash commodity no longer has offsetting unfixed priced
transactions, but may continue to hold the short derivative leg of the
spread as a hedge against that fixed-price purchase or as inventory
under the enumerated hedge for fixed price transactions.
---------------------------------------------------------------------------

    \200\ The Final Rule also expands the ``spread transaction''
definition, so a market participant with an unfixed price purchase
or sale may also qualify for a calendar spread exemption, for
example, with one leg in the spot month. For further discussion of
the Final Rule's treatment of spread transactions, see Section
II.A.20.
---------------------------------------------------------------------------

    Alternatively, under this Final Rule, if the market participant
fixes the price the sales contract first, he or she may continue to
hold the long derivative leg of the spread by qualifying for bona fide
hedge treatment for that long position under another enumerated bona
fide hedge. For example, a market participant who otherwise meets all
applicable requirements of one of the anticipatory bona fide hedges may
qualify for such hedge(s) regardless of whether the market participant
holds an unfixed-price purchase transaction.
d. Hedges of Unsold Anticipated Production
(1) Background--Unsold Anticipated Production
    Unsold anticipated production has long served as the basis for an
enumerated bona fide hedging position.\201\ This bona fide hedge is
currently enumerated in paragraph (2)(i)(B) of the bona fide hedging
definition in existing Sec.  1.3, and is subject to the Five-Day Rule.
This

[[Page 3268]]

existing enumerated bona fide hedge includes hedges against the sales
of any commodity for future delivery on a contract market which does
not exceed in quantity twelve months' unsold anticipated production of
the same commodity by the same person.
---------------------------------------------------------------------------

    \201\ See 7 U.S.C. 6a(3)(A) (1940). That statutory definition of
bona fide hedging, enacted in 1936, included the amount of such
commodity such person is raising, or in good faith intends or
expects to raise, within the next twelve months, on land (in the
United States or its Territories) which such person owns or leases.
---------------------------------------------------------------------------

    The bona fide hedge of unsold anticipated production is one of two
existing enumerated anticipatory bona fide hedges currently included in
Sec.  1.3, the other being unfilled anticipated requirements (discussed
further below). The unsold anticipated production bona fide hedge
allows a market participant who anticipates production, but who has not
yet produced anything, to enter into a short derivatives position in
excess of Federal position limits to hedge the price risk arising from
that anticipated production. Since 2011, the Commission has included
hedges of unsold anticipated production in each of its position limits
rulemakings, with some modifications.\202\ The regulatory text for this
existing enumerated bona fide hedge is silent about whether it applies
to unsold anticipated production that is contracted to be sold under an
unfixed-price transaction.
---------------------------------------------------------------------------

    \202\ 81 FR at 96964; 78 FR at 75714; 76 FR at 71689.
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Unsold Anticipated Production
    The Commission proposed to maintain the existing enumerated bona
fide hedge of unsold anticipated production, with modifications as
follows. First, the Commission proposed to remove the twelve-month
restriction.\203\ Second, consistent with the treatment for the other
anticipatory bona fide hedges under the 2020 NPRM, the Commission
proposed to eliminate the existing restrictions during the last five
days of trading (i.e., eliminate the ``Five-Day Rule'').\204\
---------------------------------------------------------------------------

    \203\ 85 FR at 11608.
    \204\ For further discussion of the Five-Day rule, see Section
II.A.1.viii, Elimination of Federal Restriction Prohibiting Holding
a Bona Fide Hedge Exemption During Last Five Trading Days, the
``Five-Day Rule,'' below.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Unsold Anticipated
Production
    The Commission is adopting the enumerated bona fide hedge of unsold
anticipated production as proposed.
(4) Comments--Unsold Anticipated Production
    Several commenters, including ASR, ADM, and ICE, supported
eliminating the twelve-month restriction.\205\ ASR, for example, noted
that the lifecycle of sugarcane extends beyond a twelve-month
period.\206\
---------------------------------------------------------------------------

    \205\ ASR at 2; ADM at 2; ICE at 2; IECA at 2; and IFUS at 2.
    \206\ ASR at 2.
---------------------------------------------------------------------------

    Conversely, Better Markets and IATP opposed the elimination of the
twelve-month restriction.\207\ IATP stated that commercial market
participants such as storage facilities should instead use insurance
policies to manage their risks.\208\ Further, IATP stated that if the
Commission extends the duration up to 24 months, the Commission should
retain discretion to require market participants to demonstrate a
production level proportionate to the amount in excess of the Federal
position limit throughout the duration of the bona fide hedge
exemption.\209\
---------------------------------------------------------------------------

    \207\ IATP at 15-17; Better Markets at 57-58.
    \208\ IATP at 15-17.
    \209\ Id.
---------------------------------------------------------------------------

(5) Discussion of Final Rule--Unsold Anticipated Production
    The Commission is adopting the enumerated bona fide hedge of unsold
anticipated production as proposed. This enumerated bona fide hedge
allows a market participant who anticipates production, but who has not
yet produced anything, to enter into a short derivatives position in
excess of Federal position limits to hedge the anticipated unsold
production.\210\
---------------------------------------------------------------------------

    \210\ Once a market participant finishes its production, the
market participant will no longer qualify for this enumerated bona
fide hedge since its production is no longer anticipatory. Instead,
its completed production is now part of its inventory. However, the
enumerated bona fide hedge for inventory and cash commodity fixed-
price purchase contracts (discussed below) would become available to
the market participant.
---------------------------------------------------------------------------

    The Commission clarifies, as discussed above under Section
II.A.1.iv., that the enumerated bona fide hedge for unsold production
is available to a market participant who satisfies all applicable
requirements regardless of whether the market participant has entered
into an unfixed-price sales transaction in connection with its
anticipated unsold production. However, acquiring an unfixed-price
sales contract alone is not a basis for qualifying for this bona fide
hedge. Rather, under the Final Rule, entering into an unfixed-price
sales transaction will not prevent a market participant from qualifying
for the unsold anticipated production bona fide hedge.
    As the Commission explains above, an unfixed-price sales commitment
does not address the bona fide hedging need related to anticipated
unsold production because the market participant's price risk to its
anticipated production has not been fixed (i.e., the unfixed-price
sales contract may fall below the cost of production). In other words,
a producer with an unfixed-price sales commitment for its production
still has an anticipated need related to its price risk until the price
of the commitment is fixed. However, once the market participant enters
into a fixed-price sales contract, the market participant no longer has
price risk that needs to be hedged (i.e., its short futures contract is
no longer necessary as a hedge for its anticipated production).
    Accordingly, the market participant that enters into the fixed-
price transaction no longer has an anticipated need to hedge the price
risk associated with its unsold production (i.e., the anticipated
production is deemed to be ``sold'' by fixed-price sales transaction)
and would not qualify for this anticipated unsold production bona fide
hedge.
    Consequently, if the market participant no longer qualifies for the
unsold anticipated production bona fide hedging recognition (e.g., it
has entered into a fixed-price sales contract), its derivative
position, to the extent the position is above an applicable position
limit, must be reduced in an orderly manner in accordance with sound
commercial practices. However, if the market participant entered into a
fixed-price transaction, while it could not continue to qualify for the
unsold anticipated production bona fide hedge, the market participant
may be able to qualify for the enumerated bona fide hedge for cash
commodity fixed-price sales contracts, assuming all applicable
requirements are met.\211\
---------------------------------------------------------------------------

    \211\ For further discussion of the enumerated bona fide hedge
for cash commodity fixed-price sales contracts, see Section
II.A.1.vi.b.
---------------------------------------------------------------------------

    While the Commission acknowledges the comments from Better Markets
and IATP opposing the removal of the twelve-month restriction, the
Commission believes that this twelve-month restriction may be
unsuitable in connection with additional core referenced futures
contracts with the underlying agricultural and energy commodities that
would be subject to Federal position limits for the first time under
this Final Rule since these non-legacy commodities may have longer
growth and/or production cycles than the nine legacy agricultural
contracts. The existing twelve-month restriction may thus be
unnecessarily short in comparison to the expected life of investment in
production facilities. While this enumerated bona fide hedge for unsold
production does not have an associated twelve-month restriction under
the Final Rule, the Commission notes that because all bona fide hedges
must be economically appropriate to the

[[Page 3269]]

reduction of price risk pursuant to the CEA, a market participant may
only qualify for this enumerated bona fide hedge for anticipated unsold
production to the extent the market participant has a good faith
anticipation of legitimate anticipated unsold production giving rise to
such price risk.
    Further, additional provisions finalized herein under the Final
Rule will help ensure that all bona fide hedges, including bona fide
hedges of unsold anticipated requirements, comport with the CEA and the
Commission's regulations, and are objectively verifiable and free from
abuse.\212\
---------------------------------------------------------------------------

    \212\ See infra Sec. Sec.  150.5 and 150.9 (reporting and
recordkeeping obligations); Appendix B to part 150.
---------------------------------------------------------------------------

e. Hedges of Unfilled Anticipated Requirements
(1) Background--Unfilled Anticipated Requirements
    The existing bona fide hedge for unfilled anticipated requirements
is currently enumerated in paragraph (2)(ii)(C) of the existing bona
fide hedging definition in Sec.  1.3. This bona fide hedge includes
hedges against purchases of any commodity for future delivery on a
contract market which do not exceed in quantity twelve months' unfilled
anticipated requirements of the same cash commodity for processing,
manufacturing, or feeding by the same person.
    Consistent with the existing enumerated bona fide hedge for
anticipated unsold production, as discussed above, the existing bona
fide hedge for unfilled anticipated requirements is similarly subject
to the twelve-month restriction as well as a less-restrictive version
of the ``Five-Day Rule.'' With respect to the Five-Day Rule, under
existing Sec.  1.3, the unfilled anticipated requirements bona fide
hedge provides that the size of a market participant's position held
``in the five last trading days'' must not exceed the person's unfilled
anticipated requirements of the same cash commodity for that month and
for the next succeeding month.\213\
---------------------------------------------------------------------------

    \213\ This is essentially a less-restrictive version of the
five-day rule, allowing a participant to hold a position during the
end of the spot period if economically appropriate, but only up to
two months' worth of anticipated requirements. The two-month
quantity limitation has long-appeared in existing Sec.  1.3 as a
measure to prevent the sourcing of massive quantities of the
underlying in a short period. 17 CFR 1.3.
---------------------------------------------------------------------------

    However, the regulatory text in existing Sec.  1.3 is silent about
whether the bona fide hedge applies to unfilled anticipated
requirements that are contracted to be supplied under an unfixed-price
transaction or whether such unfixed-price supply transaction would
``fill'' the anticipated requirements.
    As discussed above, staff previously has addressed this question
through Staff Letter No. 12-07, in which staff clarified that a
commercial entity may qualify for the existing enumerated bona fide
hedge for unfilled anticipated requirements even if the commercial
entity has entered into long-term, unfixed-price supply or requirements
contracts because, as staff explained, the unfixed-price purchase
contract does not ``fill'' the commercial entity's anticipated
requirements.\214\ As explained in Staff Letter No. 12-07, the price
risk of such ``unfilled'' anticipated requirements is not offset by the
unfixed-price forward contract because the price risk remains with the
commercial entity, even though the entity has contractually assured a
supply of the commodity. Staff Letter No. 12-07 had the practical
effect of affirming that market participants with firm commitments at
unfixed prices may still be able to avail themselves of this enumerated
anticipatory hedge for unfilled requirements.
---------------------------------------------------------------------------

    \214\ CFTC Letter No. 12-07, Interpretation, Request for
guidance regarding meaning of ``unfilled anticipated requirements''
for purposes of bona fide hedging under the Commission's position
limits rules (Aug. 16, 2012).
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Unfilled Anticipated Requirements
    The Commission proposed several amendments to the unfilled
anticipated requirements bona fide hedge. First, the Commission
proposed to remove the twelve-month restriction because the Commission
recognized that market participants may have a legitimate commercial
need to hedge unfilled anticipated requirements for a period longer
than twelve months.\215\
---------------------------------------------------------------------------

    \215\ See, e.g., 85 FR at 11610.
---------------------------------------------------------------------------

    Second, the Commission proposed to remove from the regulatory text
the agricultural-specific term ``feeding,'' and to replace that word
with a reference to ``use by that person.''
    Third, recognizing that utilities are not the entities who ``use''
the commodity, the Commission also proposed to add as a permissible
hedge the unfilled anticipated requirements for the contract's
underlying cash commodity for the resale by a utility to meet the
anticipated demand of its customers. This proposed provision is
analogous to the existing unfilled anticipated requirements provision
``for processing, manufacturing or use by the same person[.]'' \216\
Under this proposed new provision, however, the commodity is not for
use by the same person--that is, the utility--but rather the commodity
is for anticipated use by the utility to fulfill its obligation to
serve retail customers.
---------------------------------------------------------------------------

    \216\ 17 CFR 1.3.
---------------------------------------------------------------------------

    Finally, consistent with the treatment for the other anticipatory
bona fide hedges under the 2020 NPRM, the Commission proposed to
eliminate the existing restrictions during the last five last days of
trading.
(3) Summary of the Commission Determination--Unfilled Anticipated
Requirements
    The Commission is adopting the unfilled anticipated requirements
enumerated bona fide hedge as proposed.
(4) Comments--Unfilled Anticipated Requirements
    Commenters supported continuing to include this bona fide hedge as
part of the Commission's amended suite of enumerated anticipatory bona
fide hedges.\217\ As described below, commenters also requested the
Commission clarify certain aspects of the proposed version.
---------------------------------------------------------------------------

    \217\ e.g., AGA at 6-7; ADM at 2; CEWG at 4; EEI and EPSA
jointly at 5; IECA at 2; NOPA at 2; NGSA at 3.
---------------------------------------------------------------------------

(i) Elimination of Requirement to Hedge Only Twelve Months' Quantity of
Unfilled Anticipated Requirements
    Only a small group of commenters directly commented on the
elimination of the twelve-month restriction. ICE, IFUS, IECA, AGA, ADM
and NOPA supported eliminating the twelve-month restriction,\218\ with
ADM stating that there may be times this anticipatory hedge is needed
for ``commercial purposes beyond twelve-months.'' \219\ In contrast,
Better Markets opposed the removal of the restriction, stating that
such removal would make the hedge less reasonably verifiable and open
the hedge to potential abuse.\220\
---------------------------------------------------------------------------

    \218\ AGA at 6-7, ADM at 2, NOPA at 2, IFUS at 2, ICE at 2, and
IECA at 2.
    \219\ ADM at 2.
    \220\ Better Markets at 58-59.
---------------------------------------------------------------------------

(a) Discussion of Final Rule--Twelve-Month Restriction
    After considering public comments, the Commission has determined
that the commercial need to hedge unfilled anticipated requirements for
a period longer than twelve months, along with the Commission's
experience in overseeing exemptions \221\ under this

[[Page 3270]]

enumerated bona fide hedge, suggest in favor of eliminating the twelve-
month restriction. While the Commission acknowledges the comments from
Better Markets opposing the removal of the twelve-month restriction,
the Commission notes that, a twelve-month limitation in connection with
this particular enumerated bona fide hedge may be unsuitable in
connection with commodities other than the nine legacy agricultural
commodities. For example, a processor or utility relying on the
unfilled anticipated requirements bona fide hedge has a physical limit
on processing, or energy generation, respectively, which should
generally result in relatively predictable levels of activity that will
not vary much year to year. Further, additional provisions finalized
herein will help ensure that all bona fide hedges, including hedges of
unfilled anticipated requirements, comport with the CEA and the
Commission's regulations, and are reasonably verifiable and free from
abuse.
---------------------------------------------------------------------------

    \221\ The Commission and its predecessor agency, the Commodity
Exchange Authority, has decades of expertise in granting bona fide
exemptions. See 21 FR 6913 (Sep 13, 1956).
---------------------------------------------------------------------------

    For example, under Sec.  150.5(a)(2)(ii)(A), finalized herein, all
market participants seeking a bona fide hedge exemption for referenced
contracts subject to Federal position limits, including those market
participants with enumerated bona fide hedges that are self-
effectuating for purposes of Federal position limits, must still file
an application to the exchange requesting an exemption from the
applicable exchange-set position limits prior to exceeding the
exchange-set limits. The application for an exemption from exchange-set
limits must include information the exchange needs to determine, and
the Commission can use that information to independently determine,
whether the facts and circumstances support the exchange granting such
an exemption. The market participant must include a description of the
applicant's activity in the cash markets and swaps markets for the
commodity underlying the position for which the application is
submitted, including, but not limited to, information regarding the
offsetting cash positions.\222\ The exchange is required to take into
account whether the exemption would result in positions that would not
be in accord with sound commercial practices and whether the position
would exceed an amount that may be established and liquidated in an
orderly fashion.\223\ Accordingly, if hedging more than twelve months'
quantity of unfilled anticipated requirements would not be in accord
with sound commercial practices, or would exceed an amount that may be
established and liquidated in an orderly fashion, the exchange would be
prohibited from granting the exemption.
---------------------------------------------------------------------------

    \222\ 150.5(a)(2)(ii)(A).
    \223\ 150.5(a)(2)(ii)(G).
---------------------------------------------------------------------------

    Even in the absence of a Federal twelve-month restriction, when
administering exchange-set limits, exchanges may, as they do today,
implement a variety of restrictions and limitations on position size to
maintain orderly markets and to fulfill their regulatory obligations.
As described in further detail below, the Commission is finalizing
guidance in paragraph (b) of Appendix B to part 150 to help exchanges
determine when any such restrictions during the spot month might be
appropriate, and when such restrictions may not be needed. For example,
consistent with the guidance in Appendix B to part 150, paragraph (b),
an exchange may consider adopting rules to require that during the
lesser of the last five days of trading (or such time period for the
spot month), such positions must not exceed the person's unfilled
anticipated requirements of the underlying cash commodity for that
month and for the next succeeding month.\224\ Depending on the specific
facts and circumstances, and particular market dynamics, any such
quantity limitation may prevent the use of long futures to source large
quantities of the underlying cash commodity. The Commission may be able
to determine that an exchange's adoption of a two-month limitation
would allow for an amount of activity that is economically appropriate
and in line with common commercial hedging practices, without
jeopardizing any statutory objectives.
---------------------------------------------------------------------------

    \224\ This is essentially a less-restrictive version of the
Five-Day rule, allowing a participant to hold a position during the
end of the spot period if economically appropriate, but only up to
two months' worth of anticipated requirements. The two-month
quantity limitation has long-appeared in existing Sec.  1.3 as a
measure to prevent the sourcing of massive quantities of the
underlying in a short time period. 17 CFR 1.3.
---------------------------------------------------------------------------

(ii) Scope of Unfilled Anticipated Requirements and Unfixed-Price
Transactions
    Commenters questioned the extent to which anticipated requirements
may be considered to be ``filled'' by unfixed-price purchase supply
contracts under the proposed enumerated bona fide hedge for unfilled
anticipated requirements. COPE, IECA, EPSA and EEI requested
clarification on whether this enumerated hedge covers anticipated
requirements ``filled'' by an unfixed-price purchase contract common to
many electric generators.\225\
---------------------------------------------------------------------------

    \225\ COPE at 6; IECA at 7-8; EPSA and EEI jointly at 5.
---------------------------------------------------------------------------

    IECA recommended the Commission should either (i) adopt a broad
definition of the word ``unfilled'' that would include anticipated
requirements that are ``filled'' by unfixed-price transactions, or (ii)
expand this bona fide hedge to include both ``unfilled'' and
``unpriced'' \226\ anticipated requirements.\227\
---------------------------------------------------------------------------

    \226\ The Commission recognizes that market participants may
utilize different nomenclature to refer to unfixed-price contracts.
For example, some commenters may refer to these contracts as
``unpriced'' contracts, while others may refer to these physical
contracts as being at an unfixed spot index price. See FIA at 17,
31; COPE at 6.
    \227\ IECA at 7-8.
---------------------------------------------------------------------------

    AGA also requested clarification \228\ regarding the 2020 NPRM's
statement that this bona fide hedge would recognize a position where a
utility is ``required or encouraged'' by its public utility commission
to hedge.\229\ AGA noted that while the ``required or encouraged''
language is not in the proposed regulatory text, clarification of the
scope for the exemption would result in more certainty for those
utilities in states where the public utility commission may not
directly address or require hedging activities, but instead may allow
or permit hedging for the potential benefits to customers.\230\
---------------------------------------------------------------------------

    \228\ AGA at 6-7.
    \229\ See 7 U.S.C. 6a(c)(2)(A)(iii); 85 FR at 11610 (``This
would recognize a bona fide hedging position where a utility is
required or encouraged by its public utility commission to hedge'').
    \230\ AGA at 6-7.
---------------------------------------------------------------------------

(a) Discussion of Final Rule--Scope of Unfilled Anticipated
Requirements
    Regarding the requests for clarification on the scope of the term
``unfilled'' in this enumerated hedge, the Commission clarifies that
anticipated ``unfilled'' requirements are not ``filled'' by unfixed-
price transactions. Accordingly, a market participant with a purchase
or sale of a physical commodity, entered into at an unfixed price, may
continue to avail itself of this anticipatory hedge even though the
participant has entered into a firm, albeit unfixed-price, commitment,
and provided all applicable requirements are satisfied.\231\
---------------------------------------------------------------------------

    \231\ The Commission clarifies that unfixed-price contracts
include physical fuel agreements for power production for security
of supply that are priced at an unfixed spot index price.
---------------------------------------------------------------------------

    As discussed above under Section II.A.1.iv., the Commission adopts
the interpretation of Staff Letter No. 12-07.\232\ That is, commercial
entities that

[[Page 3271]]

enter into unfixed-price transactions may continue to qualify for the
enumerated bona fide hedge for unfilled anticipated requirements as
long as the commercial entity otherwise satisfies the criteria for this
hedge. This rationale is predicated on the fact that an unfixed-price
purchase commitment does not fill an anticipated requirement in that
the market participant's price risk to the input has not been fixed.
---------------------------------------------------------------------------

    \232\ CFTC Staff Letter No. 12-07.
---------------------------------------------------------------------------

    The Commission continues to believe that unfilled anticipated
requirements are those anticipated inputs that are estimated in good
faith and that have not been filled. As such, an anticipated
requirement may be filled by fixed-price purchase commitments, holdings
of commodity inventory, or unsold anticipated production of the market
participant.\233\ Unfixed-price transactions, however, do not fill an
anticipated requirement.
---------------------------------------------------------------------------

    \233\ 81 FR at 96752.
---------------------------------------------------------------------------

    Under this anticipatory hedge, once the price is fixed on a supply
contract, the market participant holding the anticipatory hedge
position must, to the extent the position is above an applicable
Federal position limit, liquidate the position in an orderly manner in
accordance with sound commercial practices. Nevertheless, subject to
the specific facts and circumstances, the market participant at that
point may have established the basis for a different bona fide hedge
exemption to offset the price risk arising from its fixed price
exposure.
    Finally, the Commission agrees with the commenters' request for
clarification that a utility qualifies for the unfilled anticipated
requirements enumerated hedge even if the utility is not ``required or
encouraged'' by its public utility commission to hedge.

f. Hedges of Anticipated Merchandising

(1) Background--Anticipated Merchandising
    The existing bona fide hedge definition in Sec.  1.3 includes
enumerated bona fide hedges that recognize offsets of certain
anticipated activities,\234\ but does not currently include an
enumerated bona fide hedge for anticipated merchandising. While the
Commission's 2011 Final Rule included an enumerated hedge for
anticipated merchandising, it was a narrow hedge focused on the leasing
of storage capacity,\235\ and that rulemaking was ultimately vacated.
---------------------------------------------------------------------------

    \234\ See, e.g., Sec. Sec.  1.3(z)(2)(i)(B) (unsold anticipated
production) and 1.3(z)(2)(ii)(C) (unfilled anticipated
requirements).
    \235\ The 2011 Final Rule was the first time the Commission
recognized that in some circumstances, a market participant that
owns or leases an asset in the form of storage capacity could
establish positions to reduce the risk associated with returns
anticipated from owning or leasing that capacity. In those narrow
circumstances, the Commission found that those transactions
satisfied the statutory definition of a bona fide hedging
transaction.
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Anticipated Merchandising
    The Commission proposed a new enumerated bona fide hedge for
anticipated merchandising. The proposed anticipated merchandising hedge
recognized long or short positions in commodity derivative contracts
that offset the anticipated change in value of the underlying commodity
that a person anticipates purchasing or selling.\236\
---------------------------------------------------------------------------

    \236\ 85 FR at 11727.
---------------------------------------------------------------------------

    While the proposed enumerated anticipated merchandising bona fide
hedge would operate as a self-effectuating bona fide hedge, the
proposed bona fide hedge was subject to the following conditions: (1)
The position offsets the anticipated change in value of the underlying
commodity that a person anticipates purchasing or selling; (2) the
position does not exceed in quantity twelve months' of current or
anticipated purchase or sale requirements of the same cash commodity
that is anticipated to be purchased or sold; (3) the person holding the
position is a merchant handling the underlying commodity that is
subject to the anticipated merchandising hedge; (4) that such merchant
is entering into the position solely for purposes related to its
merchandising business; and (5) the person has a demonstrated history
of buying and selling the underlying commodity for its merchandising
business.\237\
---------------------------------------------------------------------------

    \237\ Id.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Anticipated Merchandising
    The Commission is adopting the anticipated merchandising enumerated
hedge as proposed, and makes certain clarifications below to respond to
specific questions from commenters summarized below.
    The Commission recognizes that anticipated merchandising is a
hedging practice commonly used by some commodity market participants,
and that merchandisers play an important role in the physical supply
chain. The Commission also recognizes that the derivative transactions
utilized by commercial participants to manage such merchandising
activity are beneficial to price discovery.
(4) Comments--Anticipated Merchandising
(i) Generally
    A majority of commenters strongly supported the addition of an
enumerated bona fide hedge for anticipatory merchandising.\238\ In
particular, market participants from the energy industry strongly
supported the inclusion of this enumerated hedge, subject to certain
clarifications described in detail further below.\239\ On the other
hand, Better Markets indicated that the enumerated anticipatory bona
fide hedges generally, and particularly the enumerated hedge for
anticipatory merchandising, pose a regulatory avoidance risk.\240\
Better Markets expressed concern that market participants could attempt
to claim an underlying risk is anticipated in a cash commodity in order
to justify positions in referenced contracts that exceed Federal
position limits.\241\
---------------------------------------------------------------------------

    \238\ AGA at 1, 8; AFR at 2; Cargill at 4-6; NGSA at 2, 4; CMC
at 4-5, 7-8; ADM at 3; NCFC at 2-4; Chevron at 2, 5; Suncor at 3, 5;
IFUS at 2 (Exhibit 1 RFC 4); ICEA at 2; NGFA at 4, 7; CCI at 7-9;
ASR at 2; FIA at 16; CEWG at 14.
    \239\ AGA at 8; AFR at 2; Cargill at 5-6; NGSA at 4; CMC at 5,
7; ADM at 3; NCFC at 3-4; Chevron at 5; Suncor at 5; IFUS at Exhibit
1 RFC 4; ICEA at 2; NGFA at 7; CCI at 7-9.
    \240\ Better Markets at 3, 59-60 (stating that ``. . . an
identical conceptual avoidance risk continues to exist across all of
these anticipatory hedges--namely, that firms may claim an
underlying risk is anticipated in order to justify positions well
over the speculative limits in Referenced Contracts'').
    \241\ Id.
---------------------------------------------------------------------------

    In addition to expressing support for the inclusion of this
enumerated bona fide hedge, most commenters also requested clarity or
guidance on the scope of the proposed anticipated merchandising bona
fide hedge. For example, CMC stated that the Commission must be clear
with the exchanges and the end-user community about what activity is
included in the enumerated anticipated merchandising bona fide
hedge.\242\ Similarly, Cargill and NGFA supported the addition of the
enumerated anticipated merchandising bona fide hedge, but urged the
Commission to provide more clarity on how the enumerated bona fide
hedge would be applied.\243\ Cargill and NGFA also requested that the
Commission address language that appeared in footnote 105 of the 2020
NPRM,\244\

[[Page 3272]]

which implied that certain storage hedges and hedges of assets owned or
anticipated to be owned would be evaluated through the non-enumerated
bona fide hedge process, rather than as a self-effectuating enumerated
anticipated merchandising bona fide hedge.\245\
---------------------------------------------------------------------------

    \242\ CMC at 5 (stating that n.105 of the 2020 NPRM casts a
significant shadow of uncertainty and that if the Commission
believes limits are necessary, it must be clear with the exchanges
and the end-user community about what activities are enumerated).
    \243\ Cargill at 5-6; NGFA at 7.
    \244\ 85 FR at 11612. Footnote 105 from the 2020 NPRM provided:
``Similarly, other examples of anticipatory merchandising that have
been described to the Commission in response to request for comment
on proposed rulemakings on position limits (i.e., the storage hedge
and hedges of assets owned or anticipated to be owned) would be the
type of transactions that market participants may seek through one
of the proposed processes for requesting a non-enumerated bona fide
hedge recognition.''
    \245\ Cargill at 5-6; NGFA at 7.
---------------------------------------------------------------------------

(ii) Requirements for Anticipated Merchandising
(a) Requirement to Hedge Only Twelve Months' Worth of Anticipated
Requirements
    Although many public comments addressed the new anticipated
merchandising bona fide hedge, only a few commenters opposed the
proposed requirement to limit this hedge to only twelve months' worth
of current or anticipated purchase or sale requirements of the same
cash commodity that is anticipated to be purchased or sold. FIA opposed
the twelve-month restriction, stating that CEA section 4a(c)(2) does
not tie the validity of a bona fide hedge to the duration of the
commercial requirement being hedged.\246\ FIA also provided an example
pointing out that market participants often need hedges of anticipated
purchases or sales longer than twelve months, such as when a merchant
has a reasonable expectation of anticipated sales beyond a twelve-month
quantity.\247\
---------------------------------------------------------------------------

    \246\ FIA at 16-17.
    \247\ Id.
---------------------------------------------------------------------------

    Similarly, ADM stated that anticipatory merchandising transactions
should be considered similar to ``hedges of anticipated requirements''
and therefore not subject to the twelve-month restriction.\248\
---------------------------------------------------------------------------

    \248\ ADM at 3. The 2020 Proposal would remove the existing 12-
month restriction applicable to the existing enumerated hedge for
unfilled anticipated requirements. See 85 FR at 11610.
---------------------------------------------------------------------------

(b) Discussion of Final Rule--Twelve-Month Restriction
    After considering the comments on the requirement to hedge only
twelve months' worth of anticipated requirements, the Commission is
adopting the twelve-month restriction as proposed. The Commission
continues to believe that, as stated in the 2020 NPRM, this requirement
is intended to ensure that merchants are hedging their legitimate
anticipated merchandising exposure to the value change of the
underlying commodity, while calibrating the anticipated need within a
reasonable timeframe and subject to the limitations in physical
commodity markets, such as annual production or processing
capacity.\249\ A twelve-month restriction for anticipated merchandising
is suitable in connection with contracts that are based on anticipated
activity on yet-to-be established cash positions due to the uncertainty
of forecasting such activity and, all else being equal, the increased
risk of excessive speculation on the price of a commodity the longer
the time period before the actual need arises.
---------------------------------------------------------------------------

    \249\ 85 FR at 11611.
---------------------------------------------------------------------------

    Regarding FIA's comment opposing the twelve-month restriction based
on FIA's interpretation of CEA section 4a(c)(2), the Commission is
comfortable that hedging twelve months' or less of current or
anticipated purchase or sale requirements of the same cash commodity
that is anticipated to be purchased or sold is consistent with the CEA
section 4a(c)(2)(A)(ii) requirement that bona fide hedges be
economically appropriate to the reduction of risks in the conduct and
management of a commercial enterprise.\250\ However, hedging more than
twelve months' anticipated purchase or sale requirements could in some
cases be inconsistent with that statutory requirement. Accordingly,
bona fide hedges involving more than twelve months' worth of
anticipated requirements for anticipated merchandising are best
evaluated on a case-by-case basis under the non-enumerated process
adopted herein. The Commission understands that commercial firms may
seek to manage the price risk of more than twelve months' anticipated
merchandising activities; where such situations arise, the Commission
believes a non-enumerated bona fide hedge could be appropriate.
---------------------------------------------------------------------------

    \250\ See 7 U.S.C. 6a(c)(2)(A)(ii).
---------------------------------------------------------------------------

    The Commission also considered comments that stated that the
Commission should treat the proposed anticipated merchandising bona
fide hedge similar to the other anticipatory bona fide hedges adopted
herein (i.e., the enumerated bona fide hedges for unsold anticipated
production and unfilled anticipated requirements), which are no longer
subject to the twelve-month restriction.\251\ However, the Commission
believes that the enumerated bona fide hedge for anticipated
merchandising, which is a new enumerated bona fide hedge, is
distinguishable from the enumerated bona fide hedges for unsold
anticipated production and unfilled anticipated requirements, which
both have been part of the Federal position limits framework for
decades.
---------------------------------------------------------------------------

    \251\ ADM at 3.
---------------------------------------------------------------------------

    In particular, the Commission has determined that a twelve-month
restriction is unnecessary for bona fide hedges of unfilled anticipated
requirements and unsold anticipated production in part because
anticipated production and requirements, unlike merchandising, are
linked and subject to inherent physical limits. For example, a
processor has a physical limit on production capacity to support claims
of anticipated unsold production. Likewise, a manufacturer, processor
or utility has a physical limit on manufacturing, processing, or energy
generation, respectively, for similar reasons to tie any claim of
anticipated requirements. In each case, anticipated production or
requirements generally should result in relatively predictable levels
of activity that will not vary much year to year. In contrast, the
amount a given market participant could claim to anticipate
merchandising is potentially unlimited and less connected to physical
production capacity.\252\
---------------------------------------------------------------------------

    \252\ To verify market participants' bona fide hedging needs,
the Final Rule's recordkeeping requirements require persons availing
themselves of enumerated bona fide hedge recognitions to maintain
complete books and records concerning all relevant information on
their anticipated requirements, production, and merchandising
activities. See 17 CFR 150.3(d)(1). Furthermore, the Commission
notes that as part of the exemption application process under final
Sec.  150.5, persons seeking exemptions from exchange-set position
limits are required to include a description of its activities in
the cash markets and swap markets for the commodity underlying the
position for which the application is submitted.
---------------------------------------------------------------------------

(iii) Request for Clarification--Meaning of ``Merchant''
    Comments from energy market participants requested that the
Commission clarify the meaning of the term ``merchant'' as such term is
used in the regulatory text of the proposed anticipated merchandising
hedge.\253\ Specifically, market participants from the energy industry
expressed concern about whether the Commission would construe the term
``merchant'' such that only entities that are solely merchants, and not
engaged in other business activities, would qualify for the anticipated
merchandising bona fide hedge.\254\ These commenters explained that
large energy companies with

[[Page 3273]]

vertically integrated corporate structures typically have several legal
entities that perform individual business functions, including
merchandising.\255\ As such, these commenters requested the Commission
clarify that integrated energy companies routinely engaged in
merchandising activities, as well as other activities such as
production, processing, marketing and power generation, may utilize the
enumerated hedge for anticipated merchandising in addition to other
bona fide hedges.\256\
---------------------------------------------------------------------------

    \253\ CMC at 5; Shell at 8; Chevron at 5-6; Suncor at 5-6; CEWG
at 15-16.
    \254\ Shell at 8; Chevron at 5-6; Suncor at 5-6; CEWG at 15-16.
    \255\ Id.
    \256\ Id.
---------------------------------------------------------------------------

(a) Discussion of Final Rule--Meaning of ``Merchant''
    The Commission is adopting the term ``merchant'' in the final
anticipated merchandising bona fide hedge as proposed, but clarifies
here the intended meaning of that term.
    In particular, the Commission is clarifying that the term
``merchant'' in the anticipated merchandising enumerated bona fide
hedge is not limited to those entities exclusively engaged in the
business of merchandising. Instead, the term ``merchant'' may include
physical commodity market participants that, in addition to offering or
entering into transactions solely for purposes related to their
merchandising business, may otherwise also be a producer, processor, or
commercial user of the commodity that underlies the anticipated
merchandising transaction.
    The Commission's use of the term ``merchant'' is intended to
capture commercial market participants who participate in the physical
commodity market, and does not exclude such participants simply because
they have a vertically integrated corporate structure. That is, energy,
agricultural, or metal companies in the physical commodity market with
vertically-integrated or complex corporate structures are not excluded
as merchants, so long as they otherwise satisfy all applicable
requirements related to the anticipated merchandising bona fide hedge.
    The condition requiring the person to be a merchant to qualify for
this enumerated hedge is consistent with the Commission's longstanding
practice of providing commercial market participants relief from
certain regulatory requirements as a way of reducing regulatory
compliance obligations that would otherwise burden a commercial market
participant's physical commodity business.
    The Commission has taken a similar approach under the trade option
exemption by exempting the physically delivered commodity options
purchased by commercial users of the commodities underlying the
options. Under the trade option relief, the Commission recognized that
commercial market participants needed relief by generally exempting
qualifying commodity options from the swap requirements of the CEA and
the Commission's regulations.\257\ Unlike in the trade option
requirements, there is no requirement under the anticipated
merchandising enumerated bona fide hedge that both counterparties
qualify as merchants. The anticipated merchandising enumerated bona
fide hedge, however, is intended to generally benefit the same type of
market participants as the trade option exemption, that is, commercial
market participants who participate in the physical commodity market
for the underlying commodity being merchandised. As such, the text of
the anticipated merchandising enumerated bona fide hedge excludes a
party who is not entering into the anticipated merchandising activity
solely for commercial purposes related to its merchandising business,
but instead, to speculate on the price of the underlying commodity. For
example, non-commercial market participants who employ various
arbitrage strategies, including sometimes trading arbitrage positions
in cash commodity markets to speculate on the price of the underlying
commodity, and those market participants with highly leveraged
derivatives portfolios of non-physical commodities, would not qualify
as merchants.
---------------------------------------------------------------------------

    \257\ Trade Options, Final Rule, 81 FR 14966 (March 21, 2016).
---------------------------------------------------------------------------

    Finally, the Commission has determined that it is not necessary to
amend the regulatory text's reference to merchant to expressly include
producers or processors. As clarified above, a producer and a processor
may qualify for the anticipated merchandising bona fide hedge as a
merchant if a part of their business involves merchandising.
Furthermore, such entities that are also producers or processors may
otherwise rely on the enumerated anticipated unsold anticipated
production or unfilled anticipated requirements bona fide hedges, where
applicable. Thus, the Commission is providing these market participants
with ample flexibility to manage the price risks arising from their
anticipated merchandising activity using an expanded suite of
anticipatory bona fide hedges.
(iv) Requirement for a History of Merchandising
    The Commission did not receive any specific comments on the
proposed requirement to demonstrate a history of merchandising
activity.
(a) Discussion of Final Rule--History of Merchandising Requirement
    The Commission is adopting the requirement to demonstrate a history
of merchandising as proposed.
    Such demonstrated history must include a history of making and
taking delivery of the underlying commodity, and a demonstrated ability
to store and move the underlying commodity.\258\ A merchandiser that
lacks the requisite history of anticipated merchandising activity could
still potentially receive bona fide hedge recognition under the non-
enumerated process, so long as the merchandiser can otherwise
demonstrate compliance with the bona fide hedging definition and other
applicable requirements, including demonstrating activities in the
physical marketing channel, including, for example, arrangements to
take or make delivery of the underlying commodity.\259\
---------------------------------------------------------------------------

    \258\ 85 FR at 11611.
    \259\ Id.
---------------------------------------------------------------------------

(v) Scope of Anticipated Merchandising Activity
    In response to comments from the exchanges and market participants,
the Commission is providing further clarity on the scope of the
enumerated anticipated merchandising bona fide hedge. The Commission
discusses below certain non-exclusive types of activities that are
covered by the enumerated anticipated merchandising bona fide hedge.
(a) Request for Clarification--Unfixed-Price Contracts and Enumerated
Anticipated Merchandising Hedge
    Commenters requested clarification on whether the enumerated bona
fide hedge for anticipated merchandising may be used to manage price
risk arising from unfixed-price physical commodity transactions.
Specifically, several commenters requested clarification on whether a
firm may use the anticipated merchandising bona fide hedge to manage
the risk associated with a single-sided unfixed purchase or sale at a
moment when the same firm does not have an offsetting sale or
purchase.\260\ In

[[Page 3274]]

addition to commercial market participants, ICE and CME Group also
requested that the Commission recognize single-sided hedges of unfixed-
price purchases or sales. Similar to energy market participants, ICE
noted that pricing physical energy commodity transactions at unfixed
prices is a common pricing mechanism in the energy markets.\261\ CME
Group provided a hypothetical example of a single-side floating or
unfixed-price purchase or sale to demonstrate that derivatives
positions entered into to effectuate that single-sided unfixed-price
purchase or sale would reduce the price risk arising for each
counterparty.\262\
---------------------------------------------------------------------------

    \260\ NCFC at 3-4; CMC at 4; IFUS at 4-5; NGSA at 6 (requesting
the Commission unambiguously recognize hedges of index-price risk
(not just fixed-price risk), noting that exchanges currently
recognize these types of hedges).
    \261\ ICE at 4.
    \262\ CME Group at 8.
---------------------------------------------------------------------------

    Some commenters requested the Commission clarify that market
participants can utilize the enumerated anticipatory merchandising
hedge to manage the price risks arising from unfixed-price
transactions.\263\
---------------------------------------------------------------------------

    \263\ CEWG at 19; CMC at 8; Shell at 7-8; ACSA at 6; ICE at 5;
CME Group at 8; Ecom at 1; Southern Cotton at 2; Canale Cotton at 2;
Moody Compress at 1; IMC at 2; Mallory Alexander at 2; ACA at 2;
East Cotton at 2; Jess Smith at 2; Olam at 2; McMeekin at 2; Memtex
at 2; Omnicotton at 2; Toyo at 2; Texas Cotton at 2; NCC at 1;
Walcot at 2; White Gold at 2.
---------------------------------------------------------------------------

    Other commenters suggested the Commission could create a new
enumerated bona fide hedge category solely to recognize hedges of
unfixed-price transactions.\264\
---------------------------------------------------------------------------

    \264\ ACSA at 6-7; NCC at 2.
---------------------------------------------------------------------------

(1) Discussion of Final Rule--Unfixed-Price Contracts and Enumerated
Anticipated Merchandising Hedge
    As discussed above under Section II.A.1.iv., the Commission is
clarifying that market participants that enter into unfixed-price
transactions may still be able to qualify for the enumerated bona fide
hedge for anticipated merchandising. In other words, a commercial
entity that enters into an unfixed-price transaction may qualify for an
anticipated merchandising bona fide hedge as long as the market
participant satisfies the other requirements, discussed above and
below, of the final anticipated merchandising bona fide hedge (e.g.,
qualifies as a merchant, demonstrates a history of merchandising and
satisfies the twelve-month restriction). This rationale is predicated
on the fact that an unfixed-price transaction does not address a
merchant's anticipated merchandising need in that the merchant's price
risk to the merchandise has not been fixed. Accordingly, a merchant may
use the anticipated merchandising hedge to manage the risk associated
with a single sided unfixed purchase or sale at a moment when the same
firm does not have an offsetting sale or purchase. The Commission's
treatment of unfixed-price transactions is discussed in more detail in
Section II.A.1.iv.\265\
---------------------------------------------------------------------------

    \265\ See Section II.A.1.iv, addressing the treatment of unfixed
price transactions.
---------------------------------------------------------------------------

    While the Commission understands market participants' desire for a
standalone exemption for unfixed-price transactions, the Commission
finds that such an exemption is unnecessary. The Commission notes that
the modified and expanded suite of enumerated bona fide hedges,
including enumerated anticipatory bona fide hedges, adequately
facilitates the hedging needs of qualified commercial market
participants.
    Finally, the Commission believes that the enumerated anticipated
merchandising bona fide hedge provides for ample flexibility for
hedging. Similar to the enumerated unfilled anticipated requirements
and unsold production bona fide hedges, this bona fide hedge may be
used even when the merchant simply anticipates purchasing or selling
the commodity, and even when the merchant may have yet to enter into an
unfixed-price transaction, as long as the merchant has a good faith
belief that it will enter into the anticipated merchandising
transaction.
(b) Analysis of Examples Preliminarily Recognized as Hedges of
Anticipated Merchandising in the 2020 NPRM
    As discussed earlier in this release, in the 2020 NPRM, the
Commission addressed several requests that had been submitted in CEWG's
BFH Petition in response to the 2011 Final Rule, to obtain exemptive
relief for several transactions described by CEWG as bona fide hedging
positions. In the 2020 NPRM, the Commission preliminarily determined
that two CEWG BFH Petition examples complied with the proposed hedge of
anticipated merchandising: Example #4 (Binding, Irrevocable Bids or
Offers); and example #5 (Timing of Hedging Physical Transactions).\266\
---------------------------------------------------------------------------

    \266\ 85 FR at 11611.
---------------------------------------------------------------------------

    On the other hand, as discussed in Section II.A.1.iv., the
Commission preliminarily determined in the 2020 NPRM that the positions
described in the CEWG's BFH Petition examples #3 (unpriced physical
purchase or sale commitments) and #7 (scenario 2) (use of physical
delivery referenced contracts to hedge physical transactions using
calendar month average pricing) did not satisfy any of the proposed
enumerated hedges.\267\
---------------------------------------------------------------------------

    \267\ 85 FR at 11611-11612.
---------------------------------------------------------------------------

(1) Comments--Examples Preliminarily Recognized as Hedges of
Anticipated Merchandising in the 2020 NPRM
    The Commission received comments supporting the Commission's
preliminary determination in the 2020 NPRM that CEWG's BFH Petition
example #4 (Binding, Irrevocable Bids or Offers) \268\ and example #5
(Timing of Hedging Physical Transactions) are permitted under the 2020
NPRM's proposed enumerated hedge for anticipated merchandising.\269\
The public comments related to examples #3 and #7 (scenario 2) are
discussed in the preamble at Section II.A.1.iv., addressing the
treatment of unfixed price transactions.
---------------------------------------------------------------------------

    \268\ FIA at 16. FIA supported the Commission's preliminary
determination that Examples #4 (Binding, Irrevocable Bids or Offers)
and #5 (Timing of Hedging Physical Transactions) fit within the
newly proposed anticipatory merchandising hedge.
    \269\ CEWG at 19.
---------------------------------------------------------------------------

(2) Discussion of Final Rule--Examples Preliminarily Recognized as
Hedges of Anticipated Merchandising in the 2020 NPRM
    The Commission has considered the public's response to its
preliminary determination that several of the CEWG BFH Petition
examples fit within the 2020 NPRM. The Commission determines in this
Final Rule that BFH Petition example #4 (Binding, Irrevocable Bids or
Offers) and example #5 (Timing of Hedging Physical Transactions) comply
with the enumerated hedge for anticipated merchandising, so long as all
applicable conditions are met.
    In accordance with the Commission's treatment of unfixed-price
transactions under this Final Rule, discussed in Section II.A.1.iv.,
the Commission has determined that BFH Petition examples #3 and #7
(scenario 2) are also permitted under the Final Rule, so long as the
position or transaction complies with the applicable conditions of the
enumerated anticipatory hedge.
(c) Anticipated Merchandising Includes Hedges of Anticipated Storage
and Assets Owned or Anticipated To Be Owned
    Several commenters requested the Commission clarify the scope of
the proposed anticipated merchandising bona fide hedge in light of the
Commission's observation in footnote 105 of the 2020 NPRM.\270\ That
footnote stated that certain hedges of storage and

[[Page 3275]]

hedges of assets owned or anticipated to be owned would not be within
the scope of the proposed anticipated merchandising enumerated bona
fide hedge.\271\ However, the plain language of the proposed
anticipatory merchandising bona fide hedge appeared to be broad enough
to cover such activity. Commenters were thus unsure whether the
proposed enumerated anticipated merchandising hedge would apply to
storage transactions and to hedges of assets owned or anticipated to be
owned.
---------------------------------------------------------------------------

    \270\ Cargill at 5; CMC at 5; NGFA at 7.
    \271\ 85 FR at 11612 n.105.
---------------------------------------------------------------------------

    Most commenters from the energy industry requested the Commission
allow for anticipated storage positions to be considered as falling
within the enumerated hedge exemption for anticipated merchandising,
contending that such hedges are recognized as bona fide hedge
exemptions by the exchanges.\272\ Chevron and Castleton requested that
the Final Rule clarify that hedges of storage may qualify for the
enumerated bona fide hedge for anticipated merchandising if applicable
conditions are met.\273\
---------------------------------------------------------------------------

    \272\ NGSA at 7; CHS at 4 (requesting to include a winter
storage hedge in the list of enumerated hedges); FIA at 16, 31
(requesting to include a storage hedge as a separate enumerated
BFH); Shell at 7-8 (stating that assets used for the transport and
storage of energy are a critical part of the energy value chain,
including fuel storage tanks and pipeline assets as examples where
time spreads or location basis spreads are used to lock-in the
values of the assets. This commenter stated that with respect to
such infrastructure assets, the Commission should clarify that the
use of the hedges of anticipated storage or other physical assets is
the type of risk activity that falls within the enumerated BFH for
anticipated merchandising); Chevron at 9-11 (requesting that a final
rule clarify that hedges of storage may qualify for the enumerated
BFH for anticipated merchandising if applicable conditions are met.
In the alternative, Chevron requests the Commission identify and
clarify that storage hedges of this nature qualify for another
enumerated exemption, notably the enumerated BFH for unfilled
anticipated requirements); Suncor at 9-10 (requesting that a final
rule clarify that hedges of storage may qualify for the enumerated
BFH for anticipated merchandising if applicable conditions are met);
CCI at 7-9; and CEWG at 16-19 (requesting that the Commission
clarify that the enumerated BFH for anticipatory merchandising
applies to hedges of storage).
    \273\ Chevron at 5; CCI at 8-9.
---------------------------------------------------------------------------

    In the alternative, Chevron requested the Commission identify and
clarify that storage hedges of this nature qualify for another
enumerated exemption, notably the enumerated bona fide hedge for
unfilled anticipated requirements.\274\ Citadel similarly requested
recognition of offsetting positions related to anticipated changes in
the value of the underlying commodity to be stored in facilities on
lease, and up to the full storage capacity on lease, rather than only
the currently utilized level of leased capacity.\275\ Citadel argued
that storage facilities owned, but not those leased, by the merchant
would be covered by the proposed anticipated merchandising enumerated
bona fide hedge, and that such different treatment depending on whether
the facility was owned or leased did not make sense.\276\
---------------------------------------------------------------------------

    \274\ Chevron at 11.
    \275\ Citadel at 9.
    \276\ Id.
---------------------------------------------------------------------------

(1) Discussion of Final Rule--Anticipated Merchandising Includes Hedges
of Anticipated Storage and Assets Owned or Anticipated To Be Owned
    In response to public comments, the Commission determines that both
hedges of storage and hedges of assets owned or anticipated to be owned
can potentially qualify for the enumerated hedge for anticipated
merchandising if the applicable conditions are met.
    In footnote 105 of the 2020 NPRM, the Commission observed that
market participants could use the non-enumerated process (rather than a
self-effectuating enumerated hedge) to receive bona fide hedge
recognition for storage hedges and hedges of assets owned or
anticipated to be owned.\277\ This observation was predicated on the
Commission's recognition that different commodities have different
storage roles, manners, and procedures. For example, the use of some
storage facilities is not exclusive to a specific commodity and not all
storage is necessarily tied to anticipated merchandising activity. As
such, the Commission believed that an analysis of facts and
circumstances under the non-enumerated bona fide hedge process would
facilitate a determination on whether to recognize hedges of storage or
assets owned or anticipated to be owned under the proposed enumerated
anticipated merchandising hedge.
---------------------------------------------------------------------------

    \277\ 85 FR at 11612.
---------------------------------------------------------------------------

    The Commission has considered comments with respect to the
appropriate treatment of storage transactions and hedges of assets
owned or anticipated to be owned under the Commission's anticipated
merchandising enumerated hedge. The Commission agrees that commercial
market participants may utilize storage hedges or hedges of assets
owned or anticipated to be owned as risk reducing practices.\278\ The
Commission believes that such risk reducing hedges may be recognized as
anticipated merchandising bona fide hedges, if all the applicable
conditions of the anticipated merchandising hedge are satisfied. The
Commission clarifies that commercial market participants in the
physical marketing channel that utilize storage hedges or hedges of
assets owned or anticipated to be owned may continue to qualify for the
anticipated merchandising enumerated bona fide hedge, whether the
commercial market participant owns or leases the storage or asset, so
long as the all other applicable requirements for the bona fide hedge
are satisfied.
---------------------------------------------------------------------------

    \278\ CEWG at 16.
---------------------------------------------------------------------------

g. Hedges by Agents
(1) Background--Hedges by Agents
    Existing Sec.  1.3(z)(3) includes certain hedges by agents as an
example of a potential non-enumerated bona fide hedge.\279\ Since 2011,
the Commission has included an enumerated hedge for hedges by agents in
each of its position limits rulemakings.\280\
---------------------------------------------------------------------------

    \279\ 17 CFR 1.3(z)(3) (``Such transactions and positions may
include, but are not limited to, purchases or sales for future
delivery on any contract market by an agent who does not own or who
has not contracted to sell or purchase the offsetting cash commodity
at a fixed price, provided That the person is responsible for the
merchandising of the cash position which is being offset.'').
    \280\ 81 FR at 96964; 78 FR at 75714; 76 FR at 71689.
---------------------------------------------------------------------------

    Under the existing non-enumerated hedge process, the Commission has
recognized non-enumerated bona fide hedges for parties acting as agents
who had the responsibility to trade cash commodities on behalf of
another party for which such positions qualified as bona fide hedging
positions. Such agents could obtain bona fide hedge treatment to
offset, on a long or short basis, the risks arising from those
underlying cash positions. For example, this hedge has been recognized
in circumstances where a party traded or managed a farmer's,
producer's, or a government entity's inventory in the party's capacity
as agent. In such circumstances, the agent providing services in the
physical marketing channel, such as a commercial firm, did not take
ownership of the commodity and was eligible as an agent for an
exemption to hedge the risks associated with such cash positions.
(2) Summary of the 2020 NPRM--Hedges by Agents
    The Commission proposed to include hedges by agents as an
enumerated hedge. The proposed hedge would grant an enumerated hedge to
an agent who (1) did not own or was not contracted to sell or purchase
the offsetting cash commodity at a fixed price, (2) was responsible for
merchandising the cash positions being offset, and (3) had a

[[Page 3276]]

contractual agreement with the person who (i) owned the commodity or
(ii) held cash-market positions being offset.
    The proposed hedge of agents would substantively adopt the
Commission's existing practice under the non-enumerated process in
existing Sec.  1.3(z)(3).\281\ The Commission, however, proposed to
include hedges of agents in the list of enumerated hedges because it
preliminarily determined this was a common hedging practice and that
positions which satisfy the requirements of this enumerated hedge
conformed to the general definition of bona fide hedging without
further consideration as to the particulars of the case.\282\
---------------------------------------------------------------------------

    \281\ For example, the Commission proposed to replace the phrase
``offsetting cash commodity'' with ``contract's underlying cash
commodity'' to use language that is consistent with the other
proposed enumerated hedges.
    \282\ 85 FR at 11610.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Hedges by Agents
    The Commission is adopting the enumerated bona fide hedge for
hedges by agents as proposed.
(4) Comments--Hedges by Agents
    The Commission received several comments supporting recognition of
the hedge by agents, particularly as included in an expanded list of
enumerated hedges.\283\ ASR identified hedges of agents as a type of
hedge that is of particular importance to them because it is used daily
within its business.\284\ The Commission did not receive any comments
opposed to the enumerated hedge for hedges by agents.
---------------------------------------------------------------------------

    \283\ FIA at 16; IECA at 2; and ASR at 2.
    \284\ ASR at 2.
---------------------------------------------------------------------------

(5) Discussion of Final Rule--Hedges by Agents
    The Commission recognizes that agents provide important services in
the physical marketing channel across different commodity markets. For
example, in the agricultural sector, this enumerated hedge will
accommodate a common hedging practice in the cotton industry. This
hedge will be particularly useful in connection with cotton equities
purchased by a cotton merchant from a producer, which is commonly done
under the U.S. Department of Agriculture's loan program to facilitate
marketing tools for cotton producers.
    Another example of when the enumerated hedge by agents adopted
herein will apply is for those agents who are in the business of
merchandising (selling) the cash grain owned by multiple warehouse
operators and forwarding the merchandising revenues back to the
warehouse operators less the agent's fees. Such agents that satisfy the
requirements of this enumerated hedge, such as not owning any cash
commodity but being responsible for merchandising the cash grain
positions of the warehouse operators pursuant to contractual
agreements, will be able to hedge the price risks arising from their
merchandising activity under those agreements as a bona fide hedge by
agents.
h. Short Hedges of Anticipated Mineral Royalties
(1) Background--Anticipated Mineral Royalties
    The Commission's existing bona fide hedging definition does not
include an enumerated hedge for anticipated mineral royalties. Since
2011, the Commission has, however, included such a bona fide hedge in
each of its position limits rulemakings.\285\ While the Commission's
2011 Final Rule initially recognized the hedging of anticipated
royalties generally, each proposal since then, including the latest
2020 NPRM, has proposed that this exemption apply to: (i) Short
positions (ii) that arise from production (iii) in the context of
mineral extraction.
---------------------------------------------------------------------------

    \285\ 81 FR at 96964; 78 FR at 75715; 76 FR at 71689. In the
2011 Final Rule, the Commission recognized anticipatory royalty
transactions as a bona fide hedge, provided the following conditions
were met: (1) The royalty or services contract arose out of the
production, manufacturing, processing, use, or transportation of the
commodity underlying the Referenced Contract; (2) The hedge's value
was ``substantially related'' to anticipated receipts or payments
from a royalty or services contract; and (3) No such position was
maintained in any physical-delivery Referenced Contract during the
last five days of trading of the Core Referenced Futures Contract in
an agricultural or metal commodity or during the spot month for
other physical-delivery contracts.
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Anticipated Mineral Royalties
    The Commission proposed a new enumerated bona fide hedge for short
hedges of anticipated mineral royalties that are not currently
enumerated in existing Sec.  1.3. The proposed provision would permit
an owner of rights to a future mineral royalty to lock in the price of
anticipated mineral production by entering into a short position in a
commodity derivative contract to offset the anticipated change in value
of the mineral royalty rights that were owned by that person and arose
out of the production of a mineral commodity (e.g., oil and gas).\286\
The owner of the rights to the future mineral royalty could be a
producer, or, for example, could also be a bank that holds the relevant
royalty rights and that is financing, for example, a drilling well
operation for a producer. The Commission preliminarily believed that
this represents a common hedging practice, and that positions that
satisfied the requirements of this enumerated bona fide hedge conformed
to the general definition of bona fide hedging without further
consideration as to the particulars of the case.\287\
---------------------------------------------------------------------------

    \286\ 85 FR at 11608-11609. A short position fixes the price of
the anticipated receipts, removing exposure to change in value of
the person's share of the production revenue. A person who has
issued a royalty, in contrast, has, by definition, agreed to make a
payment in exchange for value received or to be received (e.g., the
right to extract a mineral). Upon extraction of a mineral and sale
at the prevailing cash-market price, the issuer of a royalty remits
part of the proceeds in satisfaction of the royalty agreement. The
issuer of a royalty, therefore, does not have price risk arising
from that royalty agreement.
    \287\ 85 FR at 11609.
---------------------------------------------------------------------------

    The Commission proposed to limit this enumerated bona fide hedge
only to mineral royalties, noting that while royalties have been paid
for use of land in agricultural production, the Commission did not
receive any evidence of a need for a bona fide hedge recognition from
owners of agricultural production royalties.\288\ The Commission
requested comment on whether and why such an exemption might be needed
for owners of agricultural production or other royalties.\289\
---------------------------------------------------------------------------

    \288\ Id.
    \289\ Id.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Anticipated Mineral
Royalties
    For the reasons discussed in the NPRM, the Commission is adopting
the enumerated hedge for anticipated mineral royalties as proposed.
(4) Comments--Anticipated Mineral Royalties
    The Commission did not receive any comments either opposing the
addition of an enumerated bona fide hedge for anticipated mineral
royalties or requesting modifications to the hedge as proposed.
Further, no commenters requested extending the enumerated hedge to
other types of royalties other than mineral royalties. Several
commenters expressed support for the new enumerated hedge.\290\
---------------------------------------------------------------------------

    \290\ FIA at 16; IECA at 2.
---------------------------------------------------------------------------

i. Hedges of Anticipated Services
(1) Background--Anticipated Services
    The Commission's existing bona fide hedging definition does not
include an enumerated hedge of anticipated services. Since 2011,
however, the

[[Page 3277]]

Commission has included an enumerated bona fide hedge exemption for
hedges of anticipated services in each of its position limits
rulemakings.\291\
---------------------------------------------------------------------------

    \291\ 81 FR at 96810; 78 FR at 75715. See 76 FR at 71646.
---------------------------------------------------------------------------

    Further, in 1977, the Commission noted that the existence of
futures markets for both source and product commodities, such as
soybeans, soybean oil, and soybean meal, affords business firms
increased opportunities to hedge the value of services.\292\
---------------------------------------------------------------------------

    \292\ 42 FR 14832, 14833 (Mar. 16, 1977).
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Anticipated Services
    The Commission proposed a new enumerated bona fide hedge for
anticipated services, not currently enumerated in existing Sec.  1.3.
The proposed provision would recognize as a bona fide hedge a long or
short derivative contract position used to hedge the anticipated change
in value of receipts or payments due or expected to be due under an
executed contract for services arising out of the production,
manufacturing, processing, use, or transportation of the commodity
underlying the commodity derivative contract.\293\
---------------------------------------------------------------------------

    \293\ 85 FR at 11609.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Anticipated Services
    The Commission is adopting the enumerated bona fide hedge for
anticipated services as proposed.
(4) Comments--Anticipated Services
    The Commission received four comments on the proposed enumerated
anticipated services bona fide hedge. ASR and FIA expressed support for
its inclusion as a new enumerated bona fide hedge.\294\ In contrast,
IATP and Better Markets urged the Commission to exclude this hedge from
the list of enumerated bona fide hedges.\295\ IATP stated that the
anticipated services bona fide hedge is ``presumably connected to
hedges of anticipated production'' and that, as a result, it views the
enumerated hedge as ``more vulnerable to deliverable supply estimate
disruption.'' \296\ IATP also contended that, absent a stronger
argument for inclusion of this enumerated bona fide hedge aside from
``such exemptions are granted by exchanges,'' the proposed bona fide
hedge of anticipated services merits greater Commission review before
being included as an enumerated bona fide hedge.\297\ Better Markets
stated that the definition was too vague, and that absent a time
limitation, the hedge could be used as a loophole for speculation.\298\
---------------------------------------------------------------------------

    \294\ ASR at 2; FIA at 16.
    \295\ IATP at 17; Better Markets at 58.
    \296\ IATP at 17.
    \297\ Id.
    \298\ Better Markets at 58.
---------------------------------------------------------------------------

(5) Discussion of the Final Rule--Anticipated Services
    The Commission is adopting the enumerated bona fide hedge for
anticipated services as proposed.
    In response to IATP, the Commission believes that hedging of
anticipated services may be useful to commercial market participants in
a variety of commonly-occurring scenarios. For example, one scenario
may be when a contract for services involves the production of a
commodity such as a risk service agreement to drill an oil well between
two companies where the risk service agreement between the parties
provides that a portion of the revenue receipts to one of the
counterparties depends on the value of the oil produced. To reduce the
risk of lower anticipated revenues resulting from an anticipated lower
price of oil, the company may enter into a short position in the NYMEX
Light Sweet Crude Oil referenced contract.
    Under this enumerated bona fide hedge of services, such a short
position fixes the price at the entry price to the commodity derivative
contract. For any decrease in price of the commodity that is the
subject of the executed contract for services, the expected receipts
from the contract for services would decline in value, but the short
commodity derivative contract position would increase in value--
offsetting the price risk from the expected receipts under contract for
services.
    On the other hand, this enumerated hedge of anticipated services
may also be utilized when a contract for services involves a contract
where one of the counterparties is responsible for the cost of the
commodity used to provide the service. Such a scenario may occur when a
city contracts with a firm to provide waste management services. The
contract requires that the trucks used to transport the solid waste use
natural gas as a power source. According to the contract, the city
would pay for the cost of the natural gas used to transport the solid
waste by the waste disposal company. In the event that natural gas
prices rise, the city's waste transport expenses would rise. To
mitigate this risk, the city establishes a long position in the NYMEX
natural gas referenced contract that is equivalent to the expected use
of natural gas over the life of the service contract.
    In this case, the long position fixes the exit price of the
commodity derivative contract. For any increase in the commodity that
is the subject of the executed contract for services, the payment due
or expected to be due would increase in value, but the long commodity
derivative contract would decrease in value--offsetting the price risk
from the payments under the contract for services. Under both of these
examples, the transactions meet the general requirements for a bona
fide hedging transaction and the specific provisions for hedges of
anticipated services.
    Regarding comments contending that deliverable supply estimates are
more vulnerable to disruption under this hedge, the Commission does not
believe that bona fide hedges for anticipated services will impact
actual deliverable supplies. This is because this bona fide hedge
allows a market participant to hedge the anticipated change in value of
receipts or payments due or expected to be due under an executed
contract for services, and is not an alternative means of procuring or
selling the underlying commodity.
    In addition, the Commission will continue to have sufficient access
to position and cash-market data to verify all exemptions granted. The
reporting and recordkeeping obligations under Sec. Sec.  150.5 and
150.9 will require exchanges to submit justifications, amendments, and
other necessary information to the Commission on a monthly basis. As
such, exchanges and the Commission will have visibility into the amount
of demand there is for a commodity in the spot month via the delivery
notices. In the rare event that an exchange observes an imbalance, it
has the ability under its rules to require the trader to reduce its
positions.
    Finally, the Commission notes that a time limitation is unnecessary
because, among other things, when administering exchange-set limits,
under the Final Rule, exchanges may rely on the Commission's guidance
in Appendix B to part 150 to protect price convergence and ensure an
orderly spot period. Under the guidance in Appendix B adopted herein,
an exchange may adopt rules to impose a restriction on holding a
position in a physically delivered referenced contract during the
lesser of either the last five days of trading or the time period for
the spot month in order to limit such positions to only those that are
economically appropriate for that person's specific anticipated or real
needs.

[[Page 3278]]

j. Offsets of Commodity Trade Options
(1) Background--Offsets of Commodity Trade Options
    Commodity trade options are not subject to Federal position limits
under existing regulations.\299\ Generally, a commodity trade option is
a physically-delivered commodity option purchased by commercial users
of the commodities underlying the options. In the 2016 trade options
final rule, the Commission stated that Federal position limits should
not apply to trade options.\300\ Further, in that trade options final
rule, the Commission indicated it would address the applicability of
position limits to trade options in the context of any final rulemaking
on position limits.\301\
---------------------------------------------------------------------------

    \299\ See 17 CFR 32.3(c).
    \300\ Trade Options, 81 FR at 14966, 14971 (Mar. 21, 2016).
Under the trade options final rule, trade options are generally
exempted from the rules otherwise applicable to swaps, subject to
the conditions enumerated in Sec.  32.3. For example, trade options
do not factor into the determination of whether a market participant
is an SD or MSP; trade options are exempt from the rules on
mandatory clearing; and trade options are exempt from the rules
related to real-time reporting of swaps transactions.
    \301\ Id.
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Offsets of Commodity Trade Options
    The Commission proposed a new enumerated hedge for offsets of
commodity trade options not currently enumerated in Sec.  1.3. Under
the 2020 NPRM, a qualifying commodity trade option under Sec.  32.3
\302\ would be treated as a cash position, on a futures-equivalent
basis,\303\ and serve as the basis for a bona fide hedge position.
Treating qualifying commodity trade options as cash positions, either
as a cash commodity purchase or sales contract, would allow the
Commission to extend the existing enumerated hedge exemptions for cash
positions to the offsets of commodity trade options. That is, the
offsets of qualifying commodity trade options would be treated like the
enumerated hedges for cash commodity fixed-price purchase contracts or
hedges of cash commodity fixed-price sales contracts.\304\
---------------------------------------------------------------------------

    \302\ 17 CFR 32.3. In order to qualify for the trade option
exemption, Sec.  32.3 requires, among other things, that: (1) The
offeror is either (i) an eligible contract participant, as defined
in section 1a(18) of the Act, or (ii) offering or entering into the
commodity trade option solely for purposes related to its business
as a ``producer, processor, or commercial user of, or a merchant
handling the commodity that is the subject of the'' trade option;
and (2) the offeree is offered or entering into the commodity trade
option solely for purposes related to its business as ``a producer,
processor, or commercial user of, or a merchant handling the
commodity that is the subject of the commodity'' trade option.
    \303\ It may not be possible to compute a futures-equivalent
basis for a trade option that does not have a fixed strike price. As
discussed in the Section II.A.1.iv., under the Commission's existing
portfolio hedging policy, market participants may manage their price
risks by utilizing more than one enumerated bona fide hedge
(including a commodity trade option hedge and other anticipatory
bona fide hedges, if necessary based on the market participant's
applicable facts and circumstances). For example, a commodity trade
option with a fixed strike price may be converted to a futures-
equivalent basis, and, on that futures-equivalent basis, deemed a
cash commodity sale contract, in the case of a short call option or
long put option, or a cash commodity purchase contract, in the case
of a long call option or short put option.
    \304\ 85 FR at 11610.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Offsets of Commodity Trade
Options
    The Commission continues to believe that Federal position limits
should not apply to trade options. Thus, the Commission is adopting the
enumerated bona fide hedge for offsets of commodity trade options as
proposed, with a few clarifying, non-substantive technical edits in the
regulatory text.
(4) Comments--Offsets of Commodity Trade Options
    The Commission did not receive any comments opposing the addition
of an enumerated hedge for offsets of commodity trade options. The
Commission received comments generally supporting the bona fide hedge
for offsets of commodity trade options, particularly as included in an
expanded list of enumerated bona fide hedges.\305\ NGSA stated that
defining bona fide hedging in a way that recognizes that trade options,
adjusted on a futures-equivalent basis, constitute cash commodity
purchase or sale contracts that underlie bona fide hedge positions
should ``facilitate hedging rather than restrict it.'' \306\
---------------------------------------------------------------------------

    \305\ IECA at 1; CCI at 2; CEWG at 4; Chevron at 3; Suncor at 3;
FIA at 16; and NGSA at 4.
    \306\ NGSA at 4.
---------------------------------------------------------------------------

k. Cross-Commodity Hedges
(1) Background--Cross-Commodity Hedges
    The Commission has long recognized cross-commodity bona fide
hedging under paragraph (2)(iv) of the bona fide hedging definition in
existing Sec.  1.3, which has allowed cross-commodity bona fide hedging
in connection with all of the enumerated bona fide hedges included in
the existing bona fide hedge definition.\307\
---------------------------------------------------------------------------

    \307\ 42 FR 14832, 14834 (March 16, 1977).
---------------------------------------------------------------------------

    The existing enumerated cross-commodity bona fide hedge recognizes
that risk from some cash commodity price exposures can be practically
and effectively managed through commodity derivative contracts on a
related commodity. As such, positions in any of the existing enumerated
bona fide hedges may be offset by a cash position held in a different
commodity than the commodity underlying the futures contract.
    The existing cross-commodity enumerated hedge, however, is subject
to two conditions. First, the fluctuations in value of the position in
the futures contract must be ``substantially related'' to the
fluctuations in value of the actual or anticipated cash position.
Second, under the cross-commodity enumerated bona fide hedge exemption,
a position may not be held in excess of the Federal position limit
during the last five trading days for that futures contract.
    Cross-commodity hedging also allows market participants to hedge
the price exposure arising from the products and byproducts of a
commodity where there is no futures contract for those products or
byproducts, but there is a futures contract for the source commodity of
those products or byproducts. Since 2011, the Commission has included
an enumerated cross-commodity bona fide hedge in each of its position
limits rulemakings.\308\
---------------------------------------------------------------------------

    \308\ 81 FR at 96752-96753; 78 FR at 75716; 76 FR at 71689.
---------------------------------------------------------------------------

(2) Summary of the 2020 NPRM--Cross-Commodity Hedges
    The Commission proposed to include cross-commodity hedges as an
enumerated bona fide hedge, and to expand the application of this bona
fide hedge such that it could be used to establish compliance with: (1)
Each of the proposed enumerated bona fide hedges listed in Appendix A
to part 150 except for unfilled anticipated requirements and
anticipated merchandising, which were excluded from the regulatory text
of the cross-commodity enumerated hedge; \309\ and (2) the proposed
pass-through provisions under paragraph (2) of the proposed bona fide
hedging definition discussed further below; provided, in each case,
that the position satisfied each element of the relevant enumerated
bona fide hedge.\310\ In addition, the

[[Page 3279]]

Commission also proposed to eliminate the Five-Day Rule in connection
with the proposed cross-commodity bona fide hedge (i.e., the 2020 NPRM
eliminated the restriction from holding a position in excess of the
Federal position limit under the enumerated cross-commodity bona fide
hedge during the last five days of trading).
---------------------------------------------------------------------------

    \309\ Specifically, the 2020 NPRM allowed for cross-commodity
hedging for any of the following proposed enumerated hedges: (i)
Hedges of unsold anticipated production, (ii) hedges of offsetting
unfixed-price cash commodity sales and purchases, (iii) hedges of
anticipated mineral royalties, (iv) hedges of anticipated services,
(v) hedges of inventory and cash commodity fixed-price purchase
contracts, (vi) hedges of cash commodity fixed-price sales
contracts, (vii) hedges by agents, and (viii) offsets of commodity
trade options.
    \310\ 85 FR at 11609. For example, an airline that wishes to
hedge the price of jet fuel may enter into a swap with a swap
dealer. In order to remain flat, the swap dealer may offset that
swap with a futures position, for example, in ULSD. Subsequently,
the airline may also offset the swap exposure using ULSD futures. In
this example, under the pass-through swap language of proposed Sec. 
150.1, the airline would be acting as a bona fide hedging swap
counterparty and the swap dealer would be acting as a pass-through
swap counterparty. In this example, provided each element of the
enumerated hedge in paragraph (a)(5) of Appendix A, the pass-through
swap provision in Sec.  150.1, and all other regulatory requirements
are satisfied, the airline and swap dealer could each exceed limits
in ULSD futures to offset their respective swap exposures to jet
fuel. See infra Section II.A.1.c.v. (discussion of proposed pass-
through language).
---------------------------------------------------------------------------

    The proposed cross-commodity enumerated bona fide hedge was
conditioned on the existence of a ``substantial relationship'' between
the commodity derivative contract and the related cash commodity
position. Specifically, the fluctuations in value of the position in
the commodity derivative contract, that is, of the underlying cash
commodity of that derivative contract, were required to be
``substantially related'' \311\ to the fluctuations in value of the
actual or anticipated cash commodity position or pass-through
swap.\312\ This was intended to be a qualitative analysis, rather than
quantitative.
---------------------------------------------------------------------------

    \311\ See 85 FR at 11726-11727.
    \312\ 85 FR at 11609.
---------------------------------------------------------------------------

    For example, the 2020 NPRM stated that there is a substantial
relationship between grain sorghum, which is used as a food grain for
humans or as animal feedstock, and the corn referenced contracts.
Because there is not a futures contract for grain sorghum grown in the
United States listed on a U.S. DCM,\313\ corn represents a
substantially related commodity to grain sorghum in the United
States.\314\ The 2020 NPRM noted that, in contrast, there did not
appear to be a reasonable commercial relationship between a physical
commodity, say copper, and a broad-based stock price index, such as the
S&P 500 Index, because these commodities were not reasonable
substitutes for each other in that they had very different pricing
drivers.\315\ That is, the price of a physical commodity is based on
supply and demand, whereas the stock price index is based on various
individual stock prices for different companies.\316\
---------------------------------------------------------------------------

    \313\ This remains true at the publication of this rulemaking.
    \314\ 85 FR at 11609. Grain sorghum was previously listed for
trading on the Kansas City Board of Trade and Chicago Mercantile
Exchange, but because of liquidity issues, grain buyers continued to
use the more liquid corn futures contract, which suggests that the
basis risk between corn futures and cash sorghum could be
successfully managed with the corn futures contract.
    \315\ 85 FR at 11609.
    \316\ Id.
---------------------------------------------------------------------------

    The 2020 NPRM also preliminarily determined that CEWG BFH Petition
example #9 (Holding a cross-commodity hedge using a physical delivery
contract into the spot month) and example #10 (Holding a cross-
commodity hedge using a physical delivery contract to meet unfilled
anticipated requirements) were permitted as cross-commodity enumerated
hedges.\317\
---------------------------------------------------------------------------

    \317\ 85 FR at 11611.
---------------------------------------------------------------------------

(3) Summary of the Commission Determination--Cross-Commodity Hedges
    The Commission is finalizing the cross-commodity enumerated bona
fide hedge largely as proposed, with amendments to expand the ability
to use cross-commodity hedges.
(4) Comments--Cross-Commodity Hedges
    Commenters generally supported the proposed cross-commodity
enumerated bona fide hedge, and a few commenters explicitly supported
the Commission's decision not to propose a quantitative test
requirement for the proposed enumerated cross-commodity bona fide
hedge.\318\
---------------------------------------------------------------------------

    \318\ ADM at 2; NGSA at 3-4; NOPA at 2; and ICE at 7. Prior
position limits proposals included a quantitative test, whereas the
2020 NPRM included a qualitative ``substantially related''
requirement.
---------------------------------------------------------------------------

    Better Markets stated that it views some cross-commodity hedges as
``appropriate, normal, and legitimate market practices,'' but claimed
that there is a potential for abuse if the bona fide hedge exemption
requires less than a ``demonstrable price relationship'' between the
two commodities.\319\ ICE recommended that the Commission include a
non-exclusive list of commonly-used cross-commodity hedges that satisfy
the ``substantially related'' requirement, which ICE believes should
include the natural gas core referenced futures contract and its linked
referenced contracts as bona fide hedges of electricity price exposure,
and vice versa.\320\
---------------------------------------------------------------------------

    \319\ Better Markets at 58.
    \320\ ICE at 7.
---------------------------------------------------------------------------

    The majority of energy market participants commented on a separate
item: That the express language of proposed paragraph (a)(5) of
Appendix B to part 150, which sets forth the proposed cross-commodity
bona fide hedge, inappropriately failed to cover bona fide hedges for
unfilled anticipated requirements and anticipated merchandising.\321\
Chevron, Suncor, CCI, and the CEWG requested that the Commission revise
the proposed cross-commodity enumerated bona fide hedge to specifically
clarify that enumerated bona fide hedges for unfilled anticipated
requirements and anticipated merchandising may be utilized as cross-
commodity bona fide hedges in energy markets.\322\ IECA also requested
that the cross-commodity enumerated hedge include bona fide hedges of
anticipated requirements, which would capture bona fide hedges of
anticipated requirements commonly used by many electric utilities that
enter into heat-rate transactions.\323\
---------------------------------------------------------------------------

    \321\ Chevron at 8-9; Suncor at 6-8; NOPA 2; CCI at 5-9; CEWG at
10-14; NGSA at 4; ICE at 2, 4; Shell at 7-8; ADM at 2; and IECA at
8.
    \322\ Chevron at 8; Suncor at 8; NOPA at 2; CCI at 5-7; CEWG at
10-14; NGSA at 4; and IECA at 8.
    \323\ IECA at 7-8.
---------------------------------------------------------------------------

    Suncor and Chevron highlighted an internal inconsistency in the
2020 NPRM. These commenters pointed out that while the 2020 NPRM
preliminarily determined that CEWG BFH Petition Example #10 (Holding a
cross-commodity hedge using a physical delivery contract to meet
unfilled anticipated requirements) satisfies the proposed cross-
commodity hedge, the proposed cross-commodity hedge excluded unfilled
anticipated requirements.\324\
---------------------------------------------------------------------------

    \324\ Chevron at 7; Suncor at 7.
---------------------------------------------------------------------------

(5) Discussion of Final Rule--Cross-Commodity Hedges
    The Commission is finalizing the cross-commodity enumerated bona
fide hedge largely as proposed, with amendments to expand the ability
to use cross-commodity hedges. Specifically, the Commission is amending
the express language of the cross-commodity enumerated hedge in
Appendix B to include the enumerated hedges of unfilled anticipated
requirements and hedges of anticipated merchandising so that the cross-
commodity provision applies to all enumerated hedges adopted herein.
The 2020 NPRM excluded the enumerated bona fide hedges for unfilled
anticipated requirements and for anticipated merchandising from the
cross-commodity provision. As a result, any internal inconsistency
related to example #10 has been resolved.
    Separately, as stated in the 2020 NPRM, the Commission reaffirms
that the requirement that the value fluctuations of the commodity
derivatives contract used to hedge and the value fluctuations of the
commodity

[[Page 3280]]

cash position being hedged must be ``substantially related'' is an
important factor in determining whether a cross-commodity hedge
satisfies the requirements to be a bona fide hedge. Accordingly, the
Commission believes that the ``substantially related'' requirement
sufficiently ties derivative and cash positions between two different,
but comparable, commodities that have a reasonable commercial
relationship as a result of their ability to serve as reasonable
substitutes for each other, due to, for example, similar pricing
drivers.
    The Commission agrees with commenters who stated that market
participants use cross-commodity hedging to manage their price risk,
particularly when a cash commodity is not necessarily deliverable under
the terms of any derivative contract or the cash-market transactions
are not in the same commodity underlying the futures contract. For
example, an airline that uses a predictable volume of jet fuel every
month may cross hedge its anticipated jet fuel requirements with the
ultralow sulfur diesel (``ULSD'') heating oil commodity derivative
contract because there are no physically-settled jet fuel commodity
derivative contracts available. The value fluctuations in jet fuel are
substantially related to the value fluctuations in the ULSD ``HO''
futures contract.
    The Commission believes that a determination of whether commodities
are ``substantially related'' for purposes of the cross-commodity bona
fide hedge depends on a facts and circumstances analysis and that the
relationship between the two is not static, as it may change over time
depending on market factors. Accordingly, the Commission's position is
not to publish a list of cross-commodity hedges satisfying the
``substantially related'' requirement at this time.
vii. Location and Regulatory Treatment of the Enumerated Bona Fide
Hedges
a. Background--Location and Regulatory Treatment of the Enumerated Bona
Fide Hedges
    As noted above, the existing enumerated bona fide hedges are
explicitly incorporated in the regulatory bona fide hedging definition
in Sec.  1.3 of the Commission's regulations.
b. Summary of the 2020 NPRM--Location and Regulatory Treatment of the
Enumerated Bona Fide Hedges
    In the 2020 NPRM, the Commission proposed to move the expanded list
of the enumerated bona fide hedges from the bona fide hedging
definition in regulation Sec.  1.3 to the proposed acceptable practices
in Appendix A to part 150. The Commission stated that the list of
enumerated bona fide hedges should appear as acceptable practices in an
appendix, rather than as regulations in the regulatory bona fide
hedging definition, because each enumerated bona fide hedge represents
just one way, but not the only way, to satisfy the proposed bona fide
hedging definition and Sec.  150.3(a)(1).\325\ The Commission requested
comment on whether the list of enumerated hedges should be included in
the regulatory text or in an appendix as acceptable practices.\326\
---------------------------------------------------------------------------

    \325\ As discussed below, proposed Sec.  150.3(a)(1) would allow
a person to exceed position limits for bona fide hedging
transactions or positions, as defined in proposed Sec.  150.1.
    \326\ 85 FR at 11622.
---------------------------------------------------------------------------

c. Summary of the Commission Determination--Location and Regulatory
Treatment of the Enumerated Bona Fide Hedges
    The Commission has determined to incorporate the enumerated bona
fide hedges as part of the regulatory text. While the Final Rule will
maintain the enumerated bona fide hedges in Appendix A to part 150,
Appendix A will be incorporated into final Sec.  150.3, and therefore
under the Final Rule the enumerated bona fide hedges in Appendix A will
be deemed to be part of the regulatory text rather than treated as
acceptable practices.
d. Comments--Location and Regulatory Treatment of the Enumerated Bona
Fide Hedges
    FIA and MGEX supported moving the list of enumerated bona fide
hedges to the rule text.\327\ FIA stated that ``including the list in
the regulatory text would provide market participants greater
regulatory certainty by making it clear that it could not be amended
absent notice and comment rulemaking.'' \328\
---------------------------------------------------------------------------

    \327\ MGEX at 2; FIA at 15-16.
    \328\ FIA at 16.
---------------------------------------------------------------------------

    On the other hand, CMC and the Joint Associations (i.e., EEI and
EPSA) preferred keeping the enumerated hedges in Appendix A to part
150. CMC stated its understanding that an amendment to either Appendix
A or the rule text would require the same formal rulemaking
procedures.\329\ The Joint Associations based their support of Appendix
A because it allows for ``for flexibility'' in their view.\330\
---------------------------------------------------------------------------

    \329\ CMC at 6.
    \330\ EEI/EPSA at 5.
---------------------------------------------------------------------------

e. Discussion of Final Rule--Location and Regulatory Treatment of the
Enumerated Bona Fide Hedges
    Under the Final Rule, the enumerated bona fide hedges are
incorporated as part of the regulatory text. While the Final Rule will
maintain the enumerated bona fide hedges in Appendix A to part 150,
Appendix A will be incorporated in final Sec.  150.3 as positions that
are deemed to be bona fide hedges that are self-effectuating for
purposes of Federal position limits. In other words, while the Final
Rule will maintain the enumerated bona fide hedges in Appendix A,
Appendix A will be deemed to be part of the regulatory text rather than
treated as acceptable practices as the Commission proposed in the 2020
NPRM.
    The Commission agrees that including the enumerated bona fide
hedges as part of the regulations, rather than as acceptable practices,
provides market participants with greater regulatory certainty. To
reflect that Appendix A to part 150 is part of the regulatory text, the
Commission is amending the introductory language to the Appendix to
remove any references to acceptable practices.
    In addition, while not a substantive change, the Commission has
also re-ordered the list of enumerated hedges. The Final Rule reorders
Appendix A so that the bona fide hedges are listed by hedges of
purchases, sales, anticipated activities, or other new types of hedges.
Finally, the cross-commodity hedge, which applies to all the enumerated
hedges in the appendix, is listed last.
viii. Elimination of Federal Restriction Prohibiting Holding a Bona
Fide Hedge Exemption During Last Five Trading Days, the ``Five-Day
Rule;'' Proposed Guidance in Appendix B, Paragraph (b)
a. Background--Elimination of the ``Five-Day Rule;'' Proposed Guidance
in Appendix B, Paragraph (b)
    Some of the existing enumerated bona fide hedge exemptions in Sec. 
1.3 include a restriction on the market participant holding a commodity
derivative contract position in excess of Federal position limits
during the last five days of trading (generally referred to as the
``Five-Day Rule''). The restriction limits the applicability of
exemptions during the last five days of trading because for many
agricultural commodity derivative contracts, those last five days of
trading coincide with the physical-delivery process. The practical
effect of the Five-Day Rule is a winnowing of the universe of market
participants who maintain large positions throughout the last five days
of trading to only those market

[[Page 3281]]

participants who actually intend to make or take delivery at the end of
the spot period. Narrowing the universe of market participants in this
way helps ensure an orderly trading environment and maintains the
integrity of the physical-delivery process for those market
participants who rely on price convergence between the cash and futures
markets during the last days of trading.
    When the Commission adopted the Five-Day Rule, it believed that, as
a general matter, there was little commercial need to maintain a large
position that exceeds position limits during or through the last five
days of trading.\331\
---------------------------------------------------------------------------

    \331\ Definition of Bona Fide Hedging and Related Reporting
Requirements, 42 FR 42748, 42750 (Aug. 24, 1977).
---------------------------------------------------------------------------

b. Summary of the 2020 NPRM--Elimination of the ``Five-Day Rule;''
Proposed Guidance in Appendix B, Paragraph (b)
    The Commission proposed to eliminate the restriction on holding a
bona fide hedge exemption during the last five days of trading from all
the enumerated hedges to which such five-day rule restriction applies
under existing Sec.  1.3.\332\ Instead, under proposed Sec. 
150.5(a)(2)(ii)(D), exchanges could apply a restriction against holding
positions under a bona fide hedge in excess of limits during the lesser
of the last five days of trading or the time period for the spot month
in such physical-delivery contract, or otherwise limit the size of such
position. The exchanges would thus have the ability and discretion, but
not an obligation, to apply a five-day rule or similar restriction to
exemptions on any contracts subject to Federal position limits,
regardless of whether such contracts have been subject to Federal
position limits before.
---------------------------------------------------------------------------

    \332\ The existing enumerated hedges limited by the Five-Day
rule are as follows: Unsold anticipated production, unfilled
anticipated requirements, offsetting sales and purchases, and cross-
commodity hedges.
---------------------------------------------------------------------------

    The 2020 NPRM also included guidance for exchanges on factors to
consider when applying a restriction against holding physically
delivered futures contracts into the spot month. The proposed guidance
set forth in Appendix B, paragraph (b) provided that a position held
during the spot period may still qualify as a bona fide hedging
position, provided that: (1) The position complies with the bona fide
hedging transaction or position definition; and (2) there is an
economically appropriate need to maintain such position in excess of
Federal speculative position limits during the spot period, and that
need relates to the purchase or sale of a cash commodity.\333\
---------------------------------------------------------------------------

    \333\ For example, an economically appropriate need for soybeans
would mean obtaining soybeans from a reasonable source (considering
the marketplace) that is the least expensive, at or near the
location required for the purchaser, and that such sourcing does not
cause market disruptions or prices to spike.
---------------------------------------------------------------------------

    In addition, the guidance provided several factors the exchange
should weigh when evaluating whether a person wishing to exceed Federal
position limits should be able to do so during the spot period. For
example, whether the person: (1) Intends to make or take delivery
during that period; (2) provided materials to the exchange supporting
the waiver of the Five-Day Rule; (3) demonstrated supporting cash-
market exposure in-hand that is verified by the exchange; (4)
demonstrated that, for short positions, the delivery is feasible,
meaning that the person has the ability to deliver against the short
position; \334\ and (5) demonstrated that, for long positions, the
delivery is feasible, meaning that the person has the ability to take
delivery at levels that are economically appropriate.\335\
---------------------------------------------------------------------------

    \334\ That is, the person has inventory on-hand in a deliverable
location and in a condition in which the commodity can be used upon
delivery and that it represents the best sale for that inventory.
    \335\ That is, the delivery comports with the person's
demonstrated need for the commodity, and the contract is the
cheapest source for that commodity.
---------------------------------------------------------------------------

c. Summary of the Commission Determination--Elimination of the ``Five-
Day Rule;'' Proposed Guidance in Appendix B, Paragraph (b)
    The Commission is finalizing the proposal to eliminate the
restriction on holding a bona fide hedge exemption during the last five
days of trading from all the enumerated hedges to which such Five-Day
Rule restriction applies under existing Sec.  1.3. Additionally, the
Commission has carefully considered the various comments regarding the
proposed guidance in Appendix B, paragraph (b) and has determined to
finalize the guidance, subject to several amendments and
clarifications.
    The Commission discusses and addresses comments on the proposed
elimination of the Five-Day Rule immediately below, followed by a
discussion of comments on the proposed guidance further below.
d. Comments--Elimination of the ``Five-Day Rule;'' Proposed Guidance in
Appendix B, Paragraph (b)
(1) Elimination of the ``Five-Day Rule''
    Several public interest commenters opposed the elimination of the
Five-Day Rule.\336\ IATP viewed allowing the exchanges to impose a
five-day rule or similar restriction as relegating the Commission's
function to merely monitoring ``DCM decisions and their consequences
for market participants and the public after the fact.'' \337\
Conversely, commercial market participants and exchanges generally
supported the proposal to eliminate the Five-Day Rule and instead
afford the exchanges the discretion whether to impose restrictions on
holding physically-delivered contracts.\338\
---------------------------------------------------------------------------

    \336\ IATP at 17-18; Better Markets at 61 (contending that if
the CFTC does eliminate the Five-Day rule, it should at least
formalize the proposed guidance in the rule text).
    \337\ IATP at 18.
    \338\ ADM at 3; Cargill at 8; CCI at 2, 9; CEWG at 4, 24;
Chevron at 3, 9; CMC at 5; CME Group at 9; ICE at 2, 8; IFUS at 2;
FIA at 3; NGFA at 9; NGSA at 2; Shell at 3; Suncor at 3, 12.
---------------------------------------------------------------------------

(i) Discussion of the Final Rule--Elimination of the ``Five-Day Rule''
    The Commission is finalizing the proposal to eliminate the
restriction on holding a bona fide hedge exemption during the last five
days of trading from all the enumerated hedges to which such Five-Day
Rule restriction applies under existing Sec.  1.3.
    In place of the ``Five-Day Rule,'' the Commission is finalizing
proposed Sec.  150.5(a)(2)(ii)(D), which provides that an exchange may
grant exemptions, subject to terms, conditions, or restrictions against
holding large positions in physically delivered futures contracts, as a
bona fide hedge in excess of limits during the lesser of the last five
days of trading or the time period for the spot month in such physical-
delivery contract, or otherwise limit the size of such position under
that exemption.
    For the legacy agricultural contracts, the Five-Day Rule has been
an important way to help ensure that futures and cash-market prices
converge. Price convergence helps protect the integrity of the price
discovery function and facilitates an orderly delivery process, which
overlaps with the last days of trading. As stated in the 2020 NPRM,
however, a strict five-day rule may be inappropriate and unnecessary,
as the Commission expands its Federal position limits beyond the nine
legacy agricultural contracts.\339\
---------------------------------------------------------------------------

    \339\ 85 FR at 11612.

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

[[Page 3282]]

    In particular, while the Commission continues to believe that the
justifications described above for the existing Five-Day Rule remain
valid for contracts subject to Federal position limits, the exchanges--
subject to Commission oversight--are better positioned to decide
whether to apply a restriction, such as the Five-Day Rule, in
connection with exemptions to their own exchange-set limits, or whether
to apply other tools that may be equally effective. This Final Rule
affords exchanges with the discretion to apply, and when appropriate,
grant exemptions subject to terms, conditions or limitations like the
Five-Day Rule (or similar restrictions) for purposes of their own
exchange-set limits. Allowing for such discretion when granting
exemptions will afford exchanges flexibility to quickly impose, modify,
or waive any such limitation as circumstances dictate. While a strict
Five-Day Rule may be inappropriate in certain circumstances, including
when applied to energy contracts that typically have a shorter spot
period than agricultural contracts,\340\ the flexible approach adopted
herein may allow for the development and implementation of additional
solutions other than a Five-Day Rule that protect convergence, while
minimizing the impact on market participants.
---------------------------------------------------------------------------

    \340\ Energy contracts typically have a three-day spot period,
whereas the spot period for agricultural contracts is typically two
weeks.
---------------------------------------------------------------------------

    This approach allows exchanges to design and tailor a variety of
limitations to protect convergence during the spot period. For example,
in certain circumstances, a smaller quantity restriction, rather than a
complete restriction on holding positions in excess of limits during
the spot period, may be effective at protecting convergence. Similarly,
exchanges currently utilize other tools to achieve similar policy
goals, such as by requiring market participants to ``step down'' the
levels of their exemptions as they approach the spot period, or by
establishing exchange-set speculative position limits that include a
similar step-down feature. Since Sec.  150.5(a) as adopted herein would
require that any exchange-set limits for contracts subject to Federal
position limits must be less than or equal to the Federal limit, any
exchange application of the Five-Day Rule, or a similar restriction,
would have the same effect as if administered by the Commission for
purposes of Federal speculative position limits, but could be
administered by the exchange in a more tailored and efficient manner.
    In response to commenters who stated this approach would relegate
the Commission's functions to merely monitoring the DCMs' decisions
after the fact, the Commission points out that regardless of whether
there is a Federal Five-Day Rule, the Commission will continue to
exercise oversight over exchanges before, during, and after exchange
action relating to position limits. For example, all exchange rules,
including those establishing/modifying exchange-set position limits,
accountability levels, step downs, and five-day rules and similar
restrictions, must be submitted to the Commission in advance pursuant
to part 40 of the Commission's regulations.
    Additionally, any exemption granted by an exchange from its own
position limits must meet standards established by the Commission in
Sec.  150.5(a)(ii)(C) of this Final Rule, including considering whether
the requested exemption would result in positions that would not be in
accord with sound commercial practices and/or would exceed an amount
that may be established and liquidated in an orderly fashion. Further,
any waiver of an exchange five-day rule or similar restriction should
consider the Appendix B guidance adopted herein. Additionally, the
Commission will continue to leverage its own market surveillance and
oversight functions to ensure that exchanges continue to comply with
their legal obligations, including with respect to Core Principles 2,
3, 4, and 5, among others.\341\ Finally, under Sec.  150.3(b)(6)
finalized herein, the Commission continues to have the authority to
revoke any bona fide hedge exemption.
---------------------------------------------------------------------------

    \341\ 7 U.S.C. 7B-3(f)(4)(B); 7 U.S.C. 7B-3(f)(2); 7 U.S.C. 7B-
3(f)(3); 7 U.S.C. 7B-3(f)(5).
---------------------------------------------------------------------------

(2) Proposed Guidance in Appendix B, Paragraph (b)
    There were several comments on the proposed guidance in Appendix B,
paragraph (b) regarding the circumstances when an exchange may grant
waivers from any exchange-set five-day rule or similar restriction. A
few commenters requested that the Commission eliminate the proposed
guidance altogether.\342\ IFUS stated that the proposed guidance is
unnecessary and should be removed, contending that the guidance
``reflects many of the considerations currently taken by [e]xchange
staff when reviewing exemptions and spot month positions.'' \343\ CME
Group expressed a similar view, stating that in lieu of the proposed
guidance, ``the Commission should allow exchanges to continue to rely
on their established market surveillance expertise and regular
interactions to make decisions around exemptions.'' \344\
---------------------------------------------------------------------------

    \342\ CMC at 5; CME Group at 9; IFUS at 10.
    \343\ IFUS at 3.
    \344\ CME Group at 9.
---------------------------------------------------------------------------

    Most commercial market participants and Better Markets,\345\
however, did not request to eliminate the proposed guidance in Appendix
B, paragraph (b), but instead requested certain changes or
clarifications. These commenters focused on whether the guidance: (i)
Only applies to physically-settled contracts expressly designated by an
exchange as subject to a five-day rule or similar restriction; \346\
and (ii) is too prescriptive by imposing new documentation requirements
on exchanges.\347\ CME Group requested clarification on whether the
proposed guidance applies to all exemptions or only those exemptions
previously subject to a five-day rule.\348\ Several energy market
participants requested the Commission expressly clarify that the
restrictions or guidance do not apply to markets for energy commodity
derivatives.\349\ Alternatively, these energy market participants
stated that if the Commission declined to include in a final rule an
express prohibition on the application of the Five-Day Rule to energy
commodity derivative contracts, the Commission should clarify that an
exchange is not bound to apply the waiver guidance to any physically-
settled referenced contract that has not been expressly designated as
subject to the Five-Day Rule.\350\
---------------------------------------------------------------------------

    \345\ Better Markets supported the proposed guidance. Better
Markets at 46-48.
    \346\ Chevron at 13-14; Suncor at 13-14; CCI at 9-10; CEWG at
25-26.
    \347\ CME Group at 9.
    \348\ Id.
    \349\ Chevron at 13.
    \350\ Chevron at 13; Suncor at 14; CCI at 9-10; CEWG at 25-26.
---------------------------------------------------------------------------

(i) Discussion of Final Rule--Appendix B, Paragraph (b)
    The Commission has carefully considered the various comments
regarding the guidance in Appendix B, paragraph (b) and has determined
to finalize the guidance, subject to several amendments and
clarifications, discussed below.
    The Commission is not persuaded by requests to eliminate the
guidance based on arguments that exchanges have current market
surveillance practices or procedures to review the appropriateness of
an exemption during the relevant referenced contract's spot period. The
Commission continues to believe that the justifications described above
for the existing Five-Day Rule

[[Page 3283]]

remain valid. The Commission has determined, however, that with an
expanded list of contracts subject to Federal position limits, it is
best to provide the exchanges additional discretion when granting
exemptions to protect their markets using tools other than a Five-Day
Rule, and to supplement that discretion with guidance highlighting the
importance of the spot month to ensure price convergence and an orderly
delivery process.
    For certain referenced contract markets, rather than imposing a
complete restriction on holding positions in excess of limits during
the spot period, an exchange may, when appropriate, grant an exemption
which allows exceeding the position limit by a small increment. Such
approach would be an effective way of protecting convergence while
still maintaining orderly trading. Similarly, exchanges currently
utilize other tools in administering their position limits. For
example, CME and CBOT establish certain exchange-set speculative
position limits that include a ``step down'' feature so that the
permitted position limit level is lower each day as the contract nears
its last trading days. Further, when granting position limit
exemptions, exchanges may grant such exemptions subject to a ``step
down'' level restriction as well. The Commission expects that exchanges
would closely scrutinize any participant who requests recognition
during the last five days of the spot period or in the time period for
the spot month.
    The Commission clarifies that any exchange, for the purposes of
exchange-set position limits, that elects to grant an exemption subject
to terms, conditions, or limitations, that restrict the size of a
position during the time period for the spot month of a physically-
settled contract under Sec.  150.5(a)(2)(ii)(H) may do so on any
referenced contract subject to Federal position limits under the Final
Rule, not just the nine legacy agricultural contracts. As such, the
Commission clarifies for the avoidance of doubt that exemptions in
energy contracts may be subject to an exchange's restriction aimed to
monitor the spot period for that energy contract.
    Since price convergence and an orderly trading environment serve as
a deterrent or mitigate certain types of market manipulation schemes
such as corners and squeezes, the guidance is intended to include a
non-exclusive list of considerations the Commission expects the
exchanges to consider when determining whether to allow a position in
excess of limits throughout the spot month.
    Regarding various comments contending that the proposed guidance
was too prescriptive, the Commission reiterates the appendix is not
intended to be used as a mandatory checklist. Further, the Commission
is finalizing various amendments to Appendix B, paragraph b, to respond
to commenters' requests.
    First, the Commission is amending the introductory paragraph of the
guidance to clarify that under Sec.  150.5(a)(2)(ii)(H) as finalized
herein, exchanges may impose restrictions on bona fide hedge exemptions
in the spot month. This discretion does not require any express
designation by the exchange.
    Second, the Commission is modifying the proposed guidance to
clarify that the guidance may be used when considering either an
enumerated or non-enumerated bona fide hedge exemption. Third, the
Commission clarifies here that the guidance imposes no additional
reporting requirements on market participants as the factors described
in the guidance apply simply to the exchanges' evaluation of the
specific contract market when considering whether an exemption shall be
granted subject to any condition or limitation in the spot month.
Fourth, the Commission is eliminating the proposed factor which would
have required a market participant to provide materials to the exchange
supporting a classification of the position as a bona fide hedge. The
Commission notes that the exchange application requirements already
require market participants to provide relevant cash-market
information. In addition, the Commission is amending language
throughout the guidance to clarify that exchanges have flexibility when
considering applying the guidance. For example, the Commission is
removing proposed language that would have required the exchange to
verify the market participant's cash-market exposure. The Commission is
comfortable removing this language because the cash-market information
is already required as part of the exemption application process
described elsewhere in this release.\351\ Finally, the Commission is
making technical edits to clarify that any delivery under a physical
delivery contract is economically appropriate and the ``most
economical'' source for that commodity.
---------------------------------------------------------------------------

    \351\ See Sections II.D. and II.G.
---------------------------------------------------------------------------

ix. Guidance on Measuring Risk
a. Background--Measuring Risk
    In prior proposals, the Commission discussed the issue of whether
to recognize as bona fide both ``gross hedging'' and ``net hedging.''
\352\ While the Commission has previously expressed a willingness to
consider gross hedging in certain limited circumstances, such proposals
reflected the Commission's longstanding preference for net
hedging.\353\ That preference, although not stated explicitly in prior
releases, has been underpinned by a concern that unfettered recognition
of gross hedging could potentially allow for the cherry picking of
positions in a manner that subverts the position limits rules.\354\
---------------------------------------------------------------------------

    \352\ 81 FR at 96747-96747.
    \353\ See 81 FR at 96747 (stating that gross hedging was
economically appropriate in circumstances where ``net cash positions
do not necessarily measure total risk exposure due to differences in
the timing of cash commitments, the location of stocks, and
differences in grades or the types of cash commodity.'') See also
Bona Fide Hedging Transactions or Positions, 42 FR at 14832, 14834
(Mar. 16, 1977) and Definition of Bona Fide Hedging and Related
Reporting Requirements, 42 FR 42748, 42750 (Aug. 24, 1977).
    \354\ For example, using gross hedging, a market participant
could potentially point to a large long cash position as
justification for a bona fide hedge, even though the participant, or
an entity with which the participant is required to aggregate, has
an equally large short cash position. The presence of such
offsetting cash positions would result in the participant having no
net price risk to hedge. Instead, the participant created price risk
exposure to the commodity by establishing the derivative position.
---------------------------------------------------------------------------

b. Summary of the 2020 NPRM--Measuring Risk
    The Commission recognized in the 2020 NPRM that additional
flexibility to hedge on a gross basis may be warranted given that there
are myriad ways in which organizations, particularly those not
currently subject to Federal position limits, are structured and engage
in commercial hedging practices.\355\ For example, in the energy space,
it is common for market participants to use multi-line business
strategies where risks are managed by trading desk or business line
rather than on a global basis. Accordingly, in an effort to clarify its
view on this issue, the Commission proposed guidance on gross hedging
positions in paragraph (a) to Appendix B.
---------------------------------------------------------------------------

    \355\ See 85 FR at 11613.
---------------------------------------------------------------------------

    The proposed guidance provided flexibility for a person to measure
risk either on a net or gross basis, provided that: (A) The manner in
which the person measures risk is consistent over time and follows the
person's regular, historical practice (meaning the person

[[Page 3284]]

is not switching between net hedging and gross hedging on a selective
basis simply to justify an increase in the size of the person's
derivatives positions); (B) the person is not measuring risk on a gross
basis to evade the limits set forth in proposed Sec.  150.2 and/or the
aggregation rules currently set forth in Sec.  150.4; (C) the person is
able to demonstrate (A) and (B) above to the Commission and/or an
exchange upon request; and (D) an exchange that recognizes a particular
gross hedging position as a bona fide hedge pursuant to proposed Sec. 
150.9 documents the justifications for doing so and maintains records
of such justifications in accordance with proposed Sec.  150.9(d).
c. Summary of the Commission Determination--Measuring Risk
    The Commission is adopting the proposed guidance with modifications
and clarifications to address commenter concerns.
d. Comments--Measuring Risk
    While Better Markets expressed concern that gross hedging could be
used to conduct an ``end-run'' around position limits,\356\ many other
commenters expressed support for flexibility to hedge on a net or gross
basis.\357\ Multiple commenters who expressed support for such
flexibility also requested discrete changes to the proposed guidance
and/or associated preamble, including: (i) Elimination of the
requirement that exchanges document their justifications when allowing
gross hedging; \358\ (ii) clarification that gross hedging is
permissible for both enumerated and non-enumerated hedges; \359\ and
(iii) clarification that market participants do not need to develop
procedures setting forth when gross vs. net hedging is
appropriate.\360\ Finally, IFUS requested that the Commission eliminate
the proposed guidance on the grounds that the guidance reflects
considerations currently taken by exchange staff when reviewing
exemptions.\361\
---------------------------------------------------------------------------

    \356\ Better Markets at 60.
    \357\ ASR at 2; LDC at 2; NGSA at 3; COPE at 3; Chevron at 4;
Suncor at 4.
    \358\ MGEX at 3; FIA at 14; CEWG at 4.
    \359\ Chevron at 4-5; Suncor at 4-5; CCI at 4-5; CEWG at 7-10.
    \360\ FIA at 14-15 (stating that risk managers decide on a case-
by-case basis whether to hedge on a net or gross basis).
    \361\ IFUS at 3.
---------------------------------------------------------------------------

e. Discussion of Final Rule--Measuring Risk
    The Commission continues to believe that the guidance on gross
hedging is important because it will allow market participants to
measure risk in the manner most suited to their particular
circumstances, while preventing the use of gross hedging to subvert the
Federal position limits regime.\362\
---------------------------------------------------------------------------

    \362\ The guidance will help ensure the integrity of the
position limits regime for the reasons discussed below in response
to comments from Better Markets. The Commission thus disagrees with
IFUS that the guidance is unnecessary, but agrees with IFUS that the
proposed guidance reflects considerations currently taken by
exchange staff. In particular, the guidance is consistent in many
ways with the manner in which exchanges require their participants
to measure and report risk, which is consistent with the
Commission's requirements with respect to the reporting of risk. For
example, under Sec.  17.00(d), futures commission merchants
(``FCMs''), clearing members, and foreign brokers are required to
report certain reportable net positions, while under Sec.  17.00(e),
such entities may report gross positions in certain circumstances,
including if the positions are reported to an exchange or the
clearinghouse on a gross basis. 17 CFR 17.00. The Commission's
understanding is that certain exchanges generally prefer, but do not
require, their participants to report positions on a net basis. For
those participants that elect to report positions on a gross basis,
such exchanges require such participants to continue reporting that
way, particularly through the spot period. Such consistency is a
strong indicator that the participant is not measuring risk on a
gross basis simply to evade regulatory requirements.
---------------------------------------------------------------------------

    First, the Commission is eliminating proposed prong (D) of the
guidance, which provided that an exchange that recognizes a gross
position as a non-enumerated bona fide hedge pursuant to Sec.  150.9
documents the justifications for doing so. Prong (D) is unnecessary
given that the Commission and exchanges have other tools for accessing
such information. In particular, prong (C) of the guidance allows the
Commission and exchanges to request, on an as-needed basis, information
about the manner in which market participants are measuring risk.\363\
To ensure the Commission and exchanges have access to sufficient
information in light of the removal of prong (D), the Commission is
expanding prong (C) to require that a person also demonstrate, upon
request by the Commission or an exchange, justifications for measuring
risk on a gross basis. Additionally, the proposed prong (D) reference
to the non-enumerated process in Sec.  150.9 may have created confusion
regarding the applicability of the proposed gross hedging guidance to
enumerated hedges. Thus, the Commission is also revising the
introductory language of the guidance to clarify that the guidance
applies equally to enumerated and non-enumerated bona fide hedges.
---------------------------------------------------------------------------

    \363\ Additionally, market participants seeking exemptions
remain subject to a variety of recordkeeping requirements, including
Commission regulation Sec.  1.31, and the Commission will receive
information about all exchange-granted exemptions, including cash-
market information, via the monthly spreadsheet submission required
by Sec.  150.5(a)(4).
---------------------------------------------------------------------------

    Second, the Commission is clarifying that the guidance does not
require market participants to develop written policies or procedures
setting forth when gross or net hedging is appropriate. However, having
such policies or procedures may help market participants demonstrate
compliance with prongs (A), (B), and (C) of the guidance as finalized
herein.
    Finally, the Commission believes the concerns regarding subversion
of position limits raised by Better Markets are already addressed by a
combination of the guardrails in prongs (A)-(C) of the guidance as well
as other Commission provisions, including some finalized herein. First,
to receive recognition as a bona fide hedge, a position must comply
with the bona fide hedging definition, regardless of whether the
underlying risk is measured on a net or gross basis. A market
participant thus may not use gross hedging to receive bona fide hedge
treatment for a speculative position,\364\ and measuring risk on a
gross basis to willfully circumvent or evade speculative position
limits would potentially run afoul of the Sec.  150.2(i)(2) anti-
evasion provision finalized herein. Similarly, market participants must
comply with the Commission's aggregation requirements regardless of
whether the participants are measuring risk on a net or gross
basis.\365\
---------------------------------------------------------------------------

    \364\ The introductory language to the guidance provides in
relevant part that a person's ``gross hedging positions may be
deemed in compliance . . . provided that all applicable regulatory
requirements are met, including that the position is economically
appropriate to the reduction of risks in the conduct and management
of a commercial enterprise and otherwise satisfies the bona fide
hedging definition . . .''
    \365\ Under Sec.  150.4, unless an exemption applies, a person's
positions must be aggregated with positions for which the person
controls trading or for which the person holds a 10% or greater
ownership interest. Commission Regulation Sec.  150.4(b) sets forth
several permissible exemptions from aggregation. See Final Rule,
Aggregation of Positions, 81 FR 91454, (December 16, 2016).
---------------------------------------------------------------------------

    Second, concerns about cherry-picking are addressed by the
guidance. By focusing on consistency and historical practice with
respect to the manner in which a person measures risk, the guidance
enables market participants to measure risk on a gross basis when
dictated by the nature of the exposure,\366\ but not simply when

[[Page 3285]]

utilizing gross hedging will yield a larger exposure than net hedging
or will otherwise subvert Federal position limit or aggregation
requirements. Use of gross or net hedging that is inconsistent with an
entity's historical practice, or a change from gross to net hedging (or
vice versa), could be an indication that an entity is seeking to evade
position limits regulations.\367\
---------------------------------------------------------------------------

    \366\ The Commission continues to believe that a gross hedge may
be a bona fide hedge in circumstances where net cash positions do
not necessarily measure total risk exposure due to differences in
the timing of cash commitments, the location of stocks, and
differences in grades or types of the cash commodity. See, e.g.,
Bona Fide Hedging Transactions or Positions, 42 FR at 14834.
However, the Commission clarifies that these may not be the only
circumstances in which gross hedging may be recognized as bona fide.
Like the analysis of whether a particular position satisfies the
proposed bona fide hedge definition, the analysis of whether gross
hedging may be utilized would involve a case-by-case determination
made by the Commission and/or by an exchange using its expertise and
knowledge of its participants.
    \367\ If an entity's (including a vertically-integrated
entity's) practice is to switch between net and gross hedging based
on particular circumstances, and those circumstances do not involve
evading position limits or aggregation requirements, then such
switching would not run afoul of prong (A). See Section II.B.9.
(discussing anti-evasion).
---------------------------------------------------------------------------

    Third, all market participants seeking to exceed Federal position
limits must request hedge exemptions at the exchange level, regardless
of whether they are measuring risk on a gross or net basis, and
regardless of whether they are seeking an enumerated or non-enumerated
exemption at the Federal level. Under the Final Rule, the exchanges
would have an opportunity to confirm whether such participants' use of
gross hedging is consistent with the proposed guidance, including by
reviewing detailed position information. The Commission will also have
access to such information through a variety of means, including:
Records maintained by market participants pursuant to Commission
regulation Sec.  1.31; the monthly spreadsheets that exchanges must
submit to the Commission under Sec.  150.5(a)(4) summarizing exchange-
granted exemptions and related cash-market information; and the ability
for the Commission to request such information directly from a market
participant pursuant to prong (C) of the gross hedging guidance.
x. Pass-Through Swap and Pass-Through Swap Offset Provisions
a. Background--Pass-Through Swap and Pass-Through Swap Offset
    As the Commission has noted above, CEA section 4a(c)(2)(B) \368\
contemplates bona fide hedges that by themselves do not meet the
criteria of CEA section 4a(c)(2)(A), but that are used to offset the
swap exposure of a market participant (e.g., a dealer) to the extent
that the swap exposure does satisfy CEA section 4a(c)(2)(A) for such
market participant's counterparty (e.g., a commercial end user).\369\
The Commission believes that, in affording bona fide hedging
recognition for such offsets, Congress in CEA section 4a(c)(2)(B)
intended to: (1) Encourage the provision of liquidity to commercial
entities that are hedging physical commodity price risk in a manner
consistent with the bona fide hedging definition; and (2) only
recognize risk management positions as bona fide hedges when such
positions are opposite a bona fide hedging swap counterparty.\370\ The
Commission has proposed a pass-through swap provision in each of its
position limits rulemakings since 2011.
---------------------------------------------------------------------------

    \368\ 7 U.S.C. 6a(c)(2)(B).
    \369\ CEA section 4a(c)(2)(B)(i) recognizes as a bona fide
hedging position a position that reduces risks attendant to a
position resulting from a swap that was executed opposite a
counterparty for which the transaction would qualify as a bona fide
hedging transaction pursuant to'' 4a(c)(2)(A). 7 U.S.C.
6a(c)(2)(B)(i). CEA section 4a(c)(2)(B)(ii) further recognizes as a
bona fide hedging position a position that ``reduce risks attendant
to a position resulting from a swap that meets the requirements of
4a(c)(2)(A). 7 U.S.C. 6a(c)(2)(B)(ii).
    \370\ As described above, the Commission interprets the revised
statutory temporary substitute test as limiting the Commission's
authority to recognize risk management positions as bona fide hedges
unless the position is used to offset exposure opposite a bona fide
hedging swap counterparty.
---------------------------------------------------------------------------

b. Summary of the 2020 NPRM--Pass-Through Swap and Pass-Through Swap
Offset
    The Commission proposed to implement the statutory pass-through
swap provision in paragraph (2) of the bona fide hedging definition for
physical commodities in proposed Sec.  150.1. Proposed paragraph (2)(i)
of the 2020 NPRM's bona fide hedging definition addressed a situation
where: (a) A particular swap qualifies as a bona fide hedge by
satisfying the temporary substitute test, the economically appropriate
test, and the change in value requirement under proposed paragraph (1)
of the bona fide hedging definition for one of the counterparties (the
``bona fide hedging swap counterparty''), but not for the other
counterparty; and (b) the bona fide hedge treatment ``passes through''
from the bona fide hedging swap counterparty to the other counterparty
(the ``pass-through swap counterparty''). The pass-through swap
counterparty could be an entity that provides liquidity to the bona
fide hedging swap counterparty (such as a swap dealer or a non-dealer
that offers swaps).
    Under the 2020 NPRM, the pass-through of the bona fide hedge
treatment from the bona fide hedging swap counterparty to the pass-
through swap counterparty was contingent on: (1) The pass-through swap
counterparty's ability to demonstrate upon request from the Commission
and/or from an exchange that the pass-through swap is a bona fide
hedge; \371\ and (2) the pass-through swap counterparty entering into a
futures, option on a futures, or swap position in the ``same physical
commodity'' as the pass-through swap to offset and reduce the price
risk attendant to the pass-through swap.
---------------------------------------------------------------------------

    \371\ While the 2020 NPRM's proposed paragraph (2)(i) of the
bona fide hedging definition in Sec.  150.1 required the pass-
through swap counterparty to be able to demonstrate the bona fides
of the pass-through swap upon request, the 2020 NPRM did not
prescribe the manner by which the pass-through swap counterparty
obtains the information needed to support such a demonstration. The
2020 NPRM noted that the pass-through swap counterparty could base
such a demonstration on a representation made by the bona fide
hedging swap counterparty, and such determination may be made at the
time when the parties enter into the swap, or at some later point.
The 2020 NPRM also stated that for the bona fides to pass-through as
described above, the swap position need only qualify as a bona fide
hedging position at the time the swap was entered into.
---------------------------------------------------------------------------

    If the two conditions above were satisfied, then the bona fides of
the bona fide hedging swap counterparty ``pass through'' to the pass-
through swap counterparty for purposes of recognizing as a bona fide
hedge any futures position, option on futures position, or swap
position entered into by the pass-through swap counterparty to offset
the pass-through swap (i.e., to offset and reduce the risks of the swap
opposite the bona fide hedging swap counterparty). The pass-through
swap counterparty could thus exceed Federal position limits for both:
(1) The swap opposite the bona fide hedging swap counterparty, if
applicable; and (2) an offsetting futures position, option on a futures
position, or swap position in the same physical commodity, even though
any such offsetting position on its own would not qualify as a bona
fide hedge for the pass-through swap counterparty under proposed
paragraph (1) of the bona fide hedging transaction or position
definition. The Commission clarified that once the original bona fide
pass-through swap is settled, positions held under the pass-through
swap provision must be liquidated in an orderly manner in accordance
with sound commercial practices. Further, under proposed Sec. 
150.3(d)(2), a pass-through swap counterparty would be required to
maintain any representation it relied on regarding the bona fide hedge
status of the swap for at least two years.
    Proposed paragraph (2)(ii) of the bona fide hedging definition
addressed a situation where a market participant who qualifies as a
bona fide hedging swap counterparty (i.e., a counterparty with a
position in a previously-entered into swap that qualified, at the time
the

[[Page 3286]]

swap was entered into, as a bona fide hedge under paragraph (1)) seeks,
at some later time, to offset that bona fide hedge swap position using
a futures position, option on a futures position, or a swap in excess
of Federal position limits. Such step might be taken, for example, to
respond to a change in the bona fide hedging swap counterparty's risk
exposure in the underlying commodity.\372\ Proposed paragraph (2)(ii)
would allow such a bona fide hedging swap counterparty to use a futures
position, option on a futures position, or a swap in excess of Federal
position limits to offset the price risk of the previously-entered into
swap, even though the offsetting position itself does not qualify for
that participant as a bona fide hedge under paragraph (1).
---------------------------------------------------------------------------

    \372\ Examples of a change in the bona fide hedging swap
counterparty's cash-market price risk could include a change in the
amount of the commodity that the hedger will be able to deliver due
to drought, or conversely, higher than expected yield due to growing
conditions.
---------------------------------------------------------------------------

    The proposed pass-through exemption under paragraph (2) of the bona
fide hedging or transaction definition would only apply to the pass-
through swap counterparty's offset of the bona fide hedging swap, and/
or to the bona fide hedging swap counterparty's offset of its bona fide
hedging swap. Any further offset would not be eligible for a pass-
through exemption under paragraph (2) unless the offsetting position
itself meets paragraph (1) of the proposed bona fide hedging
definition.
    The Commission stated in the 2020 NPRM that it believes the pass-
through swap provision may help mitigate some of the potential impact
resulting from the removal of the ``risk management'' exemptions that
are currently in effect.\373\
---------------------------------------------------------------------------

    \373\ See supra Section II.A.1.iii.a. (discussion of the
temporary substitute test).
---------------------------------------------------------------------------

c. Summary of the Commission Determination--Pass-Through Swap and Pass-
Through Swap Offset; Related Recordkeeping Requirement; Cross-Commodity
Hedging Under the Pass-Through Swap Provision
    The Commission is finalizing the pass-through swap and pass-through
swap offset provision of the ``bona fide hedging transaction or
position'' definition largely as proposed, with certain amendments in
response to commenters' requests discussed below:
    First, the Commission is amending the 2020 NPRM's proposed
provision that would have required that the pass-through swap
counterparty demonstrate upon request that its offsetting position is
attendant to a position resulting from a bona fide hedging pass-through
swap. Instead, under the Final Rule, in order for a pass-through swap
counterparty to treat a pass-through swap offset as a bona fide hedge,
the pass-through swap counterparty must receive from the bona fide
hedging swap counterparty a written representation that the pass-
through swap qualifies as a bona fide hedge. Under the Final Rule, the
Commission is also amending the proposed regulatory text to add that
the pass-through swap counterparty may rely in good faith on such
written representation(s) made by the bona fide hedging swap
counterparty, unless the pass-through swap counterparty has information
that would cause a reasonable person to question the accuracy of the
representation.
    Second, the Commission is adopting a revised paragraph (i)(B) of
the bona fide hedging transaction or position definition in Sec.  150.1
to delete the language in the pass-through swap provision that requires
the offset to be in the ``same physical commodity'' as the pass-through
swap.
d. Comments--Application of Pass-Through Swap Offset to Affiliates;
Recordkeeping; Cross-Commodity Hedging Under the Pass-Through Swap
Provision
    Comments generally fell into three categories, each discussed in
turn below: (1) Application of pass-through swap offsets to affiliates;
(2) pass-through recordkeeping requirements; and (3) pass through swaps
and cross-commodity hedging.
(1) Application of Pass-Through Swap Offset to Affiliates
    Commenters generally supported amending the bona fide hedge
definition in accordance with the statutory language in CEA section
4a(c)(2)(B) to include a pass-through swap and pass-through swap
offset.\374\ Some commenters requested clarification on the application
of the pass-through swap offset exemption to corporate affiliates. For
example, Shell stated that an overly strict interpretation of ``pass-
through swap counterparty'' may limit the application of the pass-
through swap offset exemption to only one entity within a corporate
structure, and such entity may not be the affiliate entity used by the
firm for its market-facing activities or to execute transactions with
exchanges to manage portfolios and position limits on an aggregated
basis.\375\ NGSA similarly requested that the Commission's
interpretation of a pass-through swap counterparty apply to affiliates
who may pass through their bona fide hedge position exemption to a
market-facing, ``treasury-affiliate'' subsidiary within a corporate
structure.\376\
---------------------------------------------------------------------------

    \374\ CEWG at 4; CMC at 5-6; FIA at 3; ICE at 6-7; ISDA at 12-
13; and Shell at 2, 4-5.
    \375\ Shell at 4.
    \376\ NGSA at 8.
---------------------------------------------------------------------------

(i) Discussion of Final Rule--Application of Pass-Through Swap Offset
to Affiliates
    The Commission clarifies that within a group of entities that
aggregates its positions under Sec.  150.4 \377\ (such as an aggregated
corporate group), any entity that is part of the aggregated group may
avail itself of the pass-through swap offset exemption. For example,
the pass-through swap offset provision extends to market-facing
affiliates that are part of an aggregated group pursuant to Sec. 
150.4, such as treasury affiliate subsidiaries that firms commonly use
to manage market-facing activities and portfolios. In such
circumstances, recognition of a secondary pass-through swap transaction
would not be necessary among an aggregated group because an aggregated
group is treated as one person for purposes of Federal position limits.
---------------------------------------------------------------------------

    \377\ Aggregation of Positions, 81 FR 91454 (Dec. 16, 2016).
---------------------------------------------------------------------------

    Separately, in response to commenter requests to allow secondary
pass throughs (i.e., the further ``pass-through'' of a pass-through
exemption from one entity to another), the Commission clarifies that
outside the context of an aggregated group, additional positions
entered into as an offset of a pass-through swap would not be eligible
for a pass-through exemption under paragraph (2) of the bona fide
hedging definition unless the offsetting position itself meets the bona
fide hedging definition. Accordingly, the bona fides of a transaction
will not extend to a third-party through the pass-through swap
counterparty. For instance, if Producer A enters into an OTC swap with
Swap Dealer B, and the OTC swap qualifies as a bona fide hedge for
Producer A, then Swap Dealer B could be eligible for a pass-through
exemption to offset that swap in the futures market. However, if Swap
Dealer B offsets its swap opposite Producer A using an OTC swap with
Swap Dealer C, Swap Dealer C would not be eligible for a pass-through
exemption.
(2) Pass-Through Swap Provision and Recordkeeping
    Commenters raised concerns with the 2020 NPRM's requirements that
the pass-through swap counterparty

[[Page 3287]]

document, and upon request, demonstrate the bona fides of the pass-
through swap.\378\ Commenters also requested that the Commission
clarify the nature of the required documentation,\379\ and/or eliminate
the required demonstration/documentation altogether, provided that the
pass-through swap counterparty has a legitimate, good-faith belief the
swap is a bona fide hedge.\380\
---------------------------------------------------------------------------

    \378\ Cargill at 10; FIA at 11-12; CMC at 5; Shell at 6-7; ICE
at 6-7; and ISDA at 11-12.
    \379\ ICE at 6-7; Shell at 6.
    \380\ Cargill at 10; CMC at 5; FIA at 11-12; and ISDA at 11-12.
---------------------------------------------------------------------------

(i) Discussion of Final Rule--Pass-Through Swap Provision and
Recordkeeping
    The Commission is amending the 2020 NPRM's proposed provision that
would have required that the pass-through swap counterparty demonstrate
upon request that its offsetting position is attendant to a position
resulting from a bona fide hedging pass-through swap. For the Final
Rule, the Commission is amending the pass-through swap provision's
regulatory text to clarify that in order for a pass-through swap
counterparty to treat a pass-through swap as a bona fide hedge, the
pass-through swap counterparty must receive from the bona fide hedging
swap counterparty a written representation that the pass-through swap
qualifies as a bona fide hedge. The Commission is further amending the
regulatory text to add that the pass-through swap counterparty may rely
in good faith on such written representation(s) made by the bona fide
hedging swap counterparty, unless the pass-through swap counterparty
has information that would cause a reasonable person to question the
accuracy of the representation. The Commission is adding the written
representation requirement to enable to Commission to verify that only
market participants with bona fide hedge exemptions are able to pass-
through those exemptions to their swap counterparties.
    The Commission agrees with commenters who stated that the bona fide
hedging counterparty is the suitable party to determine the bona fide
hedging status of the pass-through swap. This is because the bona fide
hedging status is determined based upon the bona fide hedging
counterparty's confidential, proprietary information. The Commission
clarifies that the Commission is not requiring the bona fide hedging
counterparty to share the proprietary, confidential information upon
which it is basing its determination with its counterparties.
    Similar to the 2020 NPRM, this Final Rule does not prescribe the
form or manner by which the pass-through swap counterparty obtains the
written representation. The Commission recognizes that the bona fide
hedging counterparty may make such representations on a relationship
basis through counterparty relationship documentation (e.g., through
ISDA documentation or other forms of documentation as agreed upon by
the parties) or on a transaction basis (e.g., through trade
confirmations or in other forms as agreed upon by the parties).\381\
---------------------------------------------------------------------------

    \381\ The Commission believes that allowing market participants
to determine the form and manner of how they will document the
written representation by the bona fide hedging counterparty and
allowing the pass-through swap counterparty to rely on such
representation addresses NRECA's comments on the pass-through swap
provision recordkeeping obligations. NRECA at 23.
---------------------------------------------------------------------------

    For example, if agreed to by the counterparties, the pass-through
swap counterparty may rely on a written representation made by the bona
fide hedging swap counterparty that an original pass-through swap and
any subsequent pass-through swaps entered into by and between the bona
fide hedging swap counterparty and the pass-through swap counterparty
are bona fide hedges, unless the bona fide hedging swap counterparty
provides written notice to the pass-through swap counterparty that a
particular swap is not a bona fide hedge. The Commission believes
providing market participants with flexibility recognizes
counterparties' ongoing relationships, while enabling the Commission to
verify that the pass-through swap offset reduces the risks of a bona
fide hedging swap.
    The Commission considered comments requesting the elimination of
the pass-through swap provision recordkeeping requirement in Sec. 
150.3(d) based on arguments that requiring this recordkeeping was not
practical. The Commission is not persuaded by those arguments as the
recordkeeping requirements assist the Commission in verifying that the
pass-through swap provision is only being utilized to offset risks
arising from bona fide hedges. Accordingly, the Commission is
finalizing the proposed pass-through swap recordkeeping requirement in
Sec.  150.3(d), subject to certain conforming changes to reflect
amendments to the pass-through swap paragraph of the bona fide hedging
definition.
    Since not all swaps entered into by a commercial entity would
qualify as a bona fide hedge, the Commission declines commenters'
requests that a pass-through swap counterparty may reasonably rely
solely upon the fact that the counterparty is a commercial end user
and, absent an agreement between the counterparties, that the swap
appears to be consistent with hedges entered into by end users in the
same line of business.
(3) Comments--Pass-Through Swap Provision and Cross-Commodity Hedging
    Commenters requested amending paragraph (i)(B) of the proposed bona
fide hedge definition to permit the pass-through swap provision to
apply to cross-commodity hedges by eliminating the proposed requirement
that the pass-through swap offset must be in the ``same physical
commodity'' as the pass-through swap.\382\
---------------------------------------------------------------------------

    \382\ FIA at 13 (quoting 85 FR at 11614); Shell at 5 (quoting 85
FR at 11614).
---------------------------------------------------------------------------

(i) Discussion of Final Rule--Pass-Through Swap Provision and Cross-
Commodity Hedging
    The Commission is adopting a revised paragraph (i)(B) of the bona
fide hedging transaction or position definition in Sec.  150.1 to
delete the language in the pass-through swap provision that requires
the offset to be in the ``same physical commodity'' as the pass-through
swap. The Commission's enumerated cross-commodity bona fide hedge
adopted herein thus applies to all the enumerated hedges, as well as to
the pass-through swap provision in the bona fide hedge definition. The
revised regulatory text confirms the Commission's intent to allow a
pass-through swap counterparty to utilize the pass-through swap offset
exemption when the offset itself is a cross-commodity hedge of the
underlying pass-through swap, provided that such cross-commodity hedge
meets all applicable requirements, including being substantially
related to the commodity being offset.
2. ``Commodity Derivative Contract''
i. Summary of the 2020 NPRM--Commodity Derivative Contract
    The Commission proposed to create the defined term ``commodity
derivative contract'' for use throughout part 150 of the Commission's
regulations as shorthand for any futures contract, option on a futures
contract, or swap in a commodity (other than a security futures product
as defined in CEA section 1a(45)).

[[Page 3288]]

ii. Comments and Summary of the Commission Determination--Commodity
Derivative Contract
    No commenter addressed the proposed definition of ``commodity
derivative contract.'' The Commission is adopting the definition as
proposed, with some non-substantive technical modifications.
    These technical changes include the Final Rule's reference to
``futures contract'' rather than merely ``futures,'' and ``swap''
rather than ``swap contract'' to conform to other uses in final Sec. 
150.1.\383\
---------------------------------------------------------------------------

    \383\ The Commission notes that these technical changes are to
conform more closely to CEA section 4a(a), which refers to
``contracts of sale of such commodity for future delivery'' (7
U.S.C. 6a(a)(1) (emphasis added)), ``contracts of sale for future
delivery'' (7 U.S.C. 6a(a)(2)(A) (emphasis added)), or similar
phraseology. Accordingly, the Commission is making the technical
change to refer to ``futures contracts'' rather than merely
``futures'' in order to more closely conform to the CEA's terms.
Similarly, CEA section 4a(a)(6) and section 1a(47) both refer to
``swap'' but not '' swap contract,'' and so the Commission is making
a similar conforming change.
---------------------------------------------------------------------------

3. ``Core Referenced Futures Contract''
i. Summary of the 2020 NPRM--Core Referenced Futures Contract
    The Commission proposed to create the term ``core referenced
futures contract'' as a short-hand phrase to refer to the futures
contracts listed in proposed Sec.  150.2(d) to which the Federal
position limit rules would apply.\384\ As per the ``referenced
contract'' definition described below, position limits would also apply
to any contract that is directly or indirectly linked to, or that has
certain pricing relationships with, a core referenced futures contract.
---------------------------------------------------------------------------

    \384\ The selection of the proposed core referenced futures
contracts is explained below in the discussions of Sec.  150.2 at
Section II.B. and the necessity finding infra at Section III.C.
---------------------------------------------------------------------------

ii. Comments and Summary of the Commission Determination--Core
Referenced Futures Contract
    No commenter addressed the proposed definition of ``core referenced
futures contract.'' The Commission is adopting the definition as
proposed.
4. ``Economically Equivalent Swap''
i. Background--Economically Equivalent Swap
    The Commission's existing regulations do not currently subject
swaps to Federal position limits. Similarly, the Commission is unaware
of any exchange-set limits for swaps on any of the 25 core referenced
futures contracts. Pursuant to CEA section 4a(a)(5), when the
Commission imposes position limits on futures and options on futures
pursuant to CEA section 4a(a)(2), the Commission also must develop
limits ``concurrently'' and establish limits ``simultaneously'' for
``economically equivalent'' swaps ``as appropriate.'' \385\ As the
statute does not define the term ``economically equivalent,'' the
Commission must apply its expertise in construing such term, and, as
discussed further below, must do so consistent with the policy goals
articulated by Congress, including in CEA sections 4a(a)(2)(C) and
4a(a)(3).
---------------------------------------------------------------------------

    \385\ CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). In addition, CEA
section 4a(a)(4) separately authorizes, but does not require, the
Commission to impose Federal position limits on swaps that meet
certain statutory criteria qualifying them as ``significant price
discovery function'' swaps. 7 U.S.C. 6a(a)(4). The Commission
reiterates, for the avoidance of doubt, that the definitions of
``economically equivalent'' in CEA section 4a(a)(5) and
``significant price discovery function'' in CEA section 4a(a)(4) are
separate concepts and that contracts can be economically equivalent
without serving a significant price discovery function. See 81 FR at
96736 (the Commission noting that certain commenters may have been
confusing the two definitions).
---------------------------------------------------------------------------

ii. Summary of the 2020 NPRM--Economically Equivalent Swap
    The 2020 NPRM proposed a new term, ``economically equivalent
swap.'' Under the 2020 NPRM, a swap would be deemed an ``economically
equivalent swap'' with respect to a referenced contract so long as the
swap shared identical ``material'' contractual specifications, terms,
and conditions with the referenced contract, and provided that any
differences between the swap and referenced contract with respect to
the following would be disregarded: (i) Lot size or notional amount;
(ii) for a swap and relevant referenced contract that are both
physically-settled, delivery dates diverging by less than one calendar
day, except for a physically-settled natural gas swap which could
diverge by less than two calendar days; and (iii) post-trade risk
management arrangements. Because the proposed ``economically equivalent
swap'' definition referred to ``referenced contracts,'' under the 2020
NPRM's approach a swap could be deemed to be ``economically
equivalent'' to not just a core referenced futures contract, but also
to any cash-settled look alike futures contract or option on a futures
contract.\386\
---------------------------------------------------------------------------

    \386\ As discussed under the ``referenced contract'' definition,
the term ``referenced contract'' includes core referenced futures
contracts, linked cash-settled futures contracts, and options
thereon. For further discussion, see Section II.A.16.
---------------------------------------------------------------------------

iii. Comments and Discussion of Final Rule--Economically Equivalent
Swap
a. The Inclusion of Certain Swaps Within the Federal Position Limits
Framework
    Many commenters generally supported the proposed definition.\387\
However, other commenters argued that swaps should not be subject to
Federal position limits at all \388\ or that subjecting swaps to
position limits would increase costs without commensurate
benefits.\389\ Nevertheless, several of these same commenters that
stated that swaps should not be subject to Federal position limits also
generally supported the proposed ``economically equivalent swap''
definition to the extent the Commission determined to include swaps
within Federal position limits.\390\ Similarly, IATP stated that it was
unclear why swaps are part of the 2020 NPRM given the Commission's
limited information on the swaps market.\391\
---------------------------------------------------------------------------

    \387\ E.g., AQR at 10; FIA at 2-3; NCFC at 5; Suncor at 2; SIFMA
AMG at 7; ISDA at 5; Chevron at 2; CEWG at 3; Citadel at 6.
    \388\ SIFMA AMG at 6-8; IATP at 19.
    \389\ CHS at 4-5; NCFC at 5; SIFMA AMG at 6-7; and ISDA at 5.
    \390\ Chevron at 2; FIA at 2, 3, 5; MFA/AIMA at 3; SIFMA AMG at
7; Suncor at 2; AQR at 10-11; COPE at 3; Better Markets at 4; 31;
NCFC at 5; ISDA at 5; CEWG at 3; and Citadel at 6.
    \391\ IATP at 19.
---------------------------------------------------------------------------

    In response to these comments, as an initial matter, the Commission
emphasizes that Congress has determined, through the Dodd-Frank Act's
amendments to CEA section 4a(a)(5), that the Commission must develop
Federal position limits for economically equivalent swaps
``concurrently,'' and must establish such limits ``simultaneously,''
with the Federal position limits for futures and options on futures.
Accordingly, the Commission has determined that, as a legal matter, a
swap that qualifies as ``economically equivalent'' to any referenced
contract must be included within the Federal position limits framework.
    While it did not oppose the proposed definition, NCFC expressed a
similar concern with respect to the costs that the proposed definition
could impose on commercial end users and small- and mid-sized FCMs. To
mitigate these costs, NCFC suggested that any swap that qualifies for
an exception to the Commission's clearing requirement under existing
Sec.  50.50 of the Commission's regulations should not be deemed to be
an ``economically equivalent swap.'' According to NCFC, such ``swap
contracts already must meet the test `to hedge or mitigate commercial

[[Page 3289]]

risk,' and are `not used for a purpose that is in the nature of
speculation, investing, or trading,''' pursuant to Sec.  50.50.\392\
The Commission understands NCFC's concern, but believes NCFC's
alternative is unnecessary for two reasons. First, to the extent a swap
described by NCFC would ``hedge or mitigate commercial risk,'' such
swap likely would qualify for an enumerated bona fide hedge under the
Final Rule and therefore would not contribute to a commercial end-
user's net position for Federal position limits purposes.\393\ Second,
commodity swaps are not required to be cleared under the Commission's
existing regulations, so determining whether the end-user clearing
exemption applies is not necessarily a helpful proxy in determining
whether a swap is ``economically equivalent'' for purposes of CEA
section 4a(a)(5).
---------------------------------------------------------------------------

    \392\ NCFC at 5-6.
    \393\ To the extent an FCM would not be able to qualify for a
bona fide hedge, the Commission believes that excepting such swaps
for purely financial firms would functionally have the same effect
as maintaining the risk-management exemption, which Congress,
through the Dodd-Frank Act's amendments to the CEA, has directed the
Commission to eliminate. See Section IV.A.4.ii.a(1) (discussing
elimination of the risk management exemption).
---------------------------------------------------------------------------

b. Statutory Basis for the Commission's ``Economically Equivalent
Swap'' Definition
    In promulgating the Federal position limits framework, Congress
instructed the Commission to consider several factors. First, CEA
section 4a(a)(3)(B) requires the Commission when establishing Federal
position limits, to the maximum extent practicable, in its discretion,
to: (i) Diminish, eliminate, or prevent excessive speculation; (ii)
deter and prevent market manipulation, squeezes, and corners; (iii)
ensure sufficient market liquidity for bona fide hedgers; and (iv)
ensure that the price discovery function of the underlying market is
not disrupted. Second, CEA section 4a(a)(2)(C) requires the Commission
to strive to ensure that any limits imposed by the Commission will not
cause price discovery in a commodity subject to Federal position limits
to shift to trading in foreign markets.
    Accordingly, any definition of ``economically equivalent swap''
must consider these statutory objectives. The Commission also
recognizes that swaps may include customized (i.e., ``bespoke'') terms
and are largely negotiated bilaterally and traded off-exchange (i.e.,
OTC). In contrast, futures contracts have standardized terms and are
generally exchange-traded or otherwise traded subject to the rules of
an exchange. As explained further below, due to these differences
between swaps and exchange-traded futures and related options, the
Commission has preliminarily determined that Congress's underlying
policy goals in CEA section 4a(a)(2)(C) and (3)(B) are best achieved by
adopting a narrow definition of ``economically equivalent swap,''
compared to the broader definition of ``referenced contract.'' \394\
---------------------------------------------------------------------------

    \394\ The definition of ``referenced contract'' adopted herein
will incorporate cash-settled look-alike futures contracts and
related options that are either (i) directly or indirectly linked,
including being partially or fully settled on, or priced at a fixed
differential to, the price of that particular core referenced
futures contract; or (ii) directly or indirectly linked, including
being partially or fully settled on, or priced at a fixed
differential to, the price of the same commodity underlying that
particular core referenced futures contract for delivery at the same
location or locations as specified in that particular core
referenced futures contract. See infra Section II.A.16. (definition
of ``referenced contract''). The definition of ``economically
equivalent swap'' adopted herein is a type of ``referenced
contract,'' but, as discussed herein, the ``economically equivalent
swap'' definition includes a relatively narrower class of swaps
compared to other types of ``referenced contracts,'' such as look-
alike futures and options on futures contracts, for the reasons
discussed below.
---------------------------------------------------------------------------

    The ``referenced contract'' definition adopted in Sec.  150.1 will
include ``economically equivalent swaps,'' meaning any economically
equivalent swap is subject to Federal position limits. Thus, a swap
that is deemed economically equivalent would be required to be added
to, and could be netted against, as applicable, an entity's other
referenced contracts in the same commodity for the purpose of
determining one's aggregate positions for Federal position limits.\395\
Any swap that is not deemed economically equivalent is not a referenced
contract, and thus could not be netted with referenced contracts nor
required to be aggregated with any referenced contract for Federal
position limits purposes.
---------------------------------------------------------------------------

    \395\ See infra Section II.B.10. (discussion of netting).
---------------------------------------------------------------------------

    The Commission has determined that the ``economically equivalent
swap'' definition adopted herein supports the statutory objectives in
CEA section 4a(a)(3)(B)(i) and (ii) by helping to prevent excessive
speculation and market manipulation, including corners and squeezes,
respectively, by: (1) Focusing on swaps that are the most economically
equivalent in every significant way to the futures contracts and
options on futures contracts for which the Commission deems position
limits to be necessary; \396\ and (2) limiting the ability of
speculators to obtain excessive positions through netting. Any swap
that meets the economically equivalent swap definition offers identical
risk sensitivity to its associated referenced contract with respect to
the underlying commodity, and thus could be used to effect a
manipulation, benefit from a manipulation, or otherwise potentially
distort prices in the same or similar manner as the associated futures
contract or option on the futures contract. The Commission further has
determined that the relatively narrow definition supports the statutory
objective in CEA section 4a(a)(2)(C) by not causing price discovery to
shift to trading in foreign markets.\397\
---------------------------------------------------------------------------

    \396\ See infra Section III. (necessity finding).
    \397\ For clarity, a swap may be eligible for treatment under
the pass-through swap provision as either a pass-through swap or a
pass-through swap offset, discussed above under the bona fide hedge
definition, and not necessarily be deemed to be an ``economically
equivalent swap'' since the pass-through swap provision focuses on
whether the swap serves as a bona fide hedge to one of the
counterparties. Similarly, status as an economically equivalent swap
is not dispositive for treatment under the pass-through swap
provision.
---------------------------------------------------------------------------

c. The Definition Balances Competing Statutory Goals and Is Neither Too
Broad Nor Too Narrow
    Several commenters argued that the proposed ``economically
equivalent swap'' definition was too narrow and would therefore allow
market participants to avoid Federal position limits.\398\ In
particular, CME Group and Better Markets requested the general
``referenced contract'' definition that applies to futures and options
on futures also apply to swaps.\399\ The Commission agrees with these
commenters' general concerns that the ``economically equivalent swap''
definition should not allow market participants to avoid Federal
position limits. In fact, the Commission believes that the approach
adopted in this Final Rule achieves that goal better than the approach
proposed by Better Markets and CME Group, first and foremost by
preventing parties from using netting of swaps to create large
positions in the futures market. The Final Rule's definition, compared
to the relatively broader ``referenced contract'' definition that
applies to futures and options on futures, better prevents
inappropriate netting of market participants' positions and advances
Congress's underlying policy goals in

[[Page 3290]]

CEA section 4a(a)(2)(C) and (3)(B) for the following three reasons.
---------------------------------------------------------------------------

    \398\ CME Group at 3; NEFI at 3; Better Markets at 31-33
(generally arguing that the ``economically equivalent swap'' and
``referenced contract'' definitions should be consistent to prevent
loopholes).
    \399\ CME Group at 3-4; Better Markets at 33-34 (arguing that
excluding penultimate swaps creates a technical delineation that is
largely divorced from the economic realities relating to physical
commodities underlying both contracts).
---------------------------------------------------------------------------

    First, as the Commission stated above, it believes that a narrow
``economically equivalent swap'' definition that focuses on swaps with
identical material terms and conditions reduces the ability of market
participants to structure tangentially-related (i.e., non-identical)
swaps simply to net down large, speculative positions in excess of
Federal position limits in futures or options on futures. Because
referenced contracts in the same commodity are generally netted,\400\
and because OTC swaps are bilaterally negotiated and customizable,
market participants could structure swaps that do not necessarily offer
identical risk or economic exposure or sensitivity simply to net down
large positions in other referenced contracts. This is less of a
concern with exchange-traded futures and related options, which are
subject to exchange rules and oversight, and which have standardized
terms, meaning they cannot be structured simply to net down large
speculative positions in core referenced futures contracts.
---------------------------------------------------------------------------

    \400\ See Section II.B.10. (discussing the application of
netting).
---------------------------------------------------------------------------

    The Commission recognizes as reasonable the concerns of CME Group
and Better Markets that a relatively narrow ``economically equivalent
swap'' definition, compared to a broader definition, could enable
market participants to build excessive speculative risk exposure on one
side of the market through OTC swap transactions. As discussed herein,
the Commission is equally concerned that a broader definition similarly
would permit a market participant to acquire a large position in a core
referenced futures contract through inappropriate netting.\401\
However, the Commission believes that a broader ``economically
equivalent swap'' definition as advocated by these commenters also
would be more likely to lead to the additional harms discussed below.
Accordingly, while the Commission shares the same ultimate concerns as
CME Group and Better Markets with respect to protecting market
integrity, the Commission has determined that the relatively narrow
definition concurrently protects market integrity while also better
supporting the statutory directives in CEA sections 4a(a)(2)(C) and
4a(a)(3)(B) as discussed below.
---------------------------------------------------------------------------

    \401\ For example, a broader economically equivalent swap
definition would allow a market participant to hold a long position
in a physically-settled futures contract that exceeds the applicable
Federal position limit levels by netting down with an ``offsetting''
short OTC swap, even if the swap has a different material term than
the futures contract. That is, the ``offsetting'' short swap could
have different delivery location(s), delivery date(s), quality
differential(s), or even a different underlying commodity (depending
on how broad the definition would be) than the physically-settled
futures contract. Such an ``offsetting'' short swap would allow the
market participant to more profitably engage in--and therefore more
likely to successfully effect--a corner or squeeze in two respects.
First, the ``offsetting'' short swap would allow the market
participant to obtain a larger long futures position, thus creating
a more dominant position on the long side of the market. Second, the
``offsetting'' short swap would allow the market participant to more
easily ``dispose'' of or ``bury the corpse'' at smaller expense by
enabling the market participant to deliver the underlying physical
commodity, which the market participant received pursuant to its
long physically-settled futures positions, under more profitable
circumstances compared to the terms specified in the futures
contract. For example, the ``offsetting'' short swap could allow the
market participant to deliver the commodity (i.e., ``dispose of'' or
``bury the corpse'') at a different, more profitable (or at least
for less of a loss) delivery location and/or wait for more favorable
delivery dates with more favorable prices.
---------------------------------------------------------------------------

    Second, the Commission believes that the Final Rule's definition
addresses statutory objectives by focusing Federal position limits on
those swaps that pose the greatest threat for facilitating corners and
squeezes. That is, the Final rule addresses those swaps with similar
delivery dates and identical material economic terms to futures and
options on futures subject to Federal position limits while also
minimizing market impact and liquidity for bona fide hedgers for other
positions and transactions. For example, if the Commission were to
adopt a broader economically equivalent swap definition that included
delivery dates that diverge by one or more calendar days, perhaps by
several days or weeks, a liquidity provider (including a market maker
or a speculator) with a large portfolio of swaps may be more likely to
be constrained by the applicable position limits and therefore may have
incentive either to minimize its swaps activity or move its swaps
activity to foreign jurisdictions, resulting in reduced liquidity. If
there were many similarly situated market participants, the market for
such swaps could become less liquid, which in turn could harm liquidity
for bona fide hedgers. As a result, the Commission has determined that
the relatively narrow scope of the Final Rule's definition reasonably
balances the factors in CEA section 4a(a)(3)(B)(ii) and (iii) by
decreasing the possibility of illiquid markets for bona fide hedgers on
the one hand while, on the other hand, focusing on the prevention of
market manipulation during the most sensitive period of the spot month.
    Third, the ``economically equivalent swap'' definition helps
prevent regulatory arbitrage as required by CEA section 4a(a)(2)(C) and
additionally will strengthen international comity. For example, if the
Commission instead adopted a broader definition, U.S.-based swaps
activity could potentially migrate to other jurisdictions with a
narrower definition, such as the European Union (``EU''). In this
regard, the Final Rule's definition is similar in certain ways to the
EU definition for OTC contracts that are ``economically equivalent'' to
commodity derivatives traded on an EU trading venue.\402\ The
Commission's ``economically equivalent swap'' definition thus furthers
the statutory

[[Page 3291]]

goals set forth in CEA section 4a(a)(2)(C), which requires the
Commission to strive to ensure that any Federal position limits are
``comparable'' to foreign exchanges and will not cause ``price
discovery . . . to shift to trading'' on foreign exchanges.\403\
Further, market participants trading in both U.S. and EU markets should
find the Commission's and the EU's respective definitions to be
familiar, which may help reduce compliance costs for those market
participants that already have systems and personnel in place to
identify and monitor such swaps.
---------------------------------------------------------------------------

    \402\ See EU Commission Delegated Regulation (EU) 2017/591, 2017
O.J. (L 87). The applicable EU regulations define an OTC derivative
to be ``economically equivalent'' when it has ``identical
contractual specifications, terms and conditions, excluding
different lot size specifications, delivery dates diverging by less
than one calendar day and different post trade risk management
arrangements.'' While the Final Rule's ``economically equivalent
swap'' definition is similar, the Final Rule's definition requires
``identical material'' terms rather than merely ``identical'' terms.
Further, the Final Rule's definition excludes different ``lot size
specifications or notional amounts'' rather than referencing only
``lot size'' since swaps terminology usually refers to ``notional
amounts'' rather than to ``lot sizes.'' The Commission notes that
SIFMA AMG argued in its comment letter that the Commission should
adopt the economically equivalent swap definition proposed by the
EU. See SIFMA AMG at 7. However, while the Commission's definition
will be similar to the EU's definition, to the extent that the
Commission's definition differs from the EU's by requiring
``material identical'' rather than merely ``identical'' terms, the
Commission discusses its reasoning below.
     Both the Commission's definition and the applicable EU
regulation are intended to prevent harmful netting. See European
Securities and Markets Authority, Draft Regulatory Technical
Standards on Methodology for Calculation and the Application of
Position Limits for Commodity Derivatives Traded on Trading Venues
and Economically Equivalent OTC Contracts, ESMA/2016/668 at 10 (May
2, 2016), available at https://www.esma.europa.eu/sites/default/files/library/2016-668_opinion_on_draft_rts_21.pdf (``[D]rafting the
[economically equivalent OTC swap] definition in too wide a fashion
carries an even higher risk of enabling circumvention of position
limits by creating an ability to net off positions taken in on-venue
contracts against only roughly similar OTC positions.'').
     The applicable EU regulator, the European Securities and
Markets Authority (``ESMA''), released a ``consultation paper''
discussing the status of the existing EU position limits regime and
specific comments received from market participants. According to
ESMA, no commenter, with one exception, supported changing the
definition of an economically equivalent swap (referred to as an
``economically equivalent OTC contract'' or ``EEOTC''). ESMA further
noted that for some respondents, ``the mere fact that very few EEOTC
contracts have been identified is no evidence that the regime is
overly restrictive.'' See European Securities and Markets Authority,
Consultation Paper MiFID Review Report on Position Limits and
Position Management Draft Technical Advice on Weekly Position
Reports, ESMA70-156-1484 at 46, Question 15 (Nov. 5, 2019),
available at https://www.esma.europa.eu/document/consultation-
paper-position-limits
.
    \403\ 7 U.S.C. 6a(a)(2)(C).
---------------------------------------------------------------------------

    Each element of the Final Rule's definition, including the
exclusions from the definition, and related comments, is discussed
below.
d. Scope of Identical Material Terms
    Under the Final Rule's definition, only ``material'' contractual
specifications, terms, and conditions are relevant to the analysis of
whether a particular swap qualifies as an economically equivalent swap.
The definition thus does not require that a swap be identical in all
respects to a referenced contract in order to be deemed ``economically
equivalent'' to that referenced contract. Under the Final Rule,
``material'' specifications, terms, and conditions are limited to those
provisions that drive the economic value of a swap, including with
respect to pricing and risk. Examples of ``material'' provisions
include, for example: The underlying commodity, including commodity
reference price and grade differentials; maturity or termination dates;
settlement type (i.e., cash-settled versus physically-settled); and, as
applicable for physically delivered swaps, delivery specifications,
including commodity quality standards and delivery locations.\404\
---------------------------------------------------------------------------

    \404\ In developing its definition of an ``economically
equivalent swap,'' the Commission, based on its experience, has
determined that for a swap to be ``economically equivalent'' to a
futures or option on a futures contract, the material contractual
specifications, terms, and conditions must be identical. In making
this determination, the Commission took into account, in regards to
the economics of swaps, how a swap and a corresponding futures
contract or option on a futures contract react to certain market
factors and movements, the pricing variables used in calculating
each instrument, the sensitivities of those variables, the ability
of a market participant to gain the same type of exposures, and how
the exposures move to changes in market conditions.
---------------------------------------------------------------------------

    In addition, a swap that either references another referenced
contract, or incorporates by reference the other referenced contract's
terms, is deemed to share identical terms with the referenced contract
and therefore qualifies as an economically equivalent swap.\405\ Any
change in the material terms of such a swap, however, could render the
swap no longer economically equivalent for Federal position limits
purposes.
---------------------------------------------------------------------------

    \405\ For example, a cash-settled swap that either settles to
the pricing of a corresponding cash-settled referenced contract, or
incorporates by reference the terms of such referenced contract,
would be deemed to be economically equivalent to the referenced
contract.
---------------------------------------------------------------------------

    The Commission recognizes that the material swap terms noted above
are essential to determining the pricing and risk profile for swaps.
However, there may be other contractual terms that also may be
important for the counterparties in determining the pricing and
transaction risks, but that are not necessarily ``material'' for
purposes of position limits. For example, as discussed below, certain
other terms, such as clearing arrangements or governing law, may not be
material for the purpose of determining economic equivalence for
Federal position limits, but may nonetheless affect pricing and risk or
otherwise be important to the counterparties.
    Accordingly, the Commission generally considers those swap
contractual terms, provisions, or terminology (e.g., ISDA terms and
definitions) that are unique to swaps (whether standardized or bespoke)
not to be material for purposes of determining whether a swap is
economically equivalent to a particular referenced contract, even
though such terms may be important when negotiating the swap or
contribute to the valuation and/or the counterparties' risk analysis.
For example, the following swap provisions or terms are generally
unique to swaps and/or otherwise not material, and therefore are not to
be dispositive for determining whether a swap is economically
equivalent: Designating business day or holiday conventions; day count
(e.g., 360 or actual); calculation agent; dispute resolution
mechanisms; choice of law; or representations and warranties.\406\
---------------------------------------------------------------------------

    \406\ Commodity swaps, which generally are traded OTC, are less
standardized compared to exchange-traded futures and therefore must
include these provisions in an ISDA master agreement between
counterparties. While certain provisions, for example choice of law,
dispute resolution mechanisms, or the general representations made
in an ISDA master agreement, may be important considerations for the
counterparties, the Commission would not deem such provisions
material for purposes of determining economic equivalence under the
Federal position limits framework for the same reason the Commission
would not deem a core referenced futures contract and a look-alike
referenced contract to be economically different, even though the
look-alike contract may be traded on a different exchange with
different contractual representations, governing law, holidays,
dispute resolution processes, or other provisions unique to the
exchanges. Similarly, with respect to day counts, a swap could
designate a day count that is different than the day count used in a
referenced contract but adjust relevant swap economic terms (e.g.,
relevant rates or payments, fees, basis, etc.) to achieve the same
economic exposure as the referenced contract. In such a case, the
Commission would not find such differences to be material for
purposes of determining the swap to be economically equivalent for
Federal position limits purposes.
---------------------------------------------------------------------------

    Because the Commission considers settlement type to be a material
``contractual specification, term, or condition,'' a cash-settled swap
could only be deemed to be economically equivalent to a cash-settled
referenced contract, and a physically-settled swap could only be deemed
to be economically equivalent to a physically-settled referenced
contract. However, a cash-settled swap that initially did not qualify
as ``economically equivalent'' due to no corresponding cash-settled
referenced contract (i.e., no cash-settled look-alike futures contract)
could subsequently become an ``economically equivalent swap'' if a
cash-settled futures contract market were to develop.
    Commenters had various views on the treatment of cash-settled and
physically-settled swaps. First, certain commenters requested the
Commission exclude physically-settled swaps from Federal position
limits \407\ or at least clarify the class of instruments that would be
deemed to be physically-settled swaps.\408\ Second, other commenters
requested the opposite--that the Commission instead exclude cash-
settled swaps from Federal position limits.\409\ Third, Better Markets
argued that differentiating between cash-settled and physically-settled
swaps by including settlement type as a material term would
``incentivize[ ] speculative liquidity formation away from more liquid,
more transparent, and more restrictive futures exchanges and to the
swaps markets.'' \410\
---------------------------------------------------------------------------

    \407\ COPE at 4-5.
    \408\ ICEA at 3-5; NRECA at 19-20, 27.
    \409\ SIFMA AMG at 7; PIMCO at 3; and ISDA at 5.
    \410\ Better Markets at 32.
---------------------------------------------------------------------------

i. Treatment of Physically-Settled Swaps Under the Final Rule
    Several commenters requested that the Commission exclude
physically-settled swaps from Federal position limits,\411\ or at least
clarify the scope of physically-settled swaps that would be subject to
Federal position limits.\412\ However, the Commission has determined
that doing so is inconsistent with the statutory goals in CEA section

[[Page 3292]]

4a(a)(3)(B), especially the mandates to deter corners and squeezes and
to ensure sufficient market liquidity for bona fide hedgers enumerated
in CEA section 4a(a)(3)(B)(ii) and (iii), respectively. For example,
excluding physically-settled swaps could potentially incentivize
liquidity to move from physically-settled core referenced futures
contracts to physically-settled swaps, which could both harm market
liquidity for bona fide hedgers and also enable potential manipulators
to accumulate large directional positions in physically-settled
contracts to effect a corner and squeeze more easily.
---------------------------------------------------------------------------

    \411\ COPE at 4-5.
    \412\ IECA at 3-5; NRECA at 1, 28.
---------------------------------------------------------------------------

    The Commission also received several comments requesting
clarification regarding the Commission's use of the term ``physically-
settled'' swaps in the 2020 NPRM's discussion of the definition.
    First, COPE opined that since the 2020 NPRM excluded trade options
from the ``referenced contract'' definition, as a result, only cash-
settled swaps would be deemed to be ``economically equivalent swaps''
for purposes of Federal position limits. The Commission confirms that
under the Final Rule, any swap that qualifies as a trade option under
Sec.  32.3 is ipso facto not subject to Federal position limits.\413\
However, the Commission does not believe this means that only cash-
settled swaps could be deemed ``economically equivalent swaps.'' For
example, it is possible that a physically-settled swap may not qualify
as a trade option, and if it were to otherwise satisfy the
``economically equivalent swap'' definition, it therefore would be
subject to Federal position limits.
---------------------------------------------------------------------------

    \413\ As discussed under Section II.A.16., the ``referenced
contract'' definition explicitly excludes any ``trade options that
meets the requirements of Sec.  32.3'' of the Commission's
regulations. Accordingly, a ``trade option'' is not subject to
Federal position limits under the Final Rule, even if the trade
option otherwise would satisfy the ``economically equivalent swap''
definition.
---------------------------------------------------------------------------

    Second, IECA and NRECA requested the Commission clarify what it
means when using language referring to a ``physically-settled swap,''
and suggested the Commission instead refer to a ``swap that allows for
physical settlement or delivery.'' \414\ IECA stated that ``using this
term in place of the term `physically-settled swaps' in the
Commission's proposed rulemaking will help to avoid confusion and
misinterpretation in the future.'' \415\ While the Commission is
adopting the ``economically equivalent swap'' definition as proposed
(which includes the reference to ``delivery date''), the Commission
agrees with IECA's statement and confirms that when the Commission
refers to ``physically-settled swaps'' for the purpose of this
definition, the Commission means a ``swap that allows for physical
settlement or delivery.'' The Commission agrees with IECA that
referring to ``swaps that allow for physical settlement or delivery''
does not alter the Commission's intended meaning and may avoid
confusion and misinterpretation.\416\ However, the Commission will
continue to refer to ``physically-settled swaps'' in this preamble
discussion because the Commission believes that changing the term for
discussion purposes herein, compared to the 2020 NPRM's preamble
discussion, could raise additional confusion. Further, the Commission
distinguishes between ``cash-settled'' and ``physically-settled''
referenced contracts throughout this preamble discussion, and using
different terms to refer to swaps also could increase confusion.
---------------------------------------------------------------------------

    \414\ IECA at 3-5; NRECA at 1, 28.
    \415\ IECA at 5.
    \416\ IECA at 4-5.
---------------------------------------------------------------------------

    IECA was concerned that the term ``physically-settled swap'' could
suggest that the Commission was seeking to regulate a commodity for
deferred delivery as a swap, which is otherwise excluded from the
``swap'' definition under CEA section 1a(47)(B)(ii). The Commission
confirms that neither the use of ``delivery dates'' in the definition
adopted herein nor the Commission's use of the term ``physically-
settled swaps'' for the purposes of this preamble discussion is
intended to capture instruments that are excluded from the Commission's
jurisdiction either by statute (e.g., the CEA's statutory exclusion of
the sale of a non-financial commodity for deferred shipment or delivery
that is intended to be physically-settled) \417\ or otherwise not
deemed to be swaps pursuant to the Commission's rules and regulations,
interpretations, exemption orders, or other guidance.\418\
---------------------------------------------------------------------------

    \417\ See CEA section 1a(47)(B)(ii).
    \418\ See NRECA at 18-19. For clarity, and as requested by
NRECA, the Commission notes that these ``rules and regulations''
include the Commission's trade option rule in Sec.  32.3 as well as
the Commission's forward contract exclusion (i.e., the Brent forward
exclusion) in 55 FR 39188-92 and 77 FR 48,208, 48,246 (August 13,
2012).
---------------------------------------------------------------------------

    NRECA additionally requested the Commission clarify that the
``economically equivalent swap'' definition does not include any
``customary commercial agreement, contract or transaction entered into
as part of operations (so long as it is entered into off-facility and
not involving a financial intermediary).'' \419\ As noted, to the
extent such customary commercial agreement, contract, or transaction is
exempt or excluded from either treatment as, or from the definition of,
a ``swap'' by either statute or by the Commission's rules and
regulations, interpretations, exemption orders, or other guidance, the
Commission does not deem it to be an economically equivalent swap or
otherwise subject to Federal position limits under the Final Rule.\420\
---------------------------------------------------------------------------

    \419\ NRECA at 16-20.
    \420\ For example, the Commission's swap definition excludes
certain capacity contracts and peaking supply contracts that qualify
as forward contracts with ``embedded volumetric optionality.'' See
Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, 77 FR 48,246. Since such instruments are
excluded from the Commission's regulatory ``swap'' definition, they
ipso facto will not be deemed to be ``economically equivalent
swaps'' for purposes of Federal position limits.
---------------------------------------------------------------------------

ii. Treatment of Cash-Settled Swaps Under the Final Rule
    The Commission also received several comments discussing the
treatment of cash-settled swaps under the proposed ``economically
equivalent swap'' definition. Several financial industry commenters
argued that the Final Rule should include only physically-settled swaps
and should exclude cash-settled swaps, contending that cash-settled
swaps do not affect price discovery or contribute to manipulation.\421\
---------------------------------------------------------------------------

    \421\ SIFMA AMG at 7; PIMCO at 3; and ISDA at 5 (PIMCO and ISDA
each believe neither cash-settled swaps nor cash-settled futures
should be subject to position limits).
---------------------------------------------------------------------------

    The Commission disagrees with the commenters' request to exclude
cash-settled swaps from the final definition, as doing so could
incentivize liquidity to move from cash-settled referenced contracts to
cash-settled OTC swaps, potentially harming the liquidity in the
futures markets, including liquidity for bona fide hedgers. At the very
least, the Commission does not want to preference OTC cash-settled
swaps at the expense of corresponding exchange-traded cash-settled
futures or options on futures contracts.
    In contrast, Better Markets objected to the proposed definition
because, according to Better Markets, under the 2020 NPRM cash-settled
swaps would not be able to qualify as economically equivalent to a
physically-settled core referenced futures contract.\422\ As Better
Markets commented, distinguishing between cash-settled and physically-
settled swaps and futures contracts by

[[Page 3293]]

deeming settlement type (i.e., cash-settled vs. physically-settled
settlement) to be a material term would ``incentivize[ ] speculative
liquidity formation away from more liquid, more transparent, and more
restrictive futures exchanges and to the swaps markets.'' \423\
---------------------------------------------------------------------------

    \422\ Better Markets at 32 (stating that cash-settled swaps
would be ``essentially excluded from Federal position limits).
    \423\ Id.
---------------------------------------------------------------------------

    The Commission believes Better Markets' concern is mitigated since
under the Final Rule, cash-settled swaps are subject to Federal
position limits only if there is a corresponding (i.e., ``economically
equivalent'') cash-settled futures contract or option on a futures
contract.\424\ That is, cash-settled swaps are not subject to Federal
position limits if there are no corresponding cash-settled futures
contracts or options on a futures contract. In these situations, if no
corresponding futures contract or option thereon exists, then there is
no liquidity formation in cash-settled futures and options on futures
contracts with which a cash-settled swap would be competing for
liquidity in the first place.
---------------------------------------------------------------------------

    \424\ The Commission notes that a swap could be deemed to be
``economically equivalent'' to any referenced contract, including
cash-settled look-alikes, and that the ``economically equivalent
swap'' definition is not limited to core referenced futures
contracts.
---------------------------------------------------------------------------

    FIA argued that cash-settled swaps should be subject to a separate
spot-month limit.\425\ However, as discussed in II.A.16.ii.a., the
Commission has determined that FIA's request to establish separate
Federal position limits for cash-settled swaps is not, as a default
rule, consistent with the statutory goals in CEA section 4a(a)(3)(B).
In particular, separate position limits for cash-settled swaps would
make it easier for potential manipulators to engage in market
manipulation, such as ``banging'' or ``marking'' the close, by
effectively permitting higher Federal position limits in cash-settled
referenced contracts. For example, a market participant would be able
to double its cash-settled positions by maintaining positions in both
cash-settled futures and cash-settled economically equivalent swaps
since positions in each class would not be required to be aggregated
for purposes of Federal position limits.
---------------------------------------------------------------------------

    \425\ FIA at 7-8.
---------------------------------------------------------------------------

    Furthermore, the Commission is concerned that class limits could
impair liquidity in futures contracts or swaps, as the case may be. For
example, a market participant (including a market maker or speculator)
with a large portfolio of swaps (or futures contracts) near a
particular class limit would be assumed to have a strong preference for
executing futures contracts (or swaps) transactions in order to
maintain a swaps (or futures contracts) position below the class limit.
If there were many similarly situated market participants, the market
for such swaps (or futures contracts) could become less liquid. The
absence of class limits should decrease the possibility of illiquid
markets for referenced contracts subject to Federal position limits.
Because economically equivalent swaps and the corresponding futures
contracts and option on futures contracts are close substitutes for
each other, the absence of class limits should allow greater
integration between the economically equivalent swaps and corresponding
futures and options markets for referenced contracts and should also
provide market participants with more flexibility whether hedging,
providing liquidity or market making, or speculating.
e. Exclusions From the Definition of ``Economically Equivalent Swap''
    As noted above, the Final Rule's definition provides that
differences in lot size or notional amount, delivery dates diverging by
less than one calendar day (or less than two calendar days for natural
gas), or post-trade risk management arrangements do not disqualify a
swap from being deemed ``economically equivalent'' to a particular
referenced contract.
i. Delivery Dates Diverging by Less Than One Calendar Day
    The definition as it applies to commodities (other than natural
gas) encompasses swaps with delivery dates that diverge by less than
one calendar day from that of a referenced contract.\426\ As a result,
a swap with a delivery date that differs from that of a referenced
contract by one calendar day or more is not deemed economically
equivalent under the Final Rule, and such swaps are not required to be
added to, nor permitted to be netted against, any referenced contract
when calculating compliance with Federal position limits.\427\ For
example, these include contracts commonly referred to as
``penultimate'' contracts, which settle on the trading day immediately
preceding the final trading day of the corresponding core referenced
futures contract.
---------------------------------------------------------------------------

    \426\ This aspect of the proposed definition would be irrelevant
for cash-settled swaps since ``delivery date'' applies only to
physically-settled swaps.
    \427\ A swap as so described that is not ``economically
equivalent'' would not be subject to a Federal speculative position
limit under the Final Rule.
---------------------------------------------------------------------------

    In response to the definition's proposed exclusion of physically-
settled penultimate swaps, Better Markets argued, among other things,
that excluding penultimate swaps ``creates technical delineations that
are largely divorced from the economic realities relating to physical
commodities underlying both contracts.'' \428\ In response, the
Commission recognizes that while a penultimate contract may be
significantly correlated to its corresponding spot-month contract, a
penultimate contract does not necessarily offer identical economic or
risk exposure to the spot-month contract, and depending on the
underlying commodity and market conditions, a market participant may
open itself up to material basis risk by moving from the spot-month
contract to a penultimate contract.\429\
---------------------------------------------------------------------------

    \428\ Better Markets at 32.
    \429\ As discussed under Sections II.A.16.iii.a(2)(iii) and
II.B.3.vi.c, the Final Rule includes penultimate look-alike futures
contracts and options on futures contracts as ``referenced
contracts.'' Since futures contracts and options on futures
contracts are standardized and exchange-traded, the Commission is
less concerned about the potential for manipulation or evasion
through inappropriate netting in this context.
---------------------------------------------------------------------------

    Accordingly, the Commission has determined that it is not
appropriate ex ante to permit market participants to net such
penultimate swap positions (other than natural gas) against their core
referenced futures contract positions since such positions do not
necessarily reflect equivalent economic or risk exposure. However, the
Commission underscores that under the Final Rule, a penultimate swap
still could be deemed economically equivalent to the extent that
another penultimate referenced contract exists (assuming the swap and
other referenced contract share identical material terms and the swap
otherwise satisfies the economically equivalent swap definition). For
example, if a core referenced futures contract has a corresponding
penultimate futures contract that qualifies as a referenced contract,
then a penultimate swap could be deemed economically equivalent to the
penultimate futures contract. In such cases, the penultimate swap would
be an economically equivalent swap subject to Federal position limits.
    The Commission acknowledges that liquidity could shift from the
core referenced futures contract to penultimate swaps in cases where
there are no corresponding penultimate futures contracts or options
contracts (and therefore the swap would not be deemed to be an
economically equivalent swap), but the Commission

[[Page 3294]]

believes that this concern is mitigated for two reasons. First, basis
risk may exist between the penultimate swap and the referenced
contract, and so the Commission believes that a market participant is
less likely to hold a penultimate swap the greater the economic
difference compared to the corresponding referenced contract. Second,
the absence of penultimate futures contracts or options contracts may
indicate lack of appropriate penultimate liquidity to hedge or offset
one's penultimate swap position and therefore may militate against
entering into penultimate swaps. However, as discussed below, these
reasons do not necessarily apply to penultimate swaps for natural gas.
ii. Post-Trade Risk Management
    The Commission is specifically excluding differences in post-trade
risk management arrangements, such as clearing or margin, in
determining whether a swap is economically equivalent. As noted above,
many commodity swaps are traded OTC and may be uncleared or cleared at
a different clearing house than the corresponding referenced
contract.\430\ Moreover, since the core referenced futures contracts,
along with futures and options on futures contracts in general, are
traded on DCMs with vertically integrated clearing houses, as a
practical matter, it is unlikely that OTC commodity swaps, which
historically have been uncleared, would share identical post-trade
clearing house or other post-trade risk management arrangements with
their associated core referenced futures contracts. However, to the
extent an OTC commodity swap does share the same clearing arrangements
as a corresponding referenced contract, the Commission does not want to
incentivize the switching of cleared swap contracts to non-cleared
status for the sake of avoiding Federal position limits.
---------------------------------------------------------------------------

    \430\ Similar to the Commission's understanding of ``material''
terms, the Commission construes ``post-trade risk management
arrangements'' to include various provisions included in standard
swap agreements, including, for example: Margin or collateral
requirements, including with respect to initial or variation margin;
whether a swap is cleared, uncleared, or cleared at a different
clearing house than the applicable referenced contract; close-out,
netting, and related provisions; and different default or
termination events and conditions.
---------------------------------------------------------------------------

    Therefore, if differences in post-trade risk management
arrangements were sufficient to exclude a swap from economic
equivalence to a core referenced futures contract, then such an
exclusion could otherwise render ineffective the Commission's statutory
directive under CEA section 4a(a)(5) to include economically equivalent
swaps within the Federal position limits framework. Accordingly, the
Commission has determined that differences in post-trade risk
management arrangements should not prevent a swap from qualifying as
economically equivalent with an otherwise materially identical
referenced contract.\431\
---------------------------------------------------------------------------

    \431\ In addition, CEWG asked for clarification that the
Commission would not extend certain preamble language in the 2020
NPRM addressing the exclusion of post-trade risk management
arrangements from consideration when determining whether a swap is
economically equivalent to support a finding that such swaps are
actually off-exchange futures contracts rather than swaps. CEWG at
31. The Commission confirms that excluding post-trade risk
management arrangements from the determination that a swap is
economically equivalent does not extend to supporting a finding that
such swaps are actually off-exchange futures contracts rather than
swaps.
---------------------------------------------------------------------------

iii. Lot Size or Notional Amount
    The last exclusion clarifies that differences in lot size or
notional amount do not prevent a swap from being deemed economically
equivalent to its corresponding referenced contract. The Commission's
use of ``lot size'' and ``notional amount'' refer to the same general
concept. Futures terminology usually employs ``lot size,'' and swap
terminology usually employs ``notional amount.'' Accordingly, the
Commission is using both terms to convey the same general meaning, and
in this context does not mean to suggest a substantive difference
between the two terms.
f. Economically Equivalent Natural Gas Swaps
    Market dynamics in natural gas are unique in several respects
including, among other things, that ICE and NYMEX both list high volume
contracts, whereas liquidity in other commodities tends to pool at a
single DCM. As expiration approaches for natural gas contracts, volume
tends to shift from the NYMEX NG core referenced futures contract that
is physically-settled, to an ICE look-alike contract that is cash
settled. This trend reflects certain market participants' desire for
exposure to natural gas prices without having to make or take
delivery.\432\ NYMEX and ICE also list several ``penultimate'' cash-
settled referenced contracts that use the price of the physically-
settled NYMEX contract as a reference price for cash settlement on the
day before trading in the physically-settled NYMEX contract
terminates.\433\
---------------------------------------------------------------------------

    \432\ In part to address historical concerns over the potential
for manipulation of physically-settled natural gas contracts during
the spot month in order to benefit positions in cash-settled natural
gas contracts, the Commission discusses later in this release that
the Final Rule will allow for a higher ``conditional'' spot month
limit in cash-settled natural gas referenced contracts under the
condition that market participants seeking to utilize such
conditional limit exit any positions in physically-settled natural
gas referenced contracts. See infra Section II.C.2.e. (proposed
conditional spot month limit exemption for natural gas).
    \433\ Such penultimate contracts include: ICE's Henry Financial
Penultimate Fixed Price Futures (PHH) and options on Henry
Penultimate Fixed Price (PHE), and NYMEX's Henry Hub Natural Gas
Penultimate Financial Futures (NPG).
---------------------------------------------------------------------------

    In order to recognize the existing natural gas markets, which
include active and vibrant markets in penultimate natural gas
contracts, the Final Rule includes a slightly broader economically
equivalent swap definition for natural gas so that physically-settled
swaps with delivery dates that diverge by less than two calendar days
from an associated referenced contract could still be deemed
economically equivalent and would be subject to Federal position
limits. The Commission intends for this provision to prevent and
disincentivize manipulation and regulatory arbitrage and to prevent
volume from shifting away from the NYMEX NG core referenced futures
contract to penultimate natural gas contract futures and/or penultimate
swap markets in order to avoid Federal position limits.
    As noted above, the Commission is adopting a relatively narrow
``economically equivalent swap'' definition in order to prevent market
participants from inappropriately netting positions in referenced
contracts against swap positions further out on the curve. The
Commission acknowledges that liquidity could shift to penultimate swaps
as a result but believes that, with the exception of natural gas, this
concern is mitigated since there may be basis risk between the
penultimate swap and the referenced contract and lack of liquidity to
specifically hedge or offset one's penultimate swap position. However,
compared to other contracts, the Commission believes that natural gas
has a relatively liquid penultimate futures market that enables a
market participant to hedge or set-off its penultimate swap position.
The Commission believes that without the exception to the economically
equivalent swap definition for natural gas swaps, liquidity otherwise
could be incentivized to shift from the NYMEX NG core referenced
futures contract to penultimate natural gas swaps in order to avoid
Federal position limits.
    CME Group stated in its comment letter that that these concerns
also may apply to other energy core referenced

[[Page 3295]]

futures contracts.\434\ As a result, the Commission intends to observe
the behavior in these other markets in response to the Final Rule, but
the Commission understands that the natural gas markets are likely the
most sensitive to these concerns based on the size of the corresponding
natural gas penultimate market. As a result, the Commission is adopting
the proposed exception for natural gas, but emphasizes that it will
continue to observe the other energy markets in order to determine the
proper course of action with respect to those markets.
---------------------------------------------------------------------------

    \434\ CME Group at 4.
---------------------------------------------------------------------------

g. Determination of Economic Equivalence
    The Commission is unable to publish a list of swaps it deems to be
economically equivalent swaps because any such determination would
involve a facts and circumstances analysis, and because most physical
commodity swaps are created bilaterally between counterparties and
traded OTC. Absent a requirement that market participants identify
their economically equivalent swaps to the Commission on a regular
basis, the Commission believes that market participants are best
positioned to determine whether particular swaps share identical
material terms with referenced contracts and would therefore qualify as
``economically equivalent'' for purposes of Federal position limits.
However, the Commission understands that for certain bespoke swaps it
may be unclear whether the facts and circumstances demonstrate whether
the swap qualifies as ``economically equivalent'' with respect to a
referenced contract.
    MFA/AIMA requested that the Commission facilitate compliance by
providing clearer guidance on terms that would be deemed material for
determining which swaps are ``economically equivalent.'' \435\
Similarly, NCFC requested that the Commission adopt a ``safe harbor''
under which ``demonstrable good faith compliance with respect to
inadvertent violations would not serve as the basis for an enforcement
action.'' \436\ In response, the Commission emphasizes that under the
Final Rule, a market participant will have the discretion to make such
determination as long as the market participant makes a reasonable,
good faith effort in reaching such determination. The Commission will
not pursue any enforcement action for violating Federal position limits
against such market participant with respect to such swaps positions as
long as the market participant (i) performed the necessary due
diligence and is able to provide sufficient evidence, if requested, to
support its reasonable, good faith determination that the swap is or is
not an economically equivalent swap and (ii) comes into compliance with
the applicable Federal position limits within a commercially reasonable
time, as determined by the Commission in consultation with the market
participant, and if applicable, any relevant exchange.\437\ The
Commission anticipates that this should provide a greater level of
certainty to provide market participants with the comfort they need to
enter into swap positions, in contrast to the alternative in which
market participants would be required to first submit swaps to the
Commission staff and wait for feedback before entering into swaps.\438\
---------------------------------------------------------------------------

    \435\ MFA/AIMA at 9.
    \436\ NCFC at 6.
    \437\ As noted below, the Commission reserves the authority
under the Final Rule to determine that a particular swap or class of
swaps either is or is not ``economically equivalent'' regardless of
a market participant's determination. See infra Section
II.A.4.iii.g. (discussion of commission determination of economic
equivalence). As long as the market participant made its
determination, prior to such Commission determination, using
reasonable, good faith efforts, the Commission would not take any
enforcement action for violating the Commission's position limits
regulations if the Commission's determination subsequently differs
from the determination of the market participant and the market
participant comes into compliance with the applicable Federal
position limits within a commercially reasonable time, as determined
by the Commission in consultation with the market participant, and
if applicable, any relevant exchange.
    \438\ As discussed under Section II.A.16. (definition of
``referenced contract''), the Commission is including a list of
futures contracts and options on futures contracts that qualify as
referenced contracts because such contracts are standardized and
published by exchanges. In contrast, since swaps are largely
bilaterally negotiated and OTC traded, a swap could have multiple
permutations and any published list of economically equivalent swaps
would be unhelpful or incomplete.
---------------------------------------------------------------------------

    While the Commission will primarily rely on market participants to
initially determine whether their swaps meet the proposed
``economically equivalent swap'' definition, the Commission is adopting
paragraph (3) to the ``economically equivalent swap'' definition to
clarify that the Commission may determine on its own initiative that
any swap or class of swaps satisfies, or does not satisfy, the
economically equivalent definition with respect to any referenced
contract or class of referenced contracts. The Commission believes that
this provision will provide the ability to offer clarity to the
marketplace in cases where uncertainty exists as to whether certain
swaps would qualify (or would not qualify) as ``economically
equivalent,'' and therefore would be (or would not be) subject to
Federal position limits. Similarly, where market participants hold
divergent views as to whether certain swaps qualify as ``economically
equivalent,'' the Commission can ensure that all market participants
treat OTC swaps with identical material terms similarly, and serve as a
backstop in case market participants fail to properly treat
economically equivalent swaps as such. As noted above, the Commission
will not take any enforcement action with respect to violating the
Commission's position limits regulations if the Commission disagrees
with a market participant's determination as long as the market
participant is able to provide sufficient support to show that it made
a reasonable, good faith effort in applying its discretion.\439\
---------------------------------------------------------------------------

    \439\ See supra Section II.A.4. (discussing market participants'
discretion in determining whether a swap is economically
equivalent).
---------------------------------------------------------------------------

    Better Markets encouraged the release of additional guidance,
suggesting that the Commission should delegate its authority to the DMO
Director to issue guidance with respect to specific types of terms and
conditions, and noting that the proposed process for the Commission to
provide clarification is cumbersome.\440\ The Commission does not
believe such delegation is necessary since Commission staff will
continue to have the ability to offer informal guidance as well as
formal no-action relief or interpretive guidance as needed.
---------------------------------------------------------------------------

    \440\ Better Markets at 34.
---------------------------------------------------------------------------

    Better Markets also suggested that in order to ensure market
participants conduct proper diligence, the Commission should clarify
and codify that a swap dealer must include an appendix in its
reasonably-designed policies and procedures under existing Sec.  23.601
that identifies swaps ``in any manner'' referencing commodities subject
to Federal position limits, regardless of whether the entity deems the
swap to be ``economically equivalent.'' \441\ In contrast, ISDA
believed the obligations in Sec.  23.601 impose costs that are overly
burdensome and are not commensurate with benefits.\442\ ISDA stated
that further guidance is necessary, but noted that even if further
guidance is provided, the regime would still impose unnecessary burdens
on swap dealers.\443\ ISDA requested the Commission consider including
further

[[Page 3296]]

clarification and/or interim relief for swap dealers.\444\
---------------------------------------------------------------------------

    \441\ Better Markets at 34.
    \442\ ISDA at 10.
    \443\ Id.
    \444\ Id.
---------------------------------------------------------------------------

    At this time, the Commission does not believe it is necessary to
provide further detail with respect to Sec.  23.601 because, as
discussed above, the Commission will defer to a market participant's
determination as long as the market participant is able to provide
sufficient support to show that it made a reasonable, good faith effort
in applying its discretion.\445\
---------------------------------------------------------------------------

    \445\ See supra Section II.A.4. (discussing market participants'
discretion in determining whether a swap is economically
equivalent).
---------------------------------------------------------------------------

h. Phased Implementation of Federal and Exchange-Set Limits on Swaps
    As discussed under Section I.D., the Final Rule generally gives
market participants until January 1, 2022 to comply with Federal
position limits for the 16 non-legacy referenced contracts that are
subject to Federal position limits for the first time under the Final
Rule, and the Final Rule provides an extra year to comply with respect
to economically equivalent swaps (January 1, 2023). After such
compliance period, economically equivalent swaps will be subject to
Federal position limits. In general, commenters supported a phase-in
for such swaps.\446\
---------------------------------------------------------------------------

    \446\ MFA/AIMA at 8 (requesting an additional 6-12 months phase-
in); SIFMA AMG at 9 (requesting an additional 6-12 months); Citadel
at 9 (requesting an additional 6 months); and NGSA at 15-16
(requesting a general phase-in in order ``to avoid the risk of harm
to market recovery and to facilitate efficiency in market
participant implementation'').
---------------------------------------------------------------------------

    As discussed further under Section II.D.4.i, final Sec.  150.5
requires exchanges to establish and enforce exchange-set limits for any
referenced contract, which includes economically equivalent swaps. The
Commission has determined to permit exchanges to delay enforcing their
respective exchange-set position limits on economically equivalent
swaps at this time. Specifically, with respect to exchange-set position
limits on swaps, the Commission notes that in two years (which
generally coincides with the compliance date for economically
equivalent swaps), the Commission will reevaluate the ability of
exchanges to establish and implement appropriate surveillance
mechanisms to implement DCM Core Principle 5 and SEF Core Principle 6
with respect to economically equivalent swaps. However, after the swap
compliance date (January 1, 2023), the Commission underscores that it
will enforce Federal position limits in connection with OTC swaps.
    In response to the Commission's proposal to allow exchanges to
delay enforcing exchange-set position limits on swaps, IATP opined that
the Commission's decision to ``[d]elay compliance with position limit
requirement [sic] to avoid imposing costs on market participants makes
it appear that the Commission is serving as a swap dealer booster,
although swaps dealers are amply resourced to provide the necessary
data to the exchanges and to the Commission. The Commission is bending
over backward to avoid requiring swaps market participants from paying
the costs of exchange trading.'' \447\ However, the Commission stated
in the same section of the 2020 NPRM that it would enforce Federal
position limits on swaps even though it would not require exchanges to
enforce position limits on swaps until the Commission determines that
exchanges have had the opportunity to access swaps data and establish
appropriate swaps oversight infrastructure.\448\ Additionally, the
Commission notes that physical commodity swaps are not subject to the
Commission's trade execution mandate to trade on exchanges, and the
Commission understands that most physical commodity swaps are traded
OTC rather than on exchanges. Accordingly, the Commission's rationale
for delaying the requirement that exchanges enforce position limits for
swaps is based on exchanges' existing capabilities and lack of insight
into the OTC swaps markets, rather than for swap dealers who will
remain subject to Federal position limits and Commission
oversight.\449\
---------------------------------------------------------------------------

    \447\ IATP at 20.
    \448\ The 2020 NPRM stated, ``Nonetheless, the Commission's
preliminary determination to permit exchanges to delay implementing
Federal position limits on swaps could incentivize market
participants to leave the futures markets and instead transact in
economically-equivalent swaps, which could reduce liquidity in the
futures and related options markets, although the Commission
recognizes that this concern should be mitigated by the reality that
the Commission would still oversee and enforce Federal position
limits on economically equivalent swaps.'' (emphasis added). 85 FR
at 11680.
    \449\ The Commission also notes that IATP quotes from the cost-
benefits considerations section of the 2020 NPRM, and thus the
Commission's focus on benefits and costs to exchanges and market
participants in the excerpt quoted by IATP.
---------------------------------------------------------------------------

i. Cross-Border Application
    Several commenters opined that the Commission should address the
cross-border application of the Final Rule, including in connection
with OTC swaps.\450\
---------------------------------------------------------------------------

    \450\ FIA at 27-28; ISDA at 11; CHS at 6 (``CHS believes that
global organizations should be in a position to better understand
the Commission's approach with respect to the cross-border
application of the rules to referenced contract positions. In CHS's
view, the proposal does not address whether and how global companies
must aggregate referenced contract positions of affiliates around
the world. As part of the retooling of the position limit regime,
CHS urges the Commission to address such an application'').
---------------------------------------------------------------------------

    In response, the Commission makes three observations. First, as
discussed above regarding the treatment of physically-settled swaps, if
a swap is otherwise excluded from the Commission's jurisdiction either
by statute or pursuant to the Commission's rules and regulations,
interpretations, exemption orders, or other guidance, then the swap is
not subject to Federal position limits. Accordingly, while related,
this determination is distinct from the Final Rule's position limits
framework. Second, the Final Rule provides a compliance period for
economically equivalent swaps until January 1, 2023. Accordingly, the
Commission and its staff expect to continue to discuss the status of
OTC swaps with market participants during this compliance period and
provide additional feedback as necessary based on the individual facts
and circumstances. Third, to a certain extent, some of the comments are
more related to the position limit aggregation rules in existing Sec. 
150.4, which was finalized in 2016.\451\ Moreover, the 2020 NPRM did
not discuss cross-border application, which is therefore beyond the
scope of this rulemaking.
---------------------------------------------------------------------------

    \451\ For further discussion related to the position limits
aggregation rules, see Section II.B.11.
---------------------------------------------------------------------------

5. ``Eligible Affiliate''
i. Summary of the 2020 NPRM--Eligible Affiliate
    The Commission proposed to create the new defined term ``eligible
affiliate'' to be used in proposed Sec.  150.2(k). As discussed further
in connection with Sec.  150.2, an entity that qualifies as an
``eligible affiliate'' would be permitted to voluntarily aggregate its
positions, even though it is eligible for an exemption from aggregation
under Sec.  150.4(b).\452\
---------------------------------------------------------------------------

    \452\ See Section II.B.11.
---------------------------------------------------------------------------

ii. Comments and Summary of the Commission Determination--Eligible
Affiliate
    The Commission received no comments on this definition and is
adopting it as proposed with certain technical changes. The Commission
is making these technical changes to clarify the antecedent to the use
of ``its'' and ``such entity'' in the definition. The Commission
expects these changes will clarify the definition, but do not represent
a substantive change in the meaning.

[[Page 3297]]

6. ``Eligible Entity''
i. Summary of the 2020 NPRM--Eligible Entity
    The Commission adopted a revised ``eligible entity'' definition in
the 2016 Final Aggregation Rulemaking.\453\ The Commission proposed no
further amendments to this definition, but is including the revised
definition in this Final Rule given that the definitions for part 150
are set forth or restated in Sec.  150.1, thus ensuring that all
defined terms are included. As noted above, the Commission also
proposed a non-substantive change to remove the lettering from this and
other definitions that appear lettered in existing Sec.  150.1, and to
list the definitions in alphabetical order.
---------------------------------------------------------------------------

    \453\ See 17 CFR 150.1(d).
---------------------------------------------------------------------------

7. ``Entity''
i. Summary of the 2020 NPRM--Entity
    The Commission proposed defining ``entity'' to mean ``a `person' as
defined in section 1a of the Act.'' \454\ The term ``entity,'' not
defined in existing Sec.  150.1, is used throughout proposed part 150
of the Commission's regulations.
---------------------------------------------------------------------------

    \454\ 7 U.S.C. 1a(38).
---------------------------------------------------------------------------

ii. Comments--Entity
    The Commission received two comments that recommended clarification
of the proposed definition of ``entity.'' \455\ FIA and MGEX contended
the proposed definition of ``entity'' should not cross-reference the
definition of ``person'' in section 1a of the CEA because the CEA
defines ``person'' to include individuals (i.e., natural persons), as
well as entities.\456\ MGEX argued that the definition of ``entity''
should not apply to individuals.\457\ FIA stated that, for purposes of
the 2020 NPRM, it is unclear whether the cross-reference to the
definition of ``person'' in section 1a of the CEA is meant to be
limited to non-natural persons.\458\ If so, FIA recommended that the
Commission amend the definition of ``entity'' to refer only to the non-
natural persons listed in the definition of ``person'' under section 1a
of the CEA.\459\ Further, FIA suggested that provisions in part 150
that are applicable to both natural and non-natural persons should
refer to ``persons'' and those that apply to only non-natural persons
should refer to ``entity.'' \460\
---------------------------------------------------------------------------

    \455\ FIA at 26; MGEX at 2.
    \456\ Id.
    \457\ MGEX at 2.
    \458\ FIA at 26.
    \459\ Id.
    \460\ Id.
---------------------------------------------------------------------------

iii. Discussion of Final Rule--Entity
    The Commission declines to adopt the commenters' suggestion to
carve ``individuals'' out of the proposed definition of ``entity'' or
to otherwise differentiate between ``person(s)'' and ``entity(ies)''
for purposes of part 150 of the Final Rule. The proposed definition of
``entity'' expressly included ``individuals'' and neither commenter
explained why individuals should be excluded from the definition and
why the CEA's statutory definition of ``person'' is inappropriate.
Accordingly, the Commission is adopting the definition of ``entity'' as
proposed.
8. ``Excluded Commodity''
i. Summary of the 2020 NPRM--Excluded Commodity
    The phrase ``excluded commodity'' is defined in CEA section 1a(19),
but is not defined or used in existing part 150 of the Commission's
regulations. The Commission proposed including a definition of
``excluded commodity'' in part 150 that references that term as defined
in CEA section 1a(19).\461\
---------------------------------------------------------------------------

    \461\ 7 U.S.C. 1a(19).
---------------------------------------------------------------------------

ii. Comments and Summary of the Commission Determination--Excluded
Commodity
    No commenter addressed the proposed definition of ``excluded
commodity.'' The Commission is adopting the definition as proposed.
9. ``Futures-Equivalent''
i. Background--Futures-Equivalent
    The phrase ``futures-equivalent'' is currently defined in existing
Sec.  150.1(f) and is used throughout existing part 150 of the
Commission's regulations to describe the method for converting a
position in an option on a futures contract to an economically
equivalent amount in a futures contract. The Dodd-Frank Act amendments
to CEA section 4a, in part, direct the Commission to apply aggregate
Federal position limits to physical commodity futures contracts and to
swap contracts that are economically equivalent to such physical
commodity futures contracts.
ii. Summary of the 2020 NPRM--Futures-Equivalent
    In order to aggregate positions in futures, options \462\ on
futures, and swaps for purposes of calculating compliance with the
Federal position limits set forth in the 2020 NPRM, the Commission
proposed adjusting position sizes to an equivalent position based on
the size of the unit of trading of the relevant core referenced futures
contract. The phrase ``futures-equivalent'' is used for that purpose
throughout the 2020 NPRM, including in connection with the ``referenced
contract'' definition in proposed Sec.  150.1. The Commission also
proposed broadening the existing ``futures-equivalent'' definition to
include references to the proposed new term ``core referenced futures
contracts.'' Additionally, with respect to options, the proposed
``futures-equivalent'' definition also provided that a participant that
exceeds Federal position limits as a result of an option assignment
would be allowed a one-day grace period to liquidate the excess
position.
---------------------------------------------------------------------------

    \462\ As stated in this definition, the term ``option'' includes
an option on a futures contract and an option that is a swap.
---------------------------------------------------------------------------

iii. Commission Determination--Futures-Equivalent
    The Commission is adopting the proposed definition of ``futures-
equivalent'' with one substantive modification: In addition to the 2020
NPRM's grace period in connection with position limit overages dues to
option assignments, under the Final Rule, the one-day grace period
would also extend to an option position that exceeds Federal position
limits as a result of certain changes in the option's exposure to price
changes of the underlying referenced contract, as long as the
applicable option contract does not exceed such position limits under
the previous business day's exposure to the underlying referenced
contract. This grace period does not apply on the last day of the spot
month for the corresponding core referenced futures contract.
    As discussed further below, the Final Rule also includes several
technical changes, including referring to an option's ``exposure'' to
price changes of the underlying referenced contract and eliminating
references to an option's ``risk factors'' and ``delta coefficient.''
As discussed below, the Commission believes these changes will add
flexibility in assessing exposure to price changes of an option to the
underlying futures contract and are not intended to reflect a
substantive difference.
iv. Comments--Futures-Equivalent
    Several commenters supported the proposed definition, including the
one-business-day grace period related to position limit overages due to
options assignments.\463\ In addition to

[[Page 3298]]

supporting the proposed definition, CME Group and ICE both supported
expanding the proposed definition's one business day grace period to
include Federal position limit overages resulting from changes in the
option's delta coefficient, noting that such a change is consistent
with their respective exchange rules.\464\ However, CME Group noted
that exercising an in-the-money option that results in a position over
the position limit should be treated as a violation if the futures-
equivalent position was over the position limit based on both the
previous and current day's delta.\465\
---------------------------------------------------------------------------

    \463\ MFA/AIMA at 11; CME Group at 14; FIA at 26; and IFUS
Exhibit 1 RFC 23.
    \464\ CME Group MRAN 1907-5 states that ``[i]f a position
exceeds position limits as a result of an option assignment, the
person who owns or controls such position shall be allowed one
business day to liquidate the excess position without being
considered in violation of the limits. Additionally, if, at the
close of trading, a position that includes options exceeds position
limits when evaluated using the delta factors as of that day's close
of trading, but does not exceed the limits when evaluated using the
previous day's delta factors, then the position shall not constitute
a position limit violation.'' See CME Group Market Regulation
Advisory Notice RA1907-5 (Aug. 2, 2019), available at: https://www.cmegroup.com/content/dam/cmegroup/notices/market-regulation/2019/08/RA1907-5.pdf; IFUS Rule 6.13(a) similarly provides persons
one business day to bring into position limits compliance any
position that exceeds limits due to changes in the deltas of the
options, or as the result of an option assignment.
    \465\ CME Group at 14.
---------------------------------------------------------------------------

    FIA sought clarification from the Commission on certain aspects of
the proposed definition. FIA stated that it is unclear how a spread
contract that qualifies as a referenced contract would be converted to
a futures-equivalent position.\466\ FIA also requested the Commission
clarify which calculation method applies to swaps and options that are
swaps.\467\
---------------------------------------------------------------------------

    \466\ FIA at 7.
    \467\ FIA at 6-7.
---------------------------------------------------------------------------

v. Discussion of Final Rule--Futures-Equivalent
    The Commission agrees with CME Group and ICE that the one-business-
day grace period also should apply to position overages in connection
with changes in the current day's option's exposure to price changes of
the underlying referenced contract (e.g., option delta coefficient).
The Commission understands that providing a one business day grace
period for these situations is consistent with existing market
practice. Further, consistent with CME Group's comment, a market
participant will not have a grace period if the market participant's
position also exceeded Federal position limits based on the previous
day's exposure (including option delta coefficient). To alleviate
concerns about delivery and to help prevent corners and squeezes, this
one-day grace period does not apply on the last trading day of the spot
month of the option's corresponding core referenced futures contract.
    Additionally, the Commission is eliminating references to an
option's ``risk factor'' and ``delta co-efficient'' and instead
referring to an option's ``exposure'' to price changes of the
underlying referenced contract.
    The Commission understands that the term ``exposure'' in the
present context is more commonly used by market participants.
Accordingly, the Commission believes that the reference to an option's
``exposure'' to price changes of the underlying referenced contract is
the technically correct term to use over ``risk factor'' or ``delta
coefficient,'' which are used in the existing ``futures-equivalent''
definition. However, the Commission's use of ``exposure'' here is meant
to encompass the concepts of ``risk factor'' and ``delta co-
efficient.'' As a result, the Commission believes that this change
provides flexibility, and is consistent with existing market practice
and understanding, in assessing the exposure of an option to the price
movement of futures contract and is not intended to reflect a
substantive change.
    Additional technical changes include the Final Rule's reference to
``futures contract'' rather than merely ``futures'' and ``entity''
rather than ``participant'' since the former terms conform to other
uses in final Sec.  150.1. The Final Rule also makes several technical
changes in connection with the use of ``computed'' in the definition,
and these changes are meant to clarify the meaning rather than imply a
substantive change.
    With respect to FIA's request for clarification regarding how a
spread contract that qualifies as a referenced contract would be
converted to a futures-equivalent position, the Commission recognizes
the inherent challenge with converting a spread contract that qualifies
as a referenced contract to a futures-equivalent position.\468\ The
Commission expects that a market participant will adjust such a spread
contract to a futures-equivalent position consistent with existing
exchange practice.
---------------------------------------------------------------------------

    \468\ FIA at 7.
---------------------------------------------------------------------------

    With respect to FIA's question regarding the calculation for swaps
and options that are swaps, subparagraph (1) of the futures-equivalent
definition applies to an option that is a swap, and subparagraph (3) of
the definition applies to a swap that is not an option.
10. ``Independent Account Controller''
i. Summary of the 2020 NPRM--Independent Account Controller
    The Commission adopted a revised ``independent account controller''
definition in the 2016 Final Aggregation Rule.\469\ The Commission
proposed no further amendments to this definition, but included that
revised definition in the 2020 NPRM so that all defined terms appeared
together.
---------------------------------------------------------------------------

    \469\ See 17 CFR 150.1(e).
---------------------------------------------------------------------------

11. ``Long Position''
i. Summary of the 2020 NPRM--Long Position
    The phrase ``long position'' is currently defined in Sec.  150.1(g)
to mean ``a long call option, a short put option or a long underlying
futures contract.'' The Commission proposed to update this definition
to apply to swaps and to clarify that such positions would be on a
futures-equivalent basis. This provision would thus be applicable to
options on futures and swaps such that a long position would also
include a long futures-equivalent option on futures and a long futures-
equivalent swap.
ii. Comments and Summary of the Commission Determination--Long Position
    No commenter addressed the proposed definition of ``long
position.'' The Commission is adopting the definition as proposed.
12. ``Physical Commodity''
i. Summary of the 2020 NPRM--Physical Commodity
    The Commission proposed to define the term ``physical commodity''
for position limits purposes. Congress used the term ``physical
commodity'' in CEA sections 4a(a)(2)(A) and 4a(a)(2)(B) to mean
commodities ``other than excluded commodities as defined by the
Commission.'' \470\ The proposed definition of ``physical commodity''
thus included both exempt and agricultural commodities, but not
excluded commodities.
---------------------------------------------------------------------------

    \470\ 7 U.S.C. 6a(a)(2)(A) and (B).
---------------------------------------------------------------------------

ii. Comments and Summary of the Commission Determination--Physical
Commodity
    No commenter addressed the proposed definition of ``physical
commodity.'' The Commission is adopting the definition as proposed.

[[Page 3299]]

13. ``Position Accountability''
i. Summary of the 2020 NPRM--Position Accountability
    Existing Sec.  150.5 permits position accountability in lieu of
exchange position limits in certain cases, but does not define the term
``position accountability.'' The proposed amendments to Sec.  150.5
would allow exchanges, in some cases, to adopt position accountability
levels in lieu of, or in addition to, position limits. The Commission
proposed a definition of ``position accountability'' for use throughout
proposed Sec.  150.5 as discussed in greater detail in connection with
proposed Sec.  150.5.
ii. Comments and Summary of the Commission Determination--Position
Accountability
    No commenter addressed the proposed definition of ``position
accountability.'' The Commission is adopting the definition as proposed
with some non-substantive technical changes related to the numbering
structure. The Commission is also changing the reference of ``trader''
to ``entity'' since ``entity'' is the proper defined term in Sec. 
150.1 under the Final Rule while ``trader'' is not a defined term under
Sec.  150.1.
14. ``Pre-Enactment Swap''
i. Summary of the 2020 NPRM--Pre-Enactment Swap
    The Commission proposed to create the defined term ``pre-enactment
swap'' to mean any swap entered into prior to enactment of the Dodd-
Frank Act of 2010 (July 21, 2010), the terms of which had not expired
as of the date of enactment of the Dodd-Frank Act. As discussed in
connection with proposed Sec.  150.3 later in this release, if acquired
in good faith, such swaps would be exempt from Federal position limits,
although such swaps could not be netted with post-effective date swaps
for purposes of complying with spot month Federal position limits.
ii. Comments and Summary of the Commission Determination--Pre-Enactment
Swap
    No commenter addressed the proposed definition of ``pre-enactment
swap.'' The Commission is adopting the definition as proposed. For
further discussion of the treatment of pre-existing positions, see
Sections II.B.7. and II.C.7.
15. ``Pre-Existing Position''
i. Summary of the 2020 NPRM--Pre-Existing Position
    The Commission proposed to create the defined term ``pre-existing
position'' to reference any position in a commodity derivative contract
acquired in good faith prior to the effective date of a final Federal
position limit rulemaking. Proposed Sec.  150.2(g) would set forth the
circumstances under which Federal position limits would apply to such
positions.
ii. Comments and Summary of the Commission Determination--Pre-Existing
Position
    No commenter addressed the proposed definition of ``pre-existing
position.'' The Commission is adopting the term ``pre-existing
position'' as proposed. However, the Commission did receive comments
related to the treatment of certain pre-existing positions. For further
discussion of the treatment of pre-existing positions and related
comments, see Sections II.B.7. and II.C.7.
16. ``Referenced Contracts''
i. Background--Referenced Contracts
    When a futures contract expires, all open futures contract
positions in such contract are settled by physical delivery (which the
Commission refers to as ``physically-settled'' herein) or cash
settlement (which the Commission refers to as ``cash-settled'' herein),
depending on the contract terms set by the exchange. The nine legacy
agricultural contracts currently subject to Federal position limits are
all physically-settled futures contracts. Deliveries on physically-
settled futures contracts are made through the exchange's
clearinghouse, and the delivery of the physical commodity must be
consummated between the buyer and seller per the exchange rules and
contract specifications. On the other hand, other futures contracts are
``cash-settled'' because they do not involve the transfer of physical
commodity ownership and require that all open positions at expiration
be settled by a transfer of cash to or from the clearinghouse based
upon the final settlement price of the contracts.
    Market participants may use the settlement price of physically
delivered futures contracts as a key benchmark to price cash-market
contracts and other derivatives, including so-called ``look-alike''
cash-settled derivatives (which could be futures, options on futures,
or swaps contracts). Look-alike cash-settled derivative contracts are
explicitly linked to the physically-settled futures contracts. A look-
alike cash-settled derivatives contract has nearly identical
specifications as its physically-settled counterpart, but rather than
calling for delivery of the underlying commodity at expiration, the
contract terms require a cash payment at expiration. Each look-alike
cash-settled derivatives contract is linked by design to its respective
physically-settled contract in that the final settlement value of the
cash-settled contract is defined as the final settlement price of the
physically-settled contract in the same commodity for the same month.
Additionally, other types of cash-settled derivatives contracts may be
similar to a look-alike, but the final settlement price of such
contracts are determined based on a basis, or differential, to the
final settlement price of the corresponding physically-settled
contract.
    Existing Sec.  150.2 applies Federal position limits to the nine
legacy agricultural contracts as well as to options thereon on a
futures-equivalent basis, but the existing Federal framework does not
include provisions to apply Federal position limits to contracts that
are linked in some manner to the nine physically-settled legacy
agricultural contracts. As a result, the existing Federal position
limits do not apply to any cash-settled contracts, including both look-
alike contracts and contracts that settle at a basis or differential to
a physically-settled contract, options on such cash-settled contracts,
or swaps.\471\
---------------------------------------------------------------------------

    \471\ Under CEA section 1a(47)(A), an option on a swap is deemed
to be a swap.
---------------------------------------------------------------------------

    As the Final Rule is expanding the position limits framework to
cover certain cash-settled futures contracts, options on such futures
contracts, and economically equivalent swaps, for the reasons discussed
below, the Commission is adopting the proposed defined term
``referenced contract,'' with modifications, for use throughout final
part 150 to refer to derivatives contracts that are subject to Federal
position limits.
ii. Summary of the 2020 NPRM--Referenced Contracts
    The 2020 NPRM proposed a new ``referenced contract'' definition
that included:
    (1) Any core referenced futures contract listed in proposed Sec. 
150.2(d); (2) any other contract (futures or option on futures), on a
futures-equivalent basis with respect to a particular core referenced
futures contract, that is directly or indirectly linked to the price of
a core referenced futures contract, or

[[Page 3300]]

that is directly or indirectly linked to the price of the same
commodity underlying a core referenced futures contract (for delivery
at the same location(s)); and (3) any economically equivalent swap, on
a futures-equivalent basis.
    The proposed referenced contract definition thus included look-
alike futures contracts and options on look-alike futures contracts (as
well as economically equivalent swaps with respect to such look-alike
contracts), contracts of the same commodity but different sizes (e.g.,
mini contracts), and penultimate contracts.\472\
---------------------------------------------------------------------------

    \472\ A penultimate contract is a cash-settled contract in which
trading ceases one business day prior to the settlement date of the
corresponding referenced contract with which the penultimate
contract is linked. With respect to penultimate contracts, the 2020
NPRM stated that ``Federal limits would apply to all cash-settled
futures and options on futures contracts on physical commodities
that are linked in some manner, whether directly or indirectly, to
physically-settled contracts subject to Federal limits.'' Further to
this general statement, the 2020 NPRM provided a footnote example of
a penultimate contact that, because it cash-settles directly to a
core referenced futures contract, the 2020 NPRM explained would
therefore be included as a referenced contract. 85 FR at 11619.
---------------------------------------------------------------------------

    Additionally, the 2020 NPRM explicitly excluded from the
``referenced contract'' definition: (1) Commodity index contracts; (2)
location basis contracts; (3) swap guarantees; and (4) trade options
that satisfy the requirement of Sec.  32.3 of the Commission's
regulations. Further, while not in the proposed regulatory text, the
Commission indicated in the preamble to the 2020 NPRM that a contract
for which the settlement price is based on an index published by a
price reporting agency (a ``PRA index contract'') that surveys cash-
market transactions (even if the cash-market practice is to price at a
differential to a futures contract) was not deemed to be ``directly or
indirectly'' linked to a referenced contract, and thus that such PRA
index contract also was excluded from the ``referenced contract''
definition under the 2020 NPRM.\473\
---------------------------------------------------------------------------

    \473\ 85 FR at 11620.
---------------------------------------------------------------------------

    Under the 2020 NPRM, a position in a referenced contract in certain
circumstances could be netted with a position in another referenced
contract, including a core referenced futures contract, which as noted
above is a type of referenced contract under the proposed ``referenced
contract'' definition. However, to avoid evasion and undermining of the
Federal position limits framework, the 2020 NPRM prohibited the use of
non-referenced contracts to net down positions in referenced
contracts.\474\
---------------------------------------------------------------------------

    \474\ 85 FR at 11619. For further discussion of the Final Rule's
treatment of the netting of positions, see Section II.B.10.
---------------------------------------------------------------------------

    Finally, the 2020 NPRM also stated that, in an effort to provide
clarity to market participants regarding which exchange-traded
contracts would be subject to Federal position limits, the Commission
anticipated publishing, and regularly updating, a list of such
contracts on its website. The Commission thus proposed to publish a
``CFTC Staff Workbook,'' which would provide a non-exhaustive list of
referenced contracts and may be helpful to market participants in
determining categories of contracts that would fit within the
referenced contract definition.
iii. Commission Determination--Referenced Contracts
    The Commission is adopting the proposed ``referenced contract''
definition with the modification discussed below, as well as one
technical change that the Commission believes clarifies the
``referenced contract'' definition, consistent with the intent of the
2020 NPRM.\475\ Like the proposed definition, the final ``referenced
contract'' definition also includes (1) the 25 core referenced futures
contracts, (2) futures and options on futures that are directly or
indirectly linked either to (i) the price of any other core referenced
futures contract or (ii) the same commodity underlying a core
referenced futures contract,\476\ and (3) economically equivalent
swaps. Like the 2020 NPRM, the final definition also explicitly
excludes certain contract types so that these contracts may not be
netted against referenced contract positions for purposes of Federal
position limits (but also are not aggregated with referenced contract
positions).
---------------------------------------------------------------------------

    \475\ The Commission is providing a clarifying technical change
to the ``referenced contract'' definition in that the final
definition refers to ``an option on a futures contract'' instead of
``options on a futures contract'' as proposed by the 2020 NPRM, to
make clear the original intent of the Commission in the 2020 NPRM
that a single option would qualify as a referenced contract.
    \476\ Prong (ii) encompasses physically-settled contracts that
do not directly reference a core referenced futures contract but
that are nonetheless based on the same commodity and delivery
location as the core referenced futures contract.
---------------------------------------------------------------------------

    However, in addition to the proposed definition's exclusions of
commodity index contracts, location basis contracts, swap guarantees,
and trade options that satisfy the requirement of Sec.  32.3 of the
Commission's regulations, the Final Rule is modifying the 2020 NPRM's
definition to also exclude two additional contract types: ``outright
price reporting agency index contracts'' and ``monthly average pricing
contracts.''
    This section will address the following issues, including related
comments, in the following order:
    a. Cash-settled referenced contracts and contracts that are
``directly or indirectly'' linked to a core referenced futures
contract, including cash-settled and penultimate contracts;
    b. Contracts explicitly excluded from the ``referenced contract''
definition; and
    c. The list of referenced contracts and the related Commission
staff ``Workbook.''
    The Commission is also adopting ``economically equivalent swaps,''
as proposed, as part of the final ``referenced contract'' definition.
However, the Commission addresses the final ``economically equivalent
swap'' definition in Section II.A.4.
a. Contracts That Are Directly or Indirectly Linked to a Core
Referenced Futures Contract
(1) Summary of the 2020 NPRM--Linked to a Core Referenced Futures
Contract
    Paragraph (1) of the proposed referenced contract definition
provided that a contract would qualify as a referenced contract if it
is a core referenced futures contract, or, with respect to a particular
core referenced futures contract, if it is directly or indirectly
linked, including being partially or fully settled on, or priced at a
fixed differential to, the price of either (i) the core referenced
futures contract itself or (ii) the same commodity underlying the core
referenced futures contract for delivery at the same location or
locations as specified in the core referenced futures contract's
specifications. As the Commission explained in the 2020 NPRM, this
provision included a cash-settled ``look-alike'' future or an option
thereon.\477\
---------------------------------------------------------------------------

    \477\ For example, the 2020 NPRM noted that ICE's Henry
Penultimate Fixed Price Future, which cash-settles directly to
NYMEX's Henry Hub Natural Gas core referenced futures contract,
would be considered a referenced contract. 85 FR at 11620.
---------------------------------------------------------------------------

(2) Summary of the Commission Determination--Linked to a Core
Referenced Futures Contract
    The Commission is adopting as final the language in paragraph (1)
of the proposed ``referenced contract'' definition. Accordingly, under
paragraph (1) of the final ``referenced contract'' definition,
referenced contracts include a core referenced

[[Page 3301]]

futures contract, and any cash-settled futures and options on futures
that are directly or indirectly linked either to (i) the price of any
other core referenced futures contract or (ii) the same commodity
underlying a core referenced futures contract for delivery at the same
location or locations as specified in the core referenced futures
contract's specifications.\478\
---------------------------------------------------------------------------

    \478\ Clause (ii) of this description comprises as referenced
contracts any physically-settled contracts that are linked to the
same commodity for delivery at the same location underlying a core
referenced futures contract. The Commission believes as failure to
do so could undermining this Federal position limits framework
through the creation of physically-settled look-alike contracts by
other exchanges. For example, without including clause (ii) above,
an exchange could create a physically-settled look-alike contract,
but unlike the existing core referenced futures contract, this new
contract would be outside the Federal position limits framework.
Such an outcome would clearly disadvantage the exchange with the
existing core referenced futures contract and harm liquidity for
bona fide hedgers by possibly dividing liquidity among competing
physically-settled look-alike contracts, as well as provide
significant incentives for market participants to trade contracts
that subvert this Federal position limits framework.
---------------------------------------------------------------------------

    Further, in response to the comments described below, the
Commission is reaffirming that penultimate futures contracts and
options thereon qualify as referenced contracts because they satisfy
paragraph (1) of the referenced contract definition under the Final
Rule.
(i) Comments--Cash-Settled Referenced Contracts
    Commenters provided differing opinions as to whether linked cash-
settled futures and related options should be subject to Federal
position limits.\479\ CME Group and NEFI supported the Commission's
proposal to subject these contracts to Federal position limits.\480\
According to CME Group, absent parity between cash and physically-
settled contracts, artificial distortions on one side of the market
could occur due to manipulations on the other side of the market,
regulatory arbitrage, or liquidity drain.\481\ CME Group warned that,
ultimately, a lack of parity could undermine the statutory goals of
position limits.\482\ NEFI agreed, arguing that applying Federal
position limits to cash-settled contracts is essential to guard against
manipulation by a trader who holds positions in both physically-settled
and cash-settled contracts for the same underlying commodity.\483\
---------------------------------------------------------------------------

    \479\ CME Group at 3-4; FIA at 7-8; ICE at 12; ISDA at 3-5; NEFI
at 3; PIMCO at 3; and SIFMA AMG at 4-6.
    \480\ CME Group at 3-4 (stating ``CME Group believes that
economically and substantively alike contracts should be accorded
the same regulatory treatment to prevent artificial distortions from
opening doors for manipulators or shifting one market's liquidity to
another. . . In this regard, as noted above, CME Group recommends
that the Commission apply similar provisions to both cash-settled
and physically settled swaps.'').
    \481\ CME Group at 6.
    \482\ Id.
    \483\ NEFI at 3.
---------------------------------------------------------------------------

    Other commenters disagreed. PIMCO and SIFMA AMG contended that
cash-settled referenced contracts should not be subject to Federal
position limits at all because cash-settled contracts do not introduce
the same risk of market manipulation. They argued that subjecting cash-
settled referenced contracts to Federal position limits would reduce
market liquidity and depth in these instruments.\484\
---------------------------------------------------------------------------

    \484\ PIMCO at 3; SIFMA AMG at 4-6.
---------------------------------------------------------------------------

    ISDA argued that cash-settled contracts should not be included in
an immediate Federal position limits rulemaking, and should instead be
deferred until the Commission has adopted Federal limits with respect
to physically-delivered spot month futures contracts, and after which
the Commission should revisit Federal limits for cash-settled
contracts.\485\
---------------------------------------------------------------------------

    \485\ ISDA at 3-5.
---------------------------------------------------------------------------

    FIA and ICE suggested that Federal position limits for cash-settled
referenced contracts should apply per DCM (rather than in aggregate
across DCMs).\486\ FIA additionally suggested setting a separate
Federal spot-month position limit for economically equivalent
swaps.\487\ FIA and ICE further argued that limits for cash-settled
referenced contracts should be higher relative to Federal position
limits for physically-settled referenced contracts. They similarly
posited that cash-settled referenced contracts are ``not subject to
corners and squeezes'' and higher limits for cash-settled contracts
will `` `ensure market liquidity for bona fide hedgers.' '' \488\
---------------------------------------------------------------------------

    \486\ FIA at 7-8; ICE at 12.
    \487\ FIA 7-8.
    \488\ ICE at 3, 15 (also arguing that cash-settled limits should
apply per exchange, rather than across exchanges); FIA at 7-8; For
further discussion on the Commission's determination to generally
apply Federal position limits on an aggregate basis across
exchanges, see Section II.B.11.
---------------------------------------------------------------------------

(ii) Discussion of Final Rule--Cash-Settled Reference Contracts
    As a general matter, the Commission does not agree with FIA and ICE
that Federal position limits should be applied at the DCM level instead
of in the aggregate for the reasons discussed below under Section
II.B.11.\489\
---------------------------------------------------------------------------

    \489\ As discussed below, as an initial matter, the Commission
interprets CEA section 4a(a)(6) as requiring aggregate Federal
position limits across exchanges. However, as discussed below, the
Commission is providing an exception to this general rule for
natural gas pursuant to the Commission's exemptive authority under
CEA section 4a(a)(7). For further discussion, see Sections
II.B.3.vi. and II.B.11.
---------------------------------------------------------------------------

    Further, the Commission addresses FIA's contention that the
Commission should impose a separate Federal spot-month position limit
for economically equivalent swaps in further detail above under Section
II.A.4.iii.
    While the Commission acknowledges commenter views to the effect
that cash-settled contracts are less susceptible to effectuating
corners and squeezes,\490\ the Commission is of the view that generally
speaking, linked cash-settled and physically-settled contracts form one
market, and thus should be subject to Federal position limits. Because
the settlement price of a physically delivered futures contract is used
as a price benchmark in many other derivative and cash-market
contracts, a change in the futures settlement price can affect the
value of a trader's overall portfolio of derivative and cash-market
positions. Accordingly, the link between physically delivered futures
and their cash-settled derivative counterparts can create incentives
for manipulation. This view is informed by the Commission's experience
overseeing derivatives markets, where the Commission has observed that
it is common for the same market participant to arbitrage linked cash-
and physically-settled contracts, and where the Commission has also
observed instances where linked cash-settled and physically-settled
contracts have been used together as part of an attempted
manipulation.\491\
---------------------------------------------------------------------------

    \490\ FIA at 7, stating ``Section 4a(a)(3)(B)(ii) directs the
Commission to set limits as appropriate `to deter and prevent market
manipulation, squeezes and corners.' '' The Commission notes that
FIA provides an example as to the effect of squeezes and corners for
cash-settled contracts--only two out of three of the points for
which the Commission should set an appropriate limit--the third
point, which is overlooked by the commenter (market manipulation) is
also a statutory objective, and for the reasons described below,
provides a basis for including cash-settled contracts within the
Federal position limits regime.
    \491\ The Commission has previously found that traders with
positions in a cash-settled contract may have an incentive to
manipulate and undermine price discovery in the physically-settled
contract to which the cash-settled contract is linked. See, e.g.,
CFTC v. Parnon Energy Inc. et al., No. 1:11-cv-03543 (S.D.N.Y. 2014)
(alleging defendants amassed sufficient quantity of physical WTI
while contemporaneously purchasing cash-settled WTI derivatives
positions on NYMEX and ICE with the intent to profit on those
positions by manipulating the price of the physically-settled WTI
contract).
---------------------------------------------------------------------------

    Applying position limits to both physically delivered futures and
linked cash-settled contracts, including their look-alike cash-settled
derivative contracts, reduces a trader's incentive and ability to
manipulate futures markets. Without position limits on

[[Page 3302]]

both types of futures contracts, traders could amass a substantial
position in the cash-settled look-alike contract and benefit their
position by manipulating the settlement price of the physically
delivered futures contracts.
    Additionally, the absence of position limits on look-alike cash-
settled derivative contracts would enable traders to manipulate a
particular cash commodity price to benefit their cash-settled
derivatives position. For example, where market conditions create a
shortage of a particular commodity, that shortage should increase the
price of the commodity. If markets are functioning properly, the price
of the physically delivered futures contract will also increase. A
trader could acquire a massive long position in the look-alike cash-
settled derivative contract and profit by bidding up the cash price of
an already scarce cash commodity. Thus, the trader's cash commodity
positions would directly affect the price of the physically-settled
futures contract and its look-alike cash-settled derivative. The
trader's strategy to purchase the cash commodity and bid up its price
could cause the value of the look-alike cash-settled derivative
position to increase because of the direct links connecting all three
markets (i.e., the positions in the underlying cash commodity, the
physically-settled derivative, and the cash-settled derivative).
Accordingly, the absence of position limits in look-alike cash-settled
derivative contracts would enable traders to effectively influence and
manipulate cash prices to benefit their cash-settled derivatives
position, which could impact the price of the physically-settled
futures contract as well.
    Additionally, excessive speculation in cash-settled derivative
contracts can affect the price of the physically-settled futures
contract and the underlying cash commodity and therefore harm the price
discovery function of the underlying markets. That is, futures prices
are determined by immediate cash commodity prices, and therefore the
relationship between cash and futures prices also depends, in part, on
the storage location of a particular commodity in relation to its
delivery point, and should result in the correct amount of a particular
commodity available at the delivery point. Thus, excessive speculation
in cash-settled derivative contracts can produce excessive supplies at
delivery points and a disruption of the flows of money and commodities
exchanged.\492\
---------------------------------------------------------------------------

    \492\ For example, manipulated ``higher'' futures contract
prices in a cash-settled futures contract can spill over into
``lower'' prices for a physically-settled futures contract through
arbitrage trades between the two futures contracts. Traders
arbitraging between the cash-settled and physically-settled futures
contracts would short the ``higher priced'' cash-settled and long
the ``lower-priced'' physically-settled futures contracts until an
equilibrium price is achieved. However, that equilibrium price may
be distorted due to the manipulation occurring in the higher priced
cash-settled contract, and as a result the physically-settled
contract would have an artificially higher price relative to the
actual cash-market price of the underlying commodity. That higher
futures contract price would then act as a false price signal to the
underlying cash commodity market, thus incentivizing owners of the
cash commodity to increase supplies at the delivery points for the
physically-settled futures contract. Accordingly, excessive
speculation in cash-settled derivative contracts can produce
excessive supplies at delivery points and a disruption of liquidity,
price discovery, and distribution of the underlying cash
commodities.
---------------------------------------------------------------------------

    Accordingly, the Commission considers cash-settled referenced
contracts to be generally economically equivalent to physical-delivery
contracts in the same commodity. In the absence of position limits, an
entity with positions in both the physically delivered and cash-settled
contracts may have an increased ability and an increased incentive to
manipulate one of these contracts to benefit positions in the other
contract. As such, the Commission believes that it is essential to
apply Federal position limits to cash-settled futures and options on
futures that are directly or indirectly linked to physically-settled
contracts in order to further the statutory objective in CEA section
4a(a)(3)(B)(iv) to deter and prevent market manipulation.
    Furthermore, the Commission has determined that including futures
contracts and options on futures contracts that are indirectly linked
to the core referenced futures contract under the ``referenced
contract'' definition will help prevent the evasion of position limits
through the creation of an economically equivalent futures contract or
option on a futures contract, as applicable, that does not directly
reference the price of the core referenced futures contract. Such
contracts that settle to the price of a referenced contract but not to
the price of a core referenced futures contract, for example, would be
indirectly linked to the core referenced futures contract.\493\
---------------------------------------------------------------------------

    \493\ As discussed above, the Commission adopted an
``economically equivalent swap'' definition that is narrower than
the class of futures contracts and option on futures contracts that
would be included as referenced contracts. For further discussion of
the ``economically equivalent swap'' definition, see Section II.A.4.
---------------------------------------------------------------------------

    However, a physically-settled derivative contract with a settlement
price that is based on the same underlying commodity at a different
delivery location would not be linked, directly or indirectly, to the
core referenced futures contract. By way of example, a hypothetical
physically-settled futures contract on ultra-low sulfur diesel
delivered at L.A. Harbor instead of the NYMEX ultra-low sulfur diesel
core referenced futures contract delivered in New York Harbor would not
be linked, directly or indirectly, to the core referenced futures
contract because NYMEX's ultra-low sulfur diesel futures contract does
not include L.A. Harbor as a possible delivery point. Therefore, the
contract specification price of the hypothetical physically delivered
L.A. Harbor contract would reflect the L.A. Harbor market price for
ultra-low sulfur diesel and not the NYMEX contract's price.
(iii) Comments and Discussion of Final Rule--Penultimate Contracts Are
a Subset of Cash-Settled Referenced Contracts
    Penultimate contracts are a type of cash-settled futures contract
(or an option thereon) that settles the day before the corresponding
physically-settled futures contract. Penultimate contracts therefore
share the same determinative attributes as the other cash-settled look-
alike referenced contracts discussed above, including the fact that the
settlement price of a penultimate contract is linked to the
corresponding physically-settled core referenced futures contract.
    In response to certain commenters requesting that the Commission
exclude penultimate contracts from the 2020 NPRM's proposed
``referenced contract'' definition (discussed below), the Commission is
affirming that penultimate contracts, as a type of linked cash-settled
look-alike contracts, fall within the Final Rule's ``referenced
contract'' definition.
    Commenters were split as to whether these penultimate contracts
should be included within the ``referenced contract'' definition. ICE
argued that penultimate contracts, and specifically its penultimate
cash-settled natural gas contract, should be excluded from position
limits for several reasons, including that its natural gas penultimate
contract is economically distinct from the NYMEX NG core referenced
futures contract and has no ability to impact settlement of that core
referenced futures contract.\494\ SIFMA AMG and ISDA broadly concurred
with this position.\495\ In contrast, CME Group supported the inclusion
of penultimate contracts within the definition of

[[Page 3303]]

referenced contract.\496\ As the Commission outlined above, its ``one
market'' view applies to cash-settled contracts that are linked in some
manner to physically-settled contracts. Penultimate futures contracts
(including options thereon), as a type of linked cash-settled contract,
have the same relation to their physically-settled counterparts as
discussed above for other linked cash-settled contracts. The Commission
therefore is applying Federal position limits to all of these
instruments.
---------------------------------------------------------------------------

    \494\ ICE at 13-14.
    \495\ ISDA at 9; SIFMA AMG at 10-11.
    \496\ CME Group at 3-4 (arguing that ``economically and
substantively alike contracts should be accorded the same regulatory
treatment to prevent artificial distortions from opening doors for
manipulations or shifting one market's liquidity to another.'').
---------------------------------------------------------------------------

    In support of its view that penultimate contracts should not be
subject to Federal position limits, ICE offered the example of the
Henry Hub LD1 (``H'') futures contract (which has an exchange-set spot-
month position limit) and the Henry Hub Penultimate (``PHH'') futures
contract (which has exchange-set position accountability), stating that
these contracts trade side-by-side, and that there has been no evidence
of a migration to the penultimate contract due to the presence of an
accountability level rather than a hard spot-month position limit.
According to ICE, this suggests that the Commission need not be
concerned about an arbitrage opportunity between the two.\497\
---------------------------------------------------------------------------

    \497\ ICE at 14.
---------------------------------------------------------------------------

    However, in further support of its argument that penultimate
contracts should not be subject to Federal position limits, ICE
suggested that penultimate contracts ``empirically'' are not
economically the same as the last day contract, as demonstrated by
settlement prices.\498\ To that end, the Commission reviewed the
settlement prices of NYMEX NG (the physically settled natural gas core
referenced futures contract), H (the ICE LD1 natural gas contract cash-
settled to the NYMEX NG), and PHH (the ICE natural gas penultimate
contract cash-settled to the NYMEX NG).\499\ Contrary to the empirical
assertion made by ICE, the prices of the six near-month contracts for
each of the contracts described above settled at identical prices on
the relevant penultimate day for all contracts at all months.\500\ As
reinforced by this observation, the Commission agrees with the
commenter that the penultimate contract is tightly correlated (and
trades side-by-side) with the cash-settled contract, as well as being
demonstrated here, with the physically settled futures contract.
---------------------------------------------------------------------------

    \498\ Id.
    \499\ Commission review of these contracts as of August 4, 2020,
based on data submitted to the Commission pursuant to part 16 of the
Commission's regulations.
    \500\ The six near-month contracts reviewed by the Commission
are as follows: Sep20, Oct20, Nov20, Dec20, Jan21, and Feb21, for
each of NYMEX NG, H, and PHH. The Commission does not compare the
spot-day price on the last day of trading of the NYMEX NG contract
with the penultimate PHH contract since by definition the PHH
contract settles on the penultimate day--that is, PHH settles on the
day before NYMEX NG's last day of trading and therefore there is no
PHH price to compare against the NYMEX NG price on NYMEX NG's last
day of trading.
---------------------------------------------------------------------------

    However, it is not in spite of this tight correlation, but rather
because of it, that the Commission considers these contracts to form
one market, and as such, raises the importance of Federal position
limits for these instruments. As noted above, the Commission believes
that Federal position limits should apply to all contracts covered by
the Final Rule's ``referenced contract'' definition, including all
varieties of linked cash-settled contracts, such as linked penultimate
contracts, given the linkages between the physically-settled contract,
the cash-settled contract (including penultimate contracts), and the
underlying cash-market commodity, and the incentives and opportunities
for market manipulation that those linkages create.
b. Exclusions From the Referenced Contract Definition
(1) Summary of the 2020 NPRM--Exclusions From the Referenced Contract
Definition
    In the 2020 NPRM, paragraph (3) of the proposed ``referenced
contract'' definition explicitly excluded: (1) A location basis
contract; (2) a commodity index contract; (3) a swap guarantee; and (4)
a trade option that meets the requirements of Commission regulation
Sec.  32.3. The 2020 NPRM also included guidance in proposed Appendix C
setting forth additional clarification regarding the types of contracts
that would qualify as either a location basis contract or a commodity
index contract for purposes of the proposed exclusions from the
``referenced contract'' definition.
(2) Summary of the Commission Determination--Exclusions From the
Referenced Contract Definition
    The Commission is adopting paragraph (3) of the 2020 NPRM's
proposed ``referenced contract'' with the following changes. In
addition to excluding the contracts mentioned above, the Final Rule is
modifying paragraph (3) to additionally exclude ``outright price
reporting agency index contracts'' and ``monthly average pricing
contracts'' from the ``referenced contract'' definition. To the extent
a contract fits within one of the excluded contracts in paragraph (3),
such contract is not a referenced contract, is not subject to Federal
position limits, and could not be used to net down positions in
referenced contracts (but also is not required to be added to
referenced contract positions when determining compliance with Federal
position limits).
    In order to clarify the types of contracts that qualify as location
basis contracts and commodity index contracts, and thus are excluded
from the ``referenced contract'' definition, the Commission also is
adopting, with modifications described below, the guidance with respect
to these instruments in Appendix C to part 150 of the Commission's
regulations. This guidance includes information to help define the
parameters of the terms ``location basis contract'' and ``commodity
index contract.'' \501\ To the extent a particular contract fits within
this guidance, such contract would not be a referenced contract, would
not be subject to Federal position limits, and could not be used to net
down positions in referenced contracts.\502\ Unlike the 2020 NPRM, the
final guidance in Appendix C will also include additional information
regarding the definition of the terms ``outright price reporting agency
index contracts'' and ``monthly average pricing contracts.''
---------------------------------------------------------------------------

    \501\ The Commission notes that the further definition of
parameters regarding a commodity index contract is responsive to the
Better Markets comment letter suggesting such additional
clarifications. Better Markets at 34.
    \502\ See infra Section II.B.10. (discussion of netting).
---------------------------------------------------------------------------

    Comments on these topics, and the Commission's responses, are set
forth below.
(3) Comments--Exclusions From the Referenced Contract Definition
    On balance, commenters were generally supportive of the 2020 NPRM's
proposed exclusions from the referenced contract definition.\503\
---------------------------------------------------------------------------

    \503\ AGA at 9; CHS at 2; FIA at 2; ICE at 10-11; NCFC at 2.
---------------------------------------------------------------------------

(i) Location Basis Contracts
    Commenters that provided an explicit opinion about location basis
contracts were unanimously supportive of the Commission excluding such
contracts from the definition of a referenced contract.\504\
---------------------------------------------------------------------------

    \504\ AGA at 9; ICE at 10.

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

[[Page 3304]]

(ii) Commodity Index Contracts
    Commenters were divided, however, regarding the exclusion of
commodity index contracts. Better Markets and IATP opposed the
exclusion,\505\ while ICE and PIMCO supported it.\506\ Better Markets
concurred with the view expressed by the Commission in the 2020 NPRM
that commodity index contracts should not be permitted to net down
referenced contract positions, but in lieu of the Commission's proposal
to exclude commodity index contracts as referenced contracts, Better
Markets suggested in the alternative that the Commission adopt
individual limits for commodity index contracts for persons also
involved in physically-settled contracts on physical commodities
serving as a constituent in the applicable index.\507\ IATP cited
several studies, including one published by Better Markets, contending
that commodity index contracts have price impacts that are detrimental
to commercial hedgers.\508\ IECA stated that the passive speculation
provided by commodity index contracts is harmful to the price discovery
function of the market.\509\
---------------------------------------------------------------------------

    \505\ Better Markets at 34, 46; IATP at 7-8 (citing studies
which they believe demonstrate that commodity index trading harms
commercial hedgers).
    \506\ ICE at 2; PIMCO at 5.
    \507\ Better Markets at 46.
    \508\ IATP at 7-8 (citing David Frenk and Wallace Turbeville,
``Commodity Index Traders: Boom and Bust in Commodity Prices,''
Better Markets, October 2011, at 15). https://bettermarkets.com/sites/default/files/documents/Better%20Markets-%20Commodity%20Index%20Traders%20and%20Boom-Bust%20in%20Commodities%20Prices.pdf.
    \509\ Industrial Energy at 3-4, suggesting a ban on natural gas
commodity index contracts, which functionally equates to a Federal
position limit of zero, or alternatively a limit to not exceed the
current percentage of the physical market.
---------------------------------------------------------------------------

    In contrast, PIMCO argued in favor of the exclusion for commodity
index contracts, contending that commodity index contracts are useful
tools for investors looking for broad-based portfolio hedging or to
take a view on price trends in the commodity markets.\510\
---------------------------------------------------------------------------

    \510\ PIMCO at 5.
---------------------------------------------------------------------------

(iii) Trade Options
    All commenters offering a specific opinion regarding trade options
unanimously supported the exclusion of trade options from the
definition of referenced contract.\511\
---------------------------------------------------------------------------

    \511\ AGA at 8; CCI at 2; EPSA at 3-4; NGSA at 4; NRECA at 17;
CEWG at 4; Chevron at 3; CHS at 2; FIA at 2; NCFC at 2; NGSA at 4;
and Suncor at 3.
---------------------------------------------------------------------------

(iv) Swap Guarantees
    Similarly, commenters supported the exclusion of swap guarantees
from the definition of reference contract.\512\
---------------------------------------------------------------------------

    \512\ CHS at 2; FIA at 2; NCFC at 2, offering general support
for excluding swap guarantees, but not providing a specific
rationale for doing so.
---------------------------------------------------------------------------

(v) Outright Price Reporting Agency Index Contracts
    FIA and ICE further recommended that the Commission should exclude
any outright contracts whose settlement price is based on an index
published by a price reporting agency that surveys cash-market
transaction prices from the ``referenced contract'' definition.\513\
---------------------------------------------------------------------------

    \513\ FIA at 6; ICE at 10-11.
---------------------------------------------------------------------------

(vi) Monthly Average Pricing Contracts
    CME Group commented that because a significant amount of commerce
is transacted on a monthly average basis, and that because monthly
average pricing contracts are calculated using the daily prices during
the contract month such that a final settlement price of a core
referenced futures contract would have the same weight as the other
twenty or more daily prices used in the monthly average price
calculation, it would be extremely unlikely for monthly average pricing
contracts to be used to manipulate or benefit from a manipulation
during the spot period. Thus, CME Group argued monthly average pricing
contracts should also be excluded from the definition of referenced
contracts.\514\
---------------------------------------------------------------------------

    \514\ CME Group at 13.
---------------------------------------------------------------------------

(vii) Additional Basis, Differential, and Spread Contracts
    ICE recommended that certain other contracts, such as additional
basis and spread contracts, should generally be excluded from the
definition of a referenced contract, even if the contracts reference a
core referenced futures contract as one component.\515\
---------------------------------------------------------------------------

    \515\ ICE at 12; see also FIA at 4 (recommending that the spread
transaction definition should be expanded to exempt additional,
commonly used spreads). For further discussion on the ``spread
transaction'' definition, see Section II.A.20.
---------------------------------------------------------------------------

(4) Discussion of Final Rule--Exclusions From the Referenced Contract
Definition
    The Commission is finalizing as proposed the exclusions from the
referenced contract definition for location basis contracts, commodity
index contracts, swap guarantees, and trade options that meet the
requirements of Sec.  32.3. Further, as noted above, the Commission is
expanding prong (3) of the proposed referenced contract definition to
additionally exclude two other contract types: ``outright price
reporting agency index contracts'' and ``monthly average pricing
contracts.''
(i) Location Basis Contracts
    The Commission has determined that, unless location basis contracts
are excluded from the ``referenced contract'' definition, speculators
would be able to net portions of their location basis contracts with
outright positions in one of the locations comprising the core
referenced futures contract, which would permit extraordinarily large
speculative positions in the outright core referenced futures
contract.\516\ For example, the 2020 NPRM explained that a large
outright position in NYMEX Henry Hub Natural Gas (NG) futures contracts
could not be netted down against a location basis contract that cash-
settles to the difference in price between the Gulf Coast Natural Gas
futures contract and the NYMEX NG futures contract.\517\ Absent this
exclusion, a market participant could increase its exposure in the
outright contract by using the location basis contract to net down
against its NYMEX NG futures position, thereby allowing the market
participant to further increase the outright NYMEX NG futures contract
position that would otherwise exceed the Federal position limits.
---------------------------------------------------------------------------

    \516\ See infra Section II.B.10. (discussion of netting).
    \517\ 85 FR at 11620.
---------------------------------------------------------------------------

    While excluding location basis contracts from the referenced
contract definition would prevent the circumstance described above, it
would also mean that location basis contracts would not be subject to
Federal position limits. The Commission is comfortable with this
outcome because location basis contracts generally demonstrate minimal
volatility and are typically significantly less liquid than the core
referenced futures contracts, meaning, in the Commission's estimation,
it is less likely that a potential manipulator would be able to effect
a market manipulation using these contracts. Further, excluding
location basis contracts from the referenced contract definition may
allow commercial end-users to more efficiently hedge the cost of
commodities at their preferred location to the extent they may
frequently require the physical commodity at a location other than the
core referenced futures contract's specified contract delivery point.
(ii) Commodity Index Contracts
    With respect to commodity index contracts, the Commission similarly
has

[[Page 3305]]

determined that excluding commodity index contracts from the
``referenced contract'' definition will ensure that market participants
cannot use a position in a commodity index contract to net down an
outright position in a referenced contract that was a component of the
commodity index contract.
    Regarding Better Markets' and IATP's requests that the Commission
alter the proposed ``referenced contract'' definition to include
commodity index contracts (i.e., to remove commodity index contracts
from the list of excluded contracts in paragraph (3) of the
``referenced contract'' definition), the Commission notes that if it
did not exclude commodity index contracts, the Commission's rules would
allow speculators to take on massive outright positions in referenced
contracts by netting against a position in a commodity index contract,
which could lead to excessive speculation.
    For example, the Commission understands that it is common for swap
dealers to enter into commodity index contracts with participants for
which the contract would not qualify as a bona fide hedging position
(e.g., with a pension fund). Failing to exclude commodity index
contracts from the referenced contract definition could enable a swap
dealer to use positions in commodity index contracts to net down
offsetting outright futures positions in the components of the index.
Additionally, this would have the effect of subverting the statutory
pass-through swap provision in CEA section 4a(c)(2)(B), which is
intended to foreclose the recognition of positions entered into for
risk management purposes as bona fide hedges unless the swap dealer is
entering into positions opposite a counterparty for which the swap
position is a bona fide hedge.\518\
---------------------------------------------------------------------------

    \518\ 7 U.S.C. 6a(c)(2)(B).
---------------------------------------------------------------------------

    The Commission recognizes that although excluding commodity index
contracts from the ``referenced contract'' definition would prevent the
potentially risky netting circumstance described above, it would also
mean that commodity index contracts would not be subject to Federal
position limits. The Commission concludes that this is an acceptable
outcome because the contracts comprising the index would themselves be
subject to limits, and because commodity index contracts generally tend
to exhibit low volatility since they are diversified across many
different commodities.
    With respect to Better Markets', ICEA's, and PMAA's requests to
impose separate standalone, or aggregate, position limits on commodity
index contracts, the Commission does not believe doing so is useful to
the extent that the individual components of a commodity index contract
are subject to Federal position limits under the Final Rule. The
Commission also is concerned that adopting a standalone limit for a
commodity index contract could inadvertently limit transactions in
commodity derivatives contracts outside the Final Rule's scope.
Specifically, a commodity index contract may contain components that
are subject to Federal position limits, as well as additional
components that are not. If the Commission were to place standalone
limits on these commodity index contracts, it would impose de facto
constraints on commodity derivative contracts that are not intended to
be the subject to the Final Rule and for which the Commission has not
found position limits to be necessary.
(iii) Trade Options
    The Commission also is finalizing, as proposed, the exclusion of
trade options that meet the requirements of Sec.  32.3 from the
definition of referenced contract. The Commission has traditionally
exempted trade options from a number of Commission requirements because
trade options are typically employed by end-users to hedge physical
risk and thus do not contribute to excessive speculation. Trade options
are not subject to position limits under current regulations, and the
proposed exclusion of trade options from the referenced contract
definition would simply codify existing practice.\519\
---------------------------------------------------------------------------

    \519\ In the trade options final rule, the Commission stated its
belief that Federal position limits should not apply to trade
options, and expressed an intention to address trade options in the
context of any final rulemaking on position limits. See Trade
Options, 81 FR at 14971.
---------------------------------------------------------------------------

(iv) Swap Guarantees
    The Commission additionally is excluding, as proposed, swap
guarantees from the ``referenced contract'' definition. In connection
with further defining the term ``swap'' jointly with the Securities and
Exchange Commission in the ``Product Definition Adopting Release,''
\520\ the Commission interpreted the term ``swap'' (that is not a
``security-based swap'' or ``mixed swap'') to include a guarantee of
such swap, to the extent that a counterparty to a swap position would
have recourse to the guarantor in connection with the position.\521\
Excluding guarantees of swaps from the definition of ``referenced
contract'' will help avoid any potential confusion regarding the
application of position limits to guarantees of swaps. The Commission
understands that swap guarantees generally serve as insurance, and, in
many cases, swap guarantors guarantee the performance of an affiliate
in order to entice a counterparty to enter into a swap with such
guarantor's affiliate. As a result, the Commission believes that swap
guarantees do not contribute to excessive speculation, market
manipulation, squeezes, or corners. Furthermore, the Commission
believes that swap guarantees were not contemplated by Congress when
Congress articulated its policy goals with respect to position limits
in CEA section 4a(a).\522\ Accordingly, the Commission is finalizing
the exclusion of swap guarantees from the definition of ``referenced
contract.''
---------------------------------------------------------------------------

    \520\ See generally Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13,
2012) (``Product Definitions Adopting Release'').
    \521\ 77 FR at 48226.
    \522\ To the extent that swap guarantees may lower costs for
uncleared OTC swaps in particular by incentivizing a counterparty to
enter into a swap with the guarantor's affiliate, excluding swap
guarantees may improve market liquidity, which is consistent with
the CEA's statutory goals in CEA section 4a(a)(3)(B) to ensure
sufficient liquidity for bona fide hedgers when establishing its
position limit framework.
---------------------------------------------------------------------------

(v) New Exclusions from the ``Referenced Contract'' Definition--Price
Reporting Agency Index Contracts and Monthly Average Pricing Contracts
    Finally, the Commission is modifying prong (3) of the proposed
``referenced contract'' definition to additionally exclude from the
Final Rule: (a) Monthly average pricing contracts and (b) outright
price reporting agency index contracts.
(a) Monthly Average Pricing Contracts
    In response to commenter suggestions, the Commission is providing
non-binding guidance in Appendix C to this Final Rule to assist market
participants and exchanges in determining whether a particular contract
qualifies as a ``monthly average pricing contract,'' that the Final
Rule is excluding from the ``referenced contract'' definition.
Specifically, in response to Question 15 of the 2020 NPRM, CME Group
commented that contract types that are generally referred to in
industry nomenclature as calendar-month average (``CMA''), trade-month
average (``TMA''), and balance-of-the-month (``BALMO'') contracts
should be excluded from the list of referenced contracts and subject
solely to exchange-set position limits.\523\ CME

[[Page 3306]]

Group explains the prevalence of these contracts in the market, and
notes an example of the June 2020 monthly average contract (in which
there are 22 U.S. business days and thus 22 daily referenced prices
incorporated into the calendar month average), concluding that it is
difficult to manipulate a CMA. CME Group thus posits that excluding
CMAs would not incentivize manipulation of the underlying core
referenced futures contract.\524\
---------------------------------------------------------------------------

    \523\ CME Group at 13.
    \524\ Id.
---------------------------------------------------------------------------

    As an initial matter, the Commission's addition of the new term
``monthly average pricing contracts'' to Appendix C of this Final Rule
is intended to generally cover the types of contracts addressed in CME
Group's comments, which are generally referred to in the industry as
``CMAs,'' ``TMAs,'' and ``BALMOs.'' The Commission agrees with CME
Group's rationale. The Commission understands that because the final
settlement price of a core referenced futures contract is only one of
many pricing points that constitute that monthly average, and as such
generally has a relatively insignificant impact on such core referenced
futures contract's monthly average price, it therefore also has a
relatively insignificant impact on the settlement price of the
corresponding monthly average pricing contract. Accordingly, the
Commission concludes that on balance, excluding monthly average pricing
contracts from the definition of referenced contract is consistent with
the statutory goals in CEA section 4a(a)(3), including with respect to
ensuring sufficient market liquidity for bona fide hedgers due to: (1)
The difficulty and expense of any entity artificially moving the price
of the monthly average by manipulating one or more component prices
within the contract; and (2) the widespread use and utility of these
contracts to commercial entities to hedge their risk. The Commission
provides non-binding guidance in Appendix C of the Final Rule to assist
market participants and exchanges in determining whether a particular
contract qualifies as a ``monthly average pricing contract.''
(b) Outright Price Reporting Agency Index Contracts
    The Commission is also modifying prong (3) of the proposed
``referenced contract'' definition to explicitly exclude ``outright
price reporting agency index contracts.'' ICE supported the exclusion
of such contracts in its comment letter.\525\ Further, FIA also
commented that it believed that a price reporting agency index contract
is outside the definition of a referenced contract.\526\
---------------------------------------------------------------------------

    \525\ ICE at 10.
    \526\ FIA at 6.
---------------------------------------------------------------------------

    The Commission agrees with ICE and FIA and confirms this
understanding. The Commission explained in the 2020 NPRM that based on
its plain reading, the ``referenced contract'' definition excluded such
contracts because outright price reporting agency index contracts were
not ``directly or indirectly'' linked to the price of a referenced
contract.\527\ The Commission reaffirms its conclusion that an
``outright price reporting agency index contract,'' which is based on
an index published by a price reporting agency that surveys cash-market
transaction prices (even if the cash-market practice is to price at a
differential to a futures contract), is not directly or indirectly
linked to the corresponding referenced contract. The Commission is
modifying the final ``referenced contract'' definition to explicitly
exclude such contracts for the sake of regulatory certainty. Similar to
the other contracts excluded from the ``referenced contract''
definition, the Commission is providing non-binding guidance in
Appendix C of the Final Rule to assist market participants and
exchanges in determining whether a particular contract qualifies as an
``outright price reporting agency index contract'' and therefore is
excluded as a referenced contract. The Commission underscores that this
exclusion applies only to ``outright'' price reporting agency index
contracts, and that a contract that settles to the difference (i.e.,
settled at a basis) between a referenced contract and the price
reporting agency index would be directly linked, and thus would qualify
as a referenced contract, because it settles in part to the referenced
contract price.
---------------------------------------------------------------------------

    \527\ 85 FR at 11620.
---------------------------------------------------------------------------

    Since the Commission stated in the preamble to the 2020 NPRM that
an outright price reporting agency index contract does not qualify as a
``referenced contract,'' the Commission does not believe that the Final
Rule's modification to explicitly exclude the term in the regulatory
definition of ``referenced contract'' represents a change in policy.
Instead, it is merely a technical change to the regulatory text to
provide regulatory clarity to market participants.
(vi) Additional Basis, Differential, and Spread Contracts
    Regarding ICE's comment that additional basis, differential, and
spread contracts should generally be excluded from the ``referenced
contract'' definition,\528\ the Commission notes a heightened concern
with potential manipulation through the use of outright positions
(particularly through inappropriate netting) and spreads, compared to
location basis contracts or commodity index contracts.\529\ Notably,
and as described in greater detail above, the Commission views the
constraints on the liquidity and volatility associated with location
basis and commodity index contracts as not present to an equal degree
in other basis and spread contracts. As noted above, while excluding
location basis contracts and commodity index contracts from the
referenced contract definition could permit large outright positions in
such contracts, the Commission believes that excluding these contracts
will nonetheless prevent the potentially risky and inappropriate
netting of a core referenced futures contract described above. Further,
as stated above, the Commission believes that location basis contracts
generally demonstrate minimal volatility and are typically
significantly less liquid than the core referenced futures contracts,
meaning they would be more costly to try to use to manipulate a core
referenced futures contract. Similarly, with respect to commodity index
contracts, commodities comprising the index could themselves be subject
to Federal position limits, and commodity index contracts also
generally tend to exhibit low volatility since they are diversified
across many different commodities.
---------------------------------------------------------------------------

    \528\ ICE at 12, noting contracts that capture the differential
between different grades of a commodity (e.g., WTI vs. sour crude)
or between different but related commodities (e.g., a crack
differential) as examples of contracts it believes should excluded.
    \529\ See 78 FR at 75696-75697.
---------------------------------------------------------------------------

    Additionally, it is unclear from ICE's discussion what additional
contract types that ICE has in mind, other than outright price
reporting agency index contracts that the Commission discusses above,
since several of the examples provided by ICE may already be exempt
under the ``spread transaction'' definition (e.g., the spread examples
provided by ICE \530\ may qualify for a spread exemption under the
Final Rule as either a quality differential spread or an inter-
commodity spread). ICE also stated that the requirement that a spread
exemption be approved by the exchange seems unnecessary and is probably
unworkable, but did not provide any arguments as to why obtaining
exchange approval would be unnecessary.\531\

[[Page 3307]]

Additionally, the Commission notes that under the Final Rule, an
exemption for any spread that is included in the ``spread transaction''
definition is self-effectuating for purposes of Federal position
limits, and, unlike the role that exchanges may play with respect to
non-enumerated bona fide hedges in final Sec.  150.9, exchanges have no
analogous role with respect to spread exemptions for Federal position
limits purposes under the Final Rule.
---------------------------------------------------------------------------

    \530\ ICE at 12.
    \531\ For further discussion of the ``spread transaction''
definition, see Section II.A.20.
---------------------------------------------------------------------------

iv. List of Referenced Contracts
a. Summary of the 2020 NPRM--List of Referenced Contracts
    In order to provide clarity to market participants, the Commission
proposed to publish, and anticipated regularly updating, a CFTC Staff
Workbook of Commodity Derivative Contracts under the Regulations
Regarding Position Limits for Derivatives (the ``Staff Workbook'') on
the Commission's website which would list exchange-traded products that
are subject to Federal position limits. In order to ensure that the
list remained accurate, the Commission also proposed changes to certain
provisions of part 40 of its regulations, which pertain to the
collection of position limits information through the filing of product
terms and conditions.
    In particular, under existing Sec. Sec.  40.2, 40.3, and 40.4, DCMs
and SEFs must submit certain requirements related to the listing of
certain new products. Many of the required submissions include the
product's ``terms and conditions,'' as defined in Sec.  40.1(j), which
in turn includes under Sec.  40.1(j)(1)(vii) ``Position limits,
position accountability standards, and position reporting
requirements.''
    The Commission proposed to expand Sec.  40.1(j)(1)(vii), which
addresses futures contracts and options contracts, to also include an
indication as to whether the submitted contract meets the ``referenced
contract'' definition in proposed Sec.  150.1. If so, proposed Sec. 
40.1(j)(1)(vii) required the submission to also include the name of the
core referenced futures contract on which the submitted new product is
based.
    The Commission further proposed to expand Sec.  40.1(j)(2)(vii),
which addresses swaps, to require the applicant to indicate whether the
submitted contract meets the proposed ``economically equivalent swap''
definition in Sec.  150.1. If so, proposed Sec.  40.1(j)(2)(vii)
similarly required the submission to include the name of the referenced
contract to which the swap is economically equivalent.
b. Comments and Summary of the Commission Determination--List of
Referenced Contracts
    The Commission is adopting as final the 2020 NPRM's amendments to
part 40 of its regulations with one modification that relates to filing
the name of the referenced contract on which the new product is based.
Part 40 and the Commission's amendments pertain to the collection of
position limits information through the filing of product terms and
conditions, and the publication and regular updates of exchange-traded
contracts that are subject to Federal position limits.\532\ The
Commission notes that the Staff Workbook is intended to provide a non-
exhaustive list of exchange-traded referenced contracts that are
subject to Federal position limits. Although the Commission endeavors
to timely update this list of contracts, the omission of a contract
from the Staff Workbook does not mean that such contract is outside the
definition of a referenced contract subject to Federal position limits.
---------------------------------------------------------------------------

    \532\ As discussed above, the Commission will provide market
participants with reasonable, good-faith discretion to determine
whether a swap would qualify as economically equivalent for Federal
position limit purposes. Due to differences between OTC swaps and
exchange-traded futures contracts and options thereon, the Staff
Workbook would not include a list of economically equivalent swaps.
For further discussion, see supra Section II.A.4. (discussion of
economically equivalent swaps).
---------------------------------------------------------------------------

    While proposed Sec.  40.1(j)(1)(vii) required the submitted futures
contract (or option thereon) to also include the name of the core
referenced futures contract on which the submitted new product is
based, final Sec.  40.1(j)(1)(vii) instead requires that the submitted
product includes the name of either the core referenced futures
contract or referenced contract, as applicable, on which the contract
is based. This is because, as discussed above under the ``referenced
contract'' definition, a referenced contract could be indirectly or
directly linked to another referenced contract that is not a core
referenced futures contract. For example, an options contract could be
based on a cash-settled look-alike or penultimate futures contract that
is a referenced contract rather than on the physically-settled core
referenced futures contract.
    The Commission's concurrent publication of the Staff Workbook will
provide a non-exhaustive list of exchange-traded referenced contracts,
and will help market participants in determining categories of
contracts that fit within the referenced contract definition. This
effort is intended to provide clarity to market participants regarding
which exchange-traded contracts are subject to Federal position limits.
    The proposed amendments to part 40 to specify new referenced
contracts generally received support.\533\ ICE noted the need for clear
guidance on how new contracts will be assessed, in order to determine
whether such contracts will be referenced contracts, and make
consistent determinations with respect to economically similar
products.\534\ Although commenters also generally supported the
publication of the Workbook, many suggested modifications, including
clarifications regarding which contracts are included as referenced
contracts, and the basis for making such determinations.\535\ The
Commission believes that the amendments to part 40 will allow the
Commission to consistently and accurately assess whether contracts
should be included within the Staff Workbook. The Commission also
believes that by providing regular updates to the Staff Workbook,
market participants will have accurate and consistent information to
assess whether such contracts are subject to Federal position limits.
Additionally, the Staff Workbook will provide a linkage between each
referenced contract, and either the core referenced futures contract or
referenced contract, as applicable, to which it is linked, to aid in
market participants' understanding of the Commission's determination.
---------------------------------------------------------------------------

    \533\ AGA at 10; MFA/AIMA at 4.
    \534\ ICE at 12.
    \535\ AGA at 10; MFA/AIMA at 9; FIA at 6; Chevron at 14; Suncor
at 14; and CEWG at 29-30.
---------------------------------------------------------------------------

    Alternatively, some commenters suggested that the Staff Workbook
could include a list of all contracts Commission staff finds are not
referenced contracts,\536\ and CME Group and ICE each provided a list
of contracts they believe should be excluded from the Staff
Workbook.\537\
---------------------------------------------------------------------------

    \536\ FIA at 6; MFA/AIMA at 9.
    \537\ CME Group at 13; ICE at 12.
---------------------------------------------------------------------------

    The Commission believes that by providing a Staff Workbook listing
core referenced futures contracts, and the referenced contracts that
are directly or indirectly related to them, the Commission is
presenting a list of contracts subject to Federal position limits in
the clearest possible fashion. Additionally, the amendments to part 40
will allow regular and accurate updates to this list.
    Some commenters expressed concern that the Staff Workbook lists
contracts that are not referenced contracts,\538\ or

[[Page 3308]]

provided examples asking for clarification.\539\ One commenter
recommended that the Commission appoint a task force to develop a
comprehensive baseline list of referenced contracts listed for trading
on exchanges.\540\
---------------------------------------------------------------------------

    \538\ FIA at 6; ICE at 9-12. ICE is specifically concerned that
the proposed workbook contains inconsistencies, such as including
location basis contracts and PRA/Price Index Contracts.
    \539\ Chevron at 14; CEWG at 29.
    \540\ CEWG at 30.
---------------------------------------------------------------------------

    The Commission believes that Commission staff (as opposed to a
taskforce) is best positioned to continually refine the Workbook
through accurate, timely updates, as aided by the additional
information required by the newly adopted amendments to part 40 under
the Final Rule.
    Further, some commenters believed that the Commission should
require exchanges to publish and maintain a definitive list of
referenced contracts (other than economically equivalent swaps).\541\
While CME Group did not believe that the Commission should impose such
a requirement on exchanges, it supported coordinating with the
Commission to ensure consistency, and publishing this information on
CME Group's website.\542\
---------------------------------------------------------------------------

    \541\ MFA/AIMA at 7; Citadel at 4-5; SIFMA AMG at 11-12.
    \542\ CME Group at 14.
---------------------------------------------------------------------------

    The Commission believes that publication of the Staff Workbook on
the www.cftc.gov website will provide a centralized location for market
participants to assess whether certain instruments are subject to
Federal position limits. Although the Commission is encouraged that
exchanges may provide redundancy in also publishing this list of core
referenced futures contracts and related referenced contracts listed
for trading on their respective exchanges, the Commission is not
adopting a requirement for exchanges to publish this information at
this time.
    Finally, CME Group contended that for commodities with only spot
month limits, financially-settled futures and options contracts should
be excluded from the Staff Workbook and not subject to Federal position
limits if the final settlement/expiry of the cash-settled futures or
option occurs before the spot month period of its core referenced
futures contract begins. CME Group additionally asserted that option
contracts that exercise into physically-settled core referenced futures
contracts should be included in the Staff Workbook and subject to
Federal position limits even if final settlement/expiry of the option
occurs before spot month period begins.
    The Commission agrees with both of CME Group's assertions with one
exception. While the Commission agrees that cash-settled futures
contracts and options on such futures contracts that are non-legacy
contracts (i.e., the 16 core referenced futures contracts that will not
have Federal non-spot position limits) and settle or expire prior to
when the spot month limits would become effective in the spot period
are not subject to Federal spot month position limits, such futures and
options contracts do qualify as referenced contracts based on the
settlement price being linked to a core referenced futures contract.
However, because the corresponding 16 core referenced futures contracts
are not subject to non-spot month Federal position limits, then these
cash-settled futures contracts and options contracts similarly are also
not subject to Federal position limits during the non-spot month.
Accordingly, as contracts not subject to Federal spot or non-spot month
position limits, these contracts will not be included in the Staff
Workbook, even if such contracts qualify as referenced contracts. The
Commission further agrees that options that exercise into the
physically-settled core referenced futures contract are within the
definition of referenced contract because when the options are
exercised, they become positions in the core referenced futures
contract.
    The Commission is clarifying that it will publish a revised Staff
Workbook shortly after the publication of this Final Rule on the
Commission's website and before the Final Rule's Effective Date. This
revised Staff Workbook will reflect the revised ``referenced contract''
definition, clarify CME Group's discussion with respect to options
discussed in the immediately above paragraph, and generally fix any
errors identified by commenters.
17. ``Short Position''
i. Summary of the 2020 NPRM--Short Position
    The Commission proposed to expand the existing definition of
``short position,'' currently defined in Sec.  150.1(h), to include
swaps and to clarify that any such positions would be measured on a
futures-equivalent basis.
ii. Comments and Summary of the Commission Determination--Short
Position
    No commenter addressed the proposed definition of ``short
position.'' The Commission is adopting the definition as proposed.
18. ``Speculative Position Limit''
i. Summary of the 2020 NPRM--Speculative Position Limit
    The Commission proposed to define the term ``speculative position
limit'' for use throughout part 150 of the Commission's regulations to
refer to Federal or exchange-set limits, net long or net short,
including single month, spot month, and all-months-combined limits.
This proposed definition was not intended to limit the authority of
exchanges to adopt other types of limits that do not meet the
``speculative position limit'' definition, such as a limit on gross
long or gross short positions, or a limit on holding or controlling
delivery instruments.
ii. Comments and Summary of the Commission Determination--Speculative
Position Limit
    No commenter addressed the proposed definition of ``speculative
position limit.'' The Commission is adopting the definition as proposed
with some non-substantive technical changes related to the numbering
structure.
19. ``Spot Month,'' ``Single Month,'' and ``All-Months''
i. Summary of the 2020 NPRM--Spot Month, Single Month, and All Months
    The Commission proposed to expand the existing definition of ``spot
month'' to: (1) Account for the fact that the proposed limits would
apply to both physically-settled and certain cash-settled contracts;
(2) clarify that the spot month for referenced contracts would be the
same period as that of the relevant core referenced futures contract;
and (3) account for variations in spot month conventions that differ by
commodity.
    In particular, for the ICE Sugar No. 11 (SB) core referenced
futures contract, the spot month would mean the period of time
beginning at the opening of trading on the second business day
following the expiration of the regular option contract traded on the
expiring futures contract and ending when the contract expires. For the
ICE Sugar No. 16 (SF) core referenced futures contract, the spot month
would mean the period of time beginning on the third-to-last trading
day of the contract month and ending when the contract expires. For the
CME Live Cattle (LC) core referenced futures contract, the spot month
would mean the period of time beginning at the close of trading on the
first business day following the first Friday of the contract month and
ending when the contract expires.
    The Commission also proposed to eliminate the existing definitions
of

[[Page 3309]]

``single month'' and ``all-months'' because the definitions for those
terms would be built into the proposed definition of ``speculative
position limit'' described above.
ii. Comments and Summary of the Commission Determination--Spot Month,
Single Month, and All Months
    No commenter addressed the proposed definition of ``spot month'' or
the proposed elimination of the existing definitions of ``single
month'' and ``all months.'' The Commission is adopting the definition
of spot month as proposed, but with a correction to reflect the proper
spot month period for the Live Cattle (LC) core referenced futures
contract. Final Sec.  150.1 defines the spot month for the Live Cattle
(LC) core referenced futures contract as the period of time beginning
at the close of trading on the first business day following the first
Friday of the contract month and ending when the contract expires. The
Commission is eliminating the existing definitions of ``single month''
and ``all months'' as proposed. Finally, the Commission is adopting
some non-substantive technical changes related to the numbering
structure.
20. ``Spread Transaction''
i. Background--Spread Transaction, Existing Sec.  150.3(a)(3)
    In existing Sec.  150.3(a)(3), the Commission exempts from Federal
position limits ``spread or arbitrage positions,'' subject to certain
restrictions, including the restriction that the spread position be
outside of the spot month.\543\ The existing regulations do not,
however, define ``spread or arbitrage positions.'' Further, under
existing regulations, spread exemptions from Federal positions limits
are self-effectuating and do not require prior Commission approval.
Rather, market participants must request spread exemptions from the
relevant exchange(s) in advance of exceeding exchange limits.
---------------------------------------------------------------------------

    \543\ See 17 CFR 150.3(a)(3) (permitting spread or arbitrage
positions that are ``between single months of a futures contract
and/or, on a futures-equivalent basis, options thereon, outside of
the spot month, in the same crop year; provided, however, that such
spread or arbitrage positions, when combined with any other net
positions in the single month, do not exceed the all-months limit
set forth in Sec.  150.2.'')
---------------------------------------------------------------------------

ii. Summary of the 2020 NPRM--Spread Transaction
    The Commission proposed a ``spread transaction'' definition to
exempt from Federal position limits transactions normally known to the
trade as ``spreads.'' The proposed definition would explicitly include
common types of spread strategies, including: Calendar spreads; inter-
commodity spreads; quality differential spreads; processing spreads
(such as energy ``crack'' or soybean ``crush'' spreads); product or by-
product differential spreads; and futures-options spreads. The proposed
spread transaction definition would also eliminate the existing Sec. 
150.3(a)(3) restrictions on spread exemptions, including the
restriction that spread positions be outside of the spot-month.
    Under proposed Sec.  150.3(a)(2)(i), positions that meet the
``spread transaction'' definition would be self-effectuating for
purposes of Federal position limits. Separately, under proposed Sec. 
150.3(a)(2)(ii), the Commission would, on a case-by-case basis, be able
to exempt any other spread transaction that was not included in the
proposed spread transaction definition, but that the Commission has
determined is consistent with CEA section 4a(a)(3)(B),\544\ and
exempted, pursuant to proposed Sec.  150.3(b).
---------------------------------------------------------------------------

    \544\ As noted above, CEA section 4a(a)(3)(B) provides that the
Commission shall set limits ``to the maximum extent practicable, in
its discretion--(i) to diminish, eliminate, or prevent excessive
speculation as described under this section; (ii) to deter and
prevent market manipulation, squeezes, and corners; (iii) to ensure
sufficient market liquidity for bona fide hedgers; and (iv) to
ensure that the price discovery function of the underlying market is
not disrupted.''
---------------------------------------------------------------------------

iii. Summary of the Commission Determination--Spread Transaction
    The Commission is adopting the definition of ``spread transaction''
with certain modifications to the definition to include additional
spread types, as described below, to address commenters' views and
other considerations. The Commission is providing additional
clarification with respect to cash-and-carry exemptions as well as the
application of spread exemptions to the NYMEX NG core referenced
futures contract. The Commission is also adopting Appendix G to part
150 under the Final Rule to provide additional clarifications to market
participants in connection with the Commission's treatment of spread
exemptions under the Final Rule.
iii. Comments--Spread Transaction
    Generally, commenters requested that the Commission expand or
clarify the ``spread transaction'' definition to ensure that other
commonly-used spread strategies are exempted from Federal position
limits, including: (1) Intra-market and inter-market spread positions;
\545\ (2) inter-market spread positions where the legs of the
transaction are futures contracts in the same commodity and same
calendar month or expiration; \546\ (3) inter-market spreads in which
one leg is a referenced contract and the other is a commodity
derivative contract (including an OTC swap) that is not subject to
Federal positions limits; \547\ (4) a spread between a physically-
settled position and a cash-settled position; \548\ (5) a spread
between two cash-settled contracts in the spot period, even if one leg
is not subject to Federal position limits; \549\ (6) intra-commodity
spreads (including an intra-commodity spread between two cash-settled
contracts or between the cash-settled and related physically-settled
futures contract); \550\ and (7) cash-and-carry exemptions that are
currently permitted under IFUS Rule 6.29(e).\551\
---------------------------------------------------------------------------

    \545\ MFA/AIMA at 10; CMC at 7.
    \546\ ICE at 7.
    \547\ ICE at 7; FIA at 21.
    \548\ CME Group at 11.
    \549\ Id.
    \550\ CEWG at 27; FIA at 20-21 (explaining that the intra-
commodity spread would acknowledge the link between the prices of
cash-settled and physical delivery futures involving the same
commodity). See also CEWG at 27; CCI at 2-3 (requesting an exemption
for intra-commodity spreads that are: (1) In the same class of
referenced contract, (2) across classes of referenced contracts, or
(3) across markets in referenced contracts (i.e., on different
exchanges) in the same or different calendar months); CEWG at 27
(providing proposed revisions to the ``spread transaction''
regulatory text); CME Group at 11.
    \551\ FIA at 21; see also, IFUS at 7-9 (providing an example of
a cash-and-carry exemption and describing such exemption as a type
of calendar month spread where a person holds a long position in the
spot month and a short position in the second nearby contract month)
and IFUS Rule 6.29(e) (outlining its strict procedures that set the
terms by which cash-and-carry exemptions may be permitted, including
the following conditions: (i) The person seeking the exemption must
provide the cost of carrying the physical commodity, the minimum
spread differential at which it will enter into a straddle position
in order to obtain profit, and the quantity of stocks currently
owned in IFUS licensed warehouses or tank facilities; (ii) when
granted a cash and carry exemption, the person receiving the
exemption shall agree that before the price of the nearby contract
month rises to a premium to the second contract month, it will
liquidate all long positions in the nearby contract month; and (iii)
block trades may not be used to establish positions upon which a
cash and carry exemption request is based). IFUS further explained
that it has a long history of granting cash and carry exemptions for
certain warehoused contracts (specifically coffee, cocoa, and FCOJ),
and that where there are plentiful supplies, these exemptions serve
an economic purpose in the days leading up to the first notice day
and throughout the notice period, because: (1) They help maintain an
appropriate economic relationship between the nearby and next
successive contract month; (2) they allow commercial market
participants the opportunity to compete for the ownership of
certified inventories beyond the limitations of the spot-month
position limit; and (3) the holder of the exemption provides
liquidity so that traders that carry short positions into the notice
period without capability to deliver may exit their positions in an
orderly manner. According to IFUS, if the appropriate supply and
price relationship exists in a given expiry, and the exchange grants
the application, then proper application of the terms as expiry
approaches will assist in an orderly expiration. IFUS 7-9; FIA at
21.

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

[[Page 3310]]

    In addition, commenters requested that the Commission clarify that:
(1) The ``spread transaction'' definition is a non-exhaustive list, and
therefore, permit exchanges to grant spread exemptions that are not
covered by Sec.  150.3(a)(2) by using the streamlined process in Sec. 
150.9 for recognizing non-enumerated bona fide hedges; \552\ and (2) a
calendar spread would permit a market participant to net down its
positions for the purposes of Federal spot-month and single-month
limits.\553\
---------------------------------------------------------------------------

    \552\ ICE at 7.
    \553\ Citadel at 8-9.
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Spread Transaction
    The Commission is adopting the proposed definition of ``spread
transaction'' with certain modifications, as described below, to
address commenters' views and other considerations. First, the
Commission is expanding the definition to include additional types of
spreads. Second, the Commission is clarifying the treatment of cash-
and-carry exemptions as permissible calendar spreads and providing
additional guidance to exchanges in connection with such spreads.
Third, the Commission addresses the application of spread exemptions in
connection with the NYMEX NG core referenced futures contract. The
Commission is also providing additional guidance on the use of exempt
spread transactions in Appendix G of this Final Rule.
a. The ``Spread Transaction'' Definition Includes Several Additional
Spread Types Under the Final Rule
    First, the Commission is expanding the proposed ``spread
transaction'' definition to make clear that the definition as finalized
includes intra-market, inter-market, and intra-commodity spread
positions in addition to the spread strategies listed in the proposed
definition. The final ``spread transaction'' definition will cover:
Intra-market spreads, inter-market spreads, intra-commodity spreads,
and inter-commodity spreads, including calendar spreads, quality
differential spreads, processing spreads, product or by-product
differential spreads, and futures-options spreads.\554\ The Commission
intends for the spread transaction definition to be sufficiently broad
to capture most, if not all, spread strategies currently granted by
exchanges and used by market participants. The Commission believes this
is consistent with, but provides more clarity than, its existing
approach to spread exemptions in existing Sec.  150.3(a)(3), which
broadly exempts ``spread or arbitrage positions.'' \555\
---------------------------------------------------------------------------

    \554\ For example, trading activity in many commodity derivative
markets is concentrated in the nearby contract month, but a hedger
may need to offset risk in deferred months where derivative trading
activity may be less active. A calendar spread trader could provide
liquidity without exposing himself or herself to the price risk
inherent in an outright position in a deferred month. Processing
spreads can serve a similar function. For example, a soybean
processor may seek to hedge his or her processing costs by entering
into a ``crush'' spread, i.e., going long soybeans and short soybean
meal and oil. A speculator could facilitate the hedger's ability to
do such a transaction by entering into a ``reverse crush'' spread
(i.e., going short soybeans and long soybean meal and oil). Quality
differential spreads, and product or by-product differential
spreads, may serve similar liquidity-enhancing functions when
spreading a position in an actively traded commodity derivatives
market such as CBOT Wheat (W) against a position in another actively
traded market, such as MGEX Wheat.
    \555\ Under existing regulations, the Commission views its use
of the term ``spread'' to mean the same as ``arbitrage'' or
``straddle'' as those terms are used in CEA section 4a(a) and
existing Sec.  150.3(a)(3) of the Commission's regulations.
Consistent with existing regulations, the Commission's sole use of
the term ``spread'' in this rulemaking is intended to also capture
arbitrage or straddle strategies, and is not intended to be a
substantive change from its existing regulations. The Commission
notes that certain exchanges may distinguish between ``spread'' and
``arbitrage'' positions for purposes of exchange exemptions, but the
Commission does not make that distinction here for purposes of its
``spread transaction'' definition.
---------------------------------------------------------------------------

    In light of the revised ``spread transaction'' definition, the
Commission expects that most spread strategies will qualify as intra-
market, inter-market, inter-commodity, or intra-commodity spreads, and
is providing a non-exhaustive list of the most common specific types of
spread strategies that fall within those four categories. Any requests
for spread exemptions that fall outside of the spread transaction
definition are required to be submitted to the Commission in advance
pursuant to Sec.  150.3(b) of the Final Rule. Accordingly, the
Commission has determined not to allow exchanges to grant new types of
spread exemptions using the streamlined process in Sec.  150.9 for
various reasons explained below in detail under the discussion of Sec. 
150.3.\556\
---------------------------------------------------------------------------

    \556\ See infra Section II.C.4. (discussing statutory and policy
reasons why the Commission will not permit exchanges to process
requests for spread exemptions that are not included in the ``spread
transaction'' definition using the Sec.  150.9 process).
---------------------------------------------------------------------------

    In addition, considering the significant number of requests for
clarification commenters submitted regarding the spread transaction
definition, the Commission is providing guidance on spread transactions
in Appendix G to part 150 of the Commission's regulations, as adopted
in this Final Rule, to address those questions and other
considerations. In particular, paragraph (a) of the guidance provides
some recommended best practices for exchanges to consider when granting
spread exemptions, especially during the spot period. Paragraph (a) of
the guidance also reminds exchanges of their existing obligations as
self-regulatory organizations, including under DCM Core Principle 5 and
SEF Core Principle 6, as applicable, to implement their exchange-set
limits and exemption granting processes in a way that (consistent with
the rules and procedures in final Sec.  150.5 adopted herein) \557\
reduces the potential threat of market manipulation or congestion.
---------------------------------------------------------------------------

    \557\ See infra Section II.D. (discussing exchanges' obligations
when setting exchange position limits and granting exemptions
therefrom).
---------------------------------------------------------------------------

    Moreover, paragraph (b) of the guidance clarifies that the
following spread strategies are covered by the ``spread transaction''
definition: (1) Inter-market spread positions where the legs of the
transaction are futures contracts in the same commodity and same
calendar month or expiration; (2) spread positions in which one leg is
a referenced contract and the other is a commodity derivative contract
that is not subject to Federal positions limits (including OTC
commodity derivative contracts, but not including commodity index
contracts); \558\ (3) a spread between a physically-settled position
and a cash-settled position; (4) a spread between two cash-settled
contracts; (5) certain cash-and-carry exemptions, subject to certain
recommendations and considerations outlined in paragraph (c) of the
Commission's guidance in Appendix G of this Final Rule; and (6) spreads
that are ``legged in'' or carried out in two steps.
---------------------------------------------------------------------------

    \558\ To avoid subverting the Commission's policy on not
allowing self-effectuating risk management exemptions (except
through the pass-through swap provision), the spread transaction
definition would not cover a spread position in which one leg is a
referenced contract and the other leg is a commodity index contract,
as clarified in Appendix G.
---------------------------------------------------------------------------

b. ``Cash-and-Carry'' Exemptions
    Second, as mentioned above, paragraph (c) of the guidance
recommends certain factors for exchanges to consider when granting
cash-and-carry exemptions.\559\ The

[[Page 3311]]

Commission understands that IFUS has granted this type of calendar
spread exemption for some time, and has experience monitoring the use
of such exemptions to ensure that its market operates in a manner that
is consistent with the applicable DCM Core Principles.\560\ The
Commission has, however, previously expressed concern about these
exemptions and their impact on the spot month price for a particular
futures contract.\561\ In particular, the Commission has explained that
a large demand for delivery on cash-and-carry positions might distort
the price of the expiring futures contract upwards.\562\ This would
particularly be a concern in those commodity markets where price
discovery for the cash spot price occurred in the expiring futures
contract.\563\
---------------------------------------------------------------------------

    \559\ As final Appendix G provides, the spread transaction
definition in Sec.  150.1 permits transactions commonly known as
``cash-and-carry'' trades whereby a market participant enters a long
futures positions in the spot month and an equivalent short futures
position in the following month, in order to guarantee a return
that, at minimum, covers the costs of its carrying charges. With
this exemption, the market participant is able to take physical
delivery of the product in the nearby month and may redeliver the
same product in a deferred month.
    \560\ See IFUS at 7-9 and ICE Futures U.S. Rule 6.29(e).
    \561\ See 81 FR at 96833.
    \562\ Id.
    \563\ See 81 FR at 96833.
---------------------------------------------------------------------------

    The Commission recognizes, however, the importance of cash-and-
carry positions in the price discovery process in certain markets and
reminds exchanges of their responsibility to monitor and safeguard
against convergence issues that could arise related to the use of cash-
and-carry exemptions. Accordingly, the Commission views these
exemptions as a type of calendar spread strategy that warrants
additional guidance to encourage exchanges to have suitable safeguards
in place to ensure that they grant and monitor cash-and-carry
exemptions in a manner that is consistent with their obligation to
reduce the potential threat of market manipulation and congestion.
c. Treatment of Spread Transactions Involving NYMEX NG
    Third, the Commission is providing clarification regarding the
intersection of the conditional natural gas spot month limit exemption
and spread exemptions permitted under Sec.  150.3. As set forth in
Appendix G, the Commission reinforces that a spread transaction
exemption would not cover natural gas spot month positions that exceed
the conditional natural gas spot month limit in Sec.  150.3(a)(4) of
this Final Rule. That is, a market participant cannot rely on a spread
transaction exemption to hold a spot month position that would exceed
the equivalent of 10,000 contracts of the NYMEX Henry Hub Natural Gas
core referenced futures contract per exchange that lists a natural gas
cash-settled referenced contract. Additional discussion on the natural
gas conditional spot month limit exemption is provided further
below.\564\
---------------------------------------------------------------------------

    \564\ See infra Section II.B.3.vi.a. (discussing the Federal
spot-month limit for natural gas under Sec.  150.2) and Section
II.C.6 (discussing the conditional spot-month limit for natural gas
under Sec.  150.3(a)(4)).
---------------------------------------------------------------------------

    As discussed further below, in Sec.  150.3, the Commission is
providing an exemption from the Federal spot month position limit level
for natural gas. The natural gas conditional spot month limit exemption
allows a trader to hold up to: (1) 10,000 spot month cash-settled NYMEX
NG referenced contracts per exchange that lists a cash-settled NYMEX NG
referenced contract (of which there are currently three--NYMEX, IFUS,
and Nodal); and (2) an additional position in cash-settled economically
equivalent NYMEX NG OTC swaps that has a notional amount equal to
10,000 equivalent-sized contracts; provided, that the market
participant does not hold positions in the spot month of the
physically-settled NYMEX NG referenced contract.\565\ The Commission
adopted the Federal conditional limit for natural gas in order to avoid
disrupting the well-developed, unique liquidity characteristics of the
natural gas derivatives markets, in which the cash-settled natural gas
referenced contracts, when combined, have significantly higher
liquidity than the physically-settled natural gas contracts. The
Federal conditional limit requires divestiture of the spot month
physically-settled NYMEX referenced contract due to concerns about,
among other things, fostering an environment that incentivizes traders
to manipulate the physically-settled NYMEX NG referenced contract in
order to benefit a larger cash-settled position in natural gas (i.e.,
``bang'' or ``mark'' the close). The Commission intends for the natural
gas conditional limit's position limit levels to serve as a firm cap
for the maximum amount of cash-settled natural gas spot month positions
a trader can hold. The Commission clarifies that a person cannot
circumvent this cap using a spread transaction exemption.
---------------------------------------------------------------------------

    \565\ This is different from the final Federal spot month
position limits for NYMEX NG, pursuant to which a trader may hold up
to: (1) 2,000 cash-settled NYMEX NG referenced contracts per
exchange that lists a cash-settled NYMEX NG referenced contract; (2)
an additional position in cash-settled economically equivalent NYMEX
NG OTC swaps that has a notional amount equal to 2,000 equivalent-
sized contracts; and (3) 2,000 physically-settled NYMEX NG
referenced contracts.
---------------------------------------------------------------------------

    That is, the Commission believes that cash-settled natural gas
positions that exceed the natural gas conditional limit in the spot
month would be unusually large and could potentially have a disruptive
effect on the physically-settled natural gas contract, including by
inhibiting convergence at expiration. Specifically, by allowing traders
to layer additional cash-settled natural gas spot month positions on
top of the maximum cash-settled natural gas spot month positions
permitted under the natural gas conditional limit, a person could amass
an extremely large cash-settled spot month position in natural gas.
This extremely large cash-settled spot month position could push prices
up for cash-settled spot month contracts vis-[agrave]-vis the
physically-settled spot month contracts. In response, arbitrageurs may
attempt to capitalize on this price discrepancy by going short the
cash-settled spot month contracts, which would have a downward pressure
on the price of these contracts, and going long on the physically-
settled spot month contracts, which would have an upward pressure on
the price of these contracts. This upward price pressure on the
physically-settled contract could potentially push the price of the
physically-settled contract away from the actual cash price for the
natural gas commodity, which could disrupt convergence upon expiration
of the physically-settled contract. As such, the Commission clarifies
that a person cannot layer a spread exemption on top of the conditional
spot month limit in natural gas and thereby circumvent the conditional
spot month limit cap.\566\
---------------------------------------------------------------------------

    \566\ For the avoidance of doubt, traders who avail themselves
of a spread exemption and enter into spread positions between the
physically-settled NYMEX NG core referenced futures contract during
the spot month and one or more cash-settled natural gas referenced
contracts or cross commodity contracts, are not allowed under the
Final Rule to avail themselves of the natural gas conditional limit
until they exit the above-noted spread position.
---------------------------------------------------------------------------

21. ``Swap'' and ``Swap Dealer''
i. Summary of the 2020 NPRM--Swap and Swap Dealer
    The Commission proposed to incorporate the definitions of ``swap''
and ``swap dealer'' as they are defined in section 1a of the Act and
Sec.  1.3 of this chapter.\567\
---------------------------------------------------------------------------

    \567\ 7 U.S.C. 1a(47) and 1a(49); 17 CFR 1.3.
---------------------------------------------------------------------------

ii. Comments and Summary of the Commission Determination--Swap and Swap
Dealer
    No commenter addressed the proposed definitions of ``swap'' or
``swap dealer.'' The Commission is adopting these definitions as
proposed.

[[Page 3312]]

22. ``Transition Period Swap''
i. Summary of the 2020 NPRM--Transition Period Swap
    The Commission proposed to create the defined term ``transition
period swap'' to mean any swap entered into during the period
commencing after the enactment of the Dodd-Frank Act of 2010 (July 22,
2010) and ending 60 days after the publication of a final Federal
position limits rulemaking in the Federal Register. As discussed in
connection with proposed Sec.  150.3 later in this release, if acquired
in good faith, such swaps would be exempt from Federal position limits,
although such swaps could not be netted with post-effective date swaps
for purposes of complying with spot month speculative position limits.
ii. Comments and Summary of the Commission Determination--Transition
Period Swap
    No commenter addressed the proposed definition of ``transition
period swap.'' The Commission is adopting the definition as proposed,
with two modifications. The Commission is clarifying that a transition
period swap is a swap entered into during the period commencing ``on
the day of,'' rather than ``after,'' the enactment of the Dodd-Frank
Act of 2010 to clarify the ambiguity of the phrase ``after the
enactment.'' The Commission is also adding a phrase to clarify that the
terms of such swaps ``have not expired as of 60 days after the
publication date.'' The Commission intended to include this in the 2020
NPRM, but the language was inadvertently omitted from the proposed
definition. This modification conforms to the definition of ``pre-
enactment swap,'' which also addresses the timeframe for expiration of
a swap's terms.
23. Deletion of Sec.  150.1(i)
i. Summary of 2020 NPRM--Deletion of Sec.  150.1(i)
    The Commission proposed to eliminate existing Sec.  150.1(i), which
includes a table specifying the ``first delivery month of the crop
year'' for certain commodities. The crop year definition had been
pertinent for purposes of the spread exemption to the individual month
limit in current Sec.  150.3(a)(3), which limits spreads to those
between individual months in the same crop year and to a level no more
than that of the all-months limit. This provision was pertinent at a
time when the single month and all-months-combined limits were
different, which is no longer the case.
ii. Comments and Summary of the Commission Determination--Deletion of
Sec.  150.1(i)
    No commenter addressed the proposed elimination of existing Sec. 
150.1(i). The Commission is adopting as proposed. Now that the current
and proposed single month and all months combined limits are the same,
and now that the Commission is adopting new enumerated bona fide hedges
in Sec.  150.1 and Appendix B to part 150 as well as a new process for
granting spread exemptions in Sec.  150.3, this provision is no longer
needed.

B. Sec.  150.2--Federal Position Limit Levels

    This section will address the issues related to Federal position
limit levels in final Sec.  150.2 in the following order:\568\
---------------------------------------------------------------------------

    \568\ In connection with the discussion of Sec.  150.2 that
appears below, for each numbered section, the Commission generally
provides a summary of the proposed approach, a brief overview of the
Commission's final determination, a summary of comments, and the
Commission's response to comments.
---------------------------------------------------------------------------

    (1) Background of the existing Federal position limit levels;
    (2) identification of contracts subject to both Federal spot and
non-spot month position limits, and contracts subject only to Federal
spot month position limits;
    (3) Federal spot month position limit levels;
    (4) Federal non-spot month position limit levels;
    (5) the establishment of subsequent spot month and non-spot month
position limit levels;
    (6) relevant contract months;
    (7) limits on ``pre-existing positions'';
    (8) positions on foreign boards of trade;
    (9) anti-evasion;
    (10) netting and Federal position limit levels for cash-settled
referenced contracts; and
    (11) ``eligible affiliates'' and position aggregation.
    As part of the discussion of Federal spot month position limit
levels (noted as issue (3) above and found in Section II.B.3. below),
the Commission also will address Federal spot month position limit
levels specifically for (i) ICE Cotton No. 2 (CT), (ii) NYMEX Henry Hub
Natural Gas (NG), and (iii) the three wheat core referenced futures
contracts. Similarly, as part of the discussion of Federal non-spot
month position limit levels (noted as issue (4) above and found in
Section II.B.4. below), the Commission will also address Federal non-
spot month position limit levels specifically for (i) ICE Cotton No. 2
(CT) and (ii) the three wheat core referenced futures contracts.
1. Background--Existing Federal Position Limit Levels--Sec.  150.2
    Federal spot month, single month, and all-months-combined position
limits currently apply to the nine physically-settled legacy
agricultural contracts listed in existing Sec.  150.2, and, on a
futures-equivalent basis, to options contracts thereon. Existing
Federal position limit levels set forth in Sec.  150.2 \569\ apply net
long or net short and are as follows:
---------------------------------------------------------------------------

    \569\ 17 CFR 150.2.

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

[[Page 3313]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.006

    While not explicitly stated in Sec.  150.2, the Commission's
practice has been to set Federal spot month position limit levels at or
below 25% of deliverable supply based on exchange estimates of
deliverable supply (``EDS'') that are verified by the Commission, and
to set Federal position limit levels outside of the spot month at 10%
of open interest for the first 25,000 contracts of open interest, with
a marginal increase of 2.5% of open interest thereafter.
2. Application of Federal Position Limits During the Spot Month and the
Non-Spot Month
i. Summary of the 2020 NPRM--Application of Federal Position Limits
During the Spot Month and the Non-Spot Month
    The 2020 NPRM imposed Federal position limits during all contract
months for the nine legacy agricultural contracts (and their associated
referenced contracts), and only during the spot month for the 16 non-
legacy core referenced futures contracts (and their associated
referenced contracts) that would be subject to Federal position limits
for the first time.\570\ For the 16 non-legacy core referenced futures
contracts (and their associated referenced contracts), the 2020 NPRM
also required that they be subject to exchange-set position limits or
position accountability outside of the spot month.\571\
---------------------------------------------------------------------------

    \570\ As noted in further detail in Section II.A.16., their
associated referenced contracts are also subject to Federal position
limits.
    \571\ Proposed Sec.  150.5(b)(2). For existing exchange-set
position limits, see Market Resources, ICE Futures U.S. Website,
available at https://www.theice.com/futures-us/market-resources (ICE
exchange-set position limits); Position Limits, CME Group website,
available at https://www.cmegroup.com/market-regulation/position-limits.html; Rules and Regulations of the Minneapolis Grain
Exchange, Inc., MGEX, available at http://www.mgex.com/documents/Rulebook_051.pdf (MGEX exchange-set position limits).
---------------------------------------------------------------------------

    The Commission proposed to maintain (rather than remove) Federal
non-spot month position limits for the nine legacy agricultural
contracts, with the modifications described further below, because the
Commission has observed no reason to eliminate them.\572\ These non-
spot month position limits have been in place for decades, and while
the Commission proposed to modify the Federal non-spot month position
limit levels, the Commission believed that removing them entirely could
potentially result in market disruption. The Commission's position was
reinforced by the feedback it received from commercial market
participants trading the nine legacy agricultural contracts who
requested that the Commission maintain Federal position limits outside
of the spot month in order to promote market integrity.\573\
---------------------------------------------------------------------------

    \572\ 85 FR at 11628.
    \573\ Id.
---------------------------------------------------------------------------

ii. Summary of the Commission Determination--Application of Federal
Position Limits During the Spot Month and the Non-Spot Month
    The Commission is adopting the approach that was proposed in the
2020 NPRM. Under the Final Rule, Federal position limits apply to all
25 core referenced futures contracts during the spot month. The 16 non-
legacy core referenced futures contracts subject to Federal position
limits for the first time under the Final Rule are subject to Federal
position limits only during the spot month (and not outside of the spot
month). Outside of the spot month, these 16 core referenced futures
contracts are subject only to exchange-set position limits or position
accountability.
iii. Comments--Application of Federal Position Limits During the Spot
Month and the Non-Spot Month
    Many commenters generally agreed with the proposed approach and
supported Federal position limits during the spot month for all 25 core
referenced futures contracts, and outside of the spot month for only
the nine legacy agricultural contracts.\574\ The Commission did not
receive any comments objecting to Federal spot month position limits
for all 25 core referenced futures contracts.
---------------------------------------------------------------------------

    \574\ See MGEX at 1; CHS at 2; CME Group at 2; IFUS at 2; ICE at
2, 3-4; Chevron at 2; CMC at 6; EEI at 4; FIA at 2; MFA/AIMA at 2-3;
NCFC at 4; Shell at 3; PIMCO at 4; SIFMA AMG at 4; Suncor at 2; AQR
at 2, 4-5, 7-10; CCI at 2; COPE at 4; IECA at 2; NGSA at 3; CEWG at
3; and AFIA at 2.
---------------------------------------------------------------------------

    On the other hand, the Commission received comments expressing
concern over two related issues. First, a few commenters disagreed with
the 2020 NPRM imposing Federal non-spot month position limits on only
the nine legacy agricultural contracts.\575\ NEFI stated that ``the
proposed rule arbitrarily fails to establish limits for non-spot month
referenced energy contracts'' and stated that ``distributing limits
across all

[[Page 3314]]

months is preferable, as it would protect market convergence and mute
disruptive signals from large speculative trades.'' \576\ PMAA echoed
similar concerns by stating that there was ``no data or discussion
provided in the proposal indicating why the Commission believes limits
for non-spot months are not appropriate.'' \577\
---------------------------------------------------------------------------

    \575\ In addition to comments from NEFI and PMAA, which are
discussed below, AFR and Rutkowski asserted that the 2020 NPRM will
likely be ``ineffective in controlling excessive speculation'' due,
in part, to its failure to ``impose Federal position limits outside
of the current spot month for most commodities (outside of legacy
agricultural commodities).'' AFR at 2 and Rutkowski at 2.
    \576\ NEFI at 3 and PMAA at 3 (with respect to energy commodity
positions, ``[h]istory has shown on a number of occasions that large
trades in non-spot months can distort markets and increase
volatility'').
    \577\ PMAA at 3. PMAA also suggested that the Commission apply
the ``traditional 2.5% limit formula to energy contracts and
economically equivalent energy futures, options, and swaps in non-
spot months.''
---------------------------------------------------------------------------

    Second, commenters also expressed concern that, by only having
Federal non-spot month position limits for the nine legacy agricultural
contracts, the Commission is relying too much on the exchanges to
address excessive speculation.\578\ In particular, commenters were
concerned about the incentives and other conflicts of interest that
exchanges may have to permit ``higher trading volumes and large numbers
of market participants'' \579\ and about the exchanges' use of position
accountability by alleging that it is a ``voluntary'' limit \580\ and
pointing to ``recent notable failures in exchange accountability
regimes.'' \581\
---------------------------------------------------------------------------

    \578\ NEFI at 3; PMAA at 3; and IATP at 10.
    \579\ NEFI at 3.
    \580\ Id.
    \581\ IATP at 10. See also PMAA at 3 (``[u]nfortunately, the
proposal instead finds accountability limits to be sufficient to
manage speculation'').
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Application of Federal Position Limits
During the Spot Month and the Non-Spot Month
    The Commission is adopting the approach that was proposed in the
2020 NPRM by applying Federal position limits to all 25 core referenced
futures contracts during the spot month, but only to the existing nine
legacy agricultural contracts outside of the spot month for the reasons
discussed below.
a. Response to Comments Opposing the 2020 NPRM's Approach To Subject
Only the Nine Legacy Agricultural Contracts to Federal Non-Spot Month
Position Limits
    The Commission has concluded that, while it may be important and,
as described below, necessary \582\ to impose Federal spot month
position limits on each core referenced futures contract, the analysis
changes with respect to the non-spot month for the following reasons.
---------------------------------------------------------------------------

    \582\ See infra Section III.E. (discussing necessity finding for
spot month and non-spot month position limits).
---------------------------------------------------------------------------

    First, while the Final Rule only applies Federal position limits to
the 16 non-legacy core referenced futures contracts during the spot
month, the Final Rule requires exchanges to establish either position
limit levels or position accountability outside of the spot month for
all such contracts.\583\ Accordingly, all 16 non-legacy core referenced
futures contracts will be subject to either position limits or position
accountability outside of the spot month at the exchange level. Any
such exchange-set position limit and position accountability must
comply with the standards established by the Commission in final Sec. 
150.5(b) including, among other things, that any such levels be
``necessary and appropriate to reduce the potential threat of market
manipulation or price distortion of the contract's or the underlying
commodity's price or index.'' \584\ Exchanges are also required to
submit any rules adopting or modifying such position limit or position
accountability to the Commission in advance of implementation pursuant
to part 40 of the Commission's regulations.\585\ Additionally,
exchanges are subject to DCM Core Principle 5 or SEF Core Principle 6,
as applicable, which establish additional protections against
manipulation and congestion.\586\ These tools and legal obligations, in
conjunction with surveillance at both the exchange and Federal level,
will continue to offer strong deterrence and protection against
manipulation and disruptions outside of the spot month.\587\
---------------------------------------------------------------------------

    \583\ Final Sec.  150.5(b)(2).
    \584\ Id.
    \585\ 17 CFR part 40. Under the final ``position
accountability'' definition in Sec.  150.1, exchange accountability
rules must require a trader whose position exceeds the
accountability level to consent to: (1) Provide information about
its position to the exchange; and (2) halt increasing further its
position or reduce its position in an orderly manner, in each case
as requested by the exchange.
    \586\ Commission regulation Sec.  38.300, which mirrors DCM Core
Principle 5, states: ``To reduce the potential threat of market
manipulation or congestion (especially during trading in the
delivery month), the board of trade shall adopt for each contract of
the board of trade, as is necessary and appropriate, position
limitations or position accountability for speculators. For any
contract that is subject to a position limitation established by the
Commission, pursuant to section 4a(a), the board of trade shall set
the position limitation of the board of trade at a level not higher
than the position limitation established by the Commission.'' 17 CFR
38.300 and 7 U.S.C. 7(d)(5). Likewise, Commission regulation Sec. 
37.600, which mirrors SEF Core Principle 6, states: ``(a) In
general. To reduce the potential threat of market manipulation or
congestion, especially during trading in the delivery month, a swap
execution facility that is a trading facility shall adopt for each
of the contracts of the facility, as is necessary and appropriate,
position limitations or position accountability for speculators. (b)
Position limits. For any contract that is subject to a position
limitation established by the Commission pursuant to section 4a(a)
of the Act, the swap execution facility shall: (1) Set its position
limitation at a level no higher than the Commission limitation; and
(2) Monitor positions established on or through the swap execution
facility for compliance with the limit set by the Commission and the
limit, if any, set by the swap execution facility.'' 17 CFR 37.600
and 7 U.S.C. 7b-3(f)(6).
    \587\ 85 FR at 11629.
---------------------------------------------------------------------------

    Second, in response to the concerns expressed by NEFI and PMAA that
a lack of Federal non-spot month position limits could harm market
convergence and lead to disruptive signals from large speculative
trades,\588\ the Commission reiterates that corners and squeezes, and
related convergence issues, do not occur outside of the spot month when
there is no threat of delivery.\589\ Convergence occurs during the spot
month and, specifically, at the expiration of the spot month for a
physically-settled contract. As a result, positions outside of the spot
month have minimal impact on convergence. The Commission, however,
recognizes that it is possible that unusually large positions in
contracts outside of the spot month could distort the natural spread
relationship between contract months. For example, if traders hold
unusually large positions outside of the spot month, and if those
traders exit those positions immediately before the spot month, that
could cause congestion and also affect the pricing of the spot month
contract. While such congestion or price distortion cannot be ruled
out, exchange-set position limits and position accountability function
to mitigate against such risks. Thus, the position limits framework
adopted herein is able to guard against any such possibility through
the tools and legal obligations applicable to exchanges that are
described in the prior paragraph.
---------------------------------------------------------------------------

    \588\ NEFI at 3 and PMAA at 3.
    \589\ In the case of certain commodities, it may become
difficult to exert market power via concentrated futures positions
in deferred month contracts. For example, a participant with a large
cash-market position and a large deferred futures position may
attempt to move cash markets in order to benefit that deferred
futures position. Any attempt to do so could become muted due to
general futures market resistance from multiple vested interests
present in that deferred futures month (i.e., the overall size of
the deferred contracts may be too large for one individual to
influence via cash-market activity). However, if a large position
that is accumulated over time in a particular deferred month is held
into the spot month, it is possible that such positions could form
the groundwork for an attempted corner or squeeze in the spot month.
---------------------------------------------------------------------------

    Third, limiting Federal non-spot month position limits to the nine
legacy agricultural commodities may limit any market disruptions that
could result

[[Page 3315]]

from adding new Federal non-spot month position limits on certain metal
and energy commodities that have never been subject to Federal position
limits.\590\
---------------------------------------------------------------------------

    \590\ 85 FR at 11629.
---------------------------------------------------------------------------

b. Response to Comments Regarding the Commission's Reliance on
Exchanges
    In response to commenters' specific concerns about the reliance on
exchanges' position accountability, the Commission views position
accountability outside of the spot month as a more flexible alternative
to Federal non-spot month position limits.\591\ Position accountability
establishes a level at which an exchange will start investigating a
trader's current position. This will include, among other things,
asking traders additional questions regarding their strategies and
their purpose for the positions, while evaluating them under current
market conditions. If a position does not raise any concerns, the
exchange will allow the trader to exceed the accountability level. If
the position raises concerns, the exchange has the authority to
instruct the trader to stop adding to the trader's position, or to
reduce the position. Position accountability is a particularly
effective tool because it provides the exchanges with an opportunity to
intervene once a position hits a relatively low level (vis-[agrave]-vis
the level at which a Federal or an exchange position limit level would
typically be set), while still affording market participants with the
flexibility to establish a position that exceeds the position
accountability level if it is justified by the nature of the position
and market conditions. Position accountability applies to all
participants on the exchange, whether commercial or non-commercial, and
regardless of whether the relevant participant would qualify for an
exemption.
---------------------------------------------------------------------------

    \591\ Id.
---------------------------------------------------------------------------

    The Commission has decades of experience overseeing position
accountability implemented by exchanges, including for all 16 non-
legacy core referenced futures contracts that are not subject to
Federal position limits outside of the spot month.\592\ Based on the
Commission's experience, position accountability has functioned
effectively.\593\ Furthermore, the Commission notes that position
accountability is not the only tool available for exchanges. As noted
previously, exchanges can also utilize exchange-set position limits.
Several exchanges have set non-spot month position limits for contracts
that are not subject to Federal position limits, and all of them appear
to have functioned effectively based on the Commission's observation of
those markets.\594\
---------------------------------------------------------------------------

    \592\ See, e.g., 56 FR at 51687 (Oct. 15, 1991) (permitting CME
to establish position accountability for certain financial contracts
traded on CME); Speculative Position Limits--Exemptions from
Commission Rule 1.61, 57 FR 29064 (June 30, 1992) (permitting the
use of accountability for trading in energy commodity contracts);
and 17 CFR 150.5(e) (2009) (formally recognizing the practice of
accountability for contracts that met specified standards).
    \593\ 85 FR at 11629.
    \594\ For example, exchanges have set non-spot month position
limits for the following core referenced futures contracts, even
though such contracts currently are not subject to Federal non-spot
month position limits (and will continue to be subject only to
Federal spot month position limits under this Final Rule): (1) CME
Live Cattle (LC), which has an exchange-set single month position
limit level of 6,300 contracts, but no all-months-combined position
limit; (2) ICE FCOJ-A (OJ), which has an exchange-set single month
position limit level of 3,200 contracts and an all-months-combined
position limit level of 3,200 contracts; and (3) ICE Sugar No. 16,
which has an exchange-set single month position limit level of 1,000
contracts and an all-months-combined position limit level of 1,000
contracts.
---------------------------------------------------------------------------

    With respect to IATP's reference to ``recent notable failures'' in
position accountability levels, IATP appears to be referencing the
events that involve Kraft Foods Group, Inc. and Mondel[emacr]z Global
LLC with respect to the CBOT Wheat (W) contract in 2011\595\ and United
States Oil Fund, LP (``US Oil'') with respect to the WTI contract
earlier this year.\596\ With respect to CBOT Wheat (W), CBOT did not
have position accountability for that contract at that time. With
respect to the WTI contract, IATP does not describe the failure in
position accountability that occurred with respect to US Oil and how
such failure resulted in negative prices in the WTI contract.\597\
---------------------------------------------------------------------------

    \595\ CFTC Charges Kraft Foods Group, Inc. and Mondel[emacr]z
Global LLC with Manipulation of Wheat Futures and Cash Wheat Prices
(Apr. 1, 2015), U.S. Commodity Futures Trading Commission website,
available at https://www.cftc.gov/PressRoom/PressReleases/7150-15.
    \596\ IATP at 5, 10, and 18.
    \597\ Id.
---------------------------------------------------------------------------

    With respect to commenter concerns about the incentives of
exchanges, the Commission believes that, although exchanges may have a
financial interest in increased trading volume, whether speculative or
hedging, the Commission closely oversees the establishment,
modification, and implementation of exchange-set position limits and
position accountability. As noted above, both exchange-set position
limits and position accountability must comply with standards
established by the Commission in final Sec.  150.5(b) including, among
other things, that any such levels be ``necessary and appropriate to
reduce the potential threat of market manipulation or price distortion
of the contract's or the underlying commodity's price or index.'' \598\
Exchanges are also required to submit any rules adopting or modifying
exchange-set position limits or position accountability to the
Commission in advance of implementation, pursuant to part 40 of the
Commission's regulations.\599\ Additionally, exchanges are subject to
DCM Core Principle 5 or SEF Core Principle 6, as applicable, which
establishes additional protections against manipulation and
congestion.\600\ Furthermore, exchange-set position limits and position
accountability will be subject to rule enforcement reviews by the
Commission.\601\ Finally, the Commission notes that exchanges also have
significant financial incentives and regulatory obligations to maintain
well-functioning markets. This observation, which has been supported by
studies, is discussed in greater detail below.\602\
---------------------------------------------------------------------------

    \598\ Final Sec.  150.5(b)(2).
    \599\ 17 CFR part 40.
    \600\ 17 CFR 38.300 and 17 CFR 37.600.
    \601\ The Commission conducts regular rule enforcement reviews
of each exchange's audit trail, trade practice surveillance,
disciplinary, and dispute resolution programs for ongoing compliance
with the Core Principles. See Rule Enforcement Reviews of Designated
Contract Markets, available at https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/dcmruleenf.html.
    \602\ Section II.B.3.iii.b.(3)(iii) (Concern over Exchanges'
Conflict of Interest and Improper Incentives in Maintaining Their
Markets).
---------------------------------------------------------------------------

3. Federal Spot Month Position Limit Levels
i. Summary of the 2020 NPRM--Federal Spot Month Position Limit Levels

[[Page 3316]]

    Under the 2020 NPRM, the Commission proposed applying Federal spot
month position limits to all 25 core referenced futures contracts and
any associated referenced contracts.\603\ The spot month limits would
apply separately to physically-settled and cash-settled referenced
contracts, which meant that a market participant could net positions
across physically-settled referenced contracts and separately net
positions across cash-settled referenced contracts.\604\ However, the
market participant would not be permitted to net cash-settled
referenced contracts with physically-settled referenced contracts.\605\
Proposed Sec.  150.2(e) provided that Federal spot month position limit
levels would be set forth in proposed Appendix E to part 150.\606\ The
proposed spot month position limit levels were as follows:
---------------------------------------------------------------------------

    \603\ As described below, under the 2020 NPRM, Federal non-spot
month position limit levels would only apply to the nine legacy
agricultural contracts and their associated referenced contracts.
The 16 non-legacy core referenced futures contracts and their
associated referenced contracts would be subject to Federal position
limits during the spot month, and exchange-set position limits or
position accountability outside of the spot month.
    \604\ See Section II.B.10.
    \605\ Id.
    \606\ Proposed 150.2(e) additionally provided that market
participants would not need to comply with the Federal position
limit levels until 365 days after publication of the Final Rule in
the Federal Register. For further discussion of the Final Rule's
compliance and effective dates, see Section I.D. (Effective Date and
Compliance Period).
---------------------------------------------------------------------------

BILLING CODE 6351-01-P
[GRAPHIC] [TIFF OMITTED] TR14JA21.007

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

    \607\ As of October 15, 2020.
    \608\ CBOT's existing exchange-set position limit level for CBOT
Wheat (W) is 600 contracts. However, for its May contract month,
CBOT has a variable spot month position limit level that is
dependent upon the deliverable supply that it publishes from the
CBOT's Stocks and Grain report on the Friday preceding the first
notice day for the May contract month. In the last five trading days
of the expiring futures month in May, the speculative spot month
position limit level is: (1) 600 contracts if deliverable supplies
are at or above 2,400 contracts; (2) 500 contracts if deliverable
supplies are between 2,000 and 2,399 contracts; (3) 400 contracts if
deliverable supplies are between 1,600 and 1,999 contracts; (4) 300
contracts if deliverable supplies are between 1,200 and 1,599
contracts; and (5) 220 contracts if deliverable supplies are below
1,200 contracts.
    \609\ The proposed Federal spot month position limit levels for
CME Live Cattle (LC) would feature step-down limit levels similar to
the CME's existing Live Cattle (LC) step-down exchange-set limit
levels. The proposed Federal spot month step down limit level is:
(1) 600 contracts at the close of trading on the first business day
following the first Friday of the contract month; (2) 300 contracts
at the close of trading on the business day prior to the last five
trading days of the contract month; and (3) 200 contracts at the
close of trading on the business day prior to the last two trading
days of the contract month.
    \610\ CME's existing exchange-set limit for Live Cattle (LC) has
the following step-down spot month position limit levels: (1) 600
contracts at the close of trading on the first business day
following the first Friday of the contract month; (2) 300 contracts
at the close of trading on the business day prior to the last five
trading days of the contract month; and (3) 200 contracts at the
close of trading on the business day prior to the last two trading
days of the contract month.
    \611\ CBOT's existing exchange-set spot month position limit
level for Rough Rice (RR) is 600 contracts for all contract months.
However, for July and September, there are step-down limit levels
from 600 contracts. In the last five trading days of the expiring
futures month, the speculative spot month position limit for the
July futures month steps down to 200 contracts from 600 contracts
and the speculative position limit for the September futures month
steps down to 250 contracts from 600 contracts.

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

[[Page 3317]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.008

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

    \612\ IFUS technically does not have an exchange-set spot month
position limit level for ICE Sugar No. 16 (SF). However, it does
have a single-month position limit level of 1,000 contracts, which
effectively operates as a spot month position limit.
    \613\ NYMEX recommended implementing the following step-down
Federal spot month position limit levels with respect to its Light
Sweet Crude Oil (CL) core referenced futures contract: (1) 6,000
contracts as of the close of trading three business days prior to
the last trading day of the contract; (2) 5,000 contracts as of the
close of trading two business days prior to the last trading day of
the contract; and (3) 4,000 contracts as of the close of trading one
business day prior to the last trading day of the contract.
    \614\ In Proposed Sec.  150.3(a)(4), the Commission also
proposed an exemption that provided a Federal conditional spot month
position limit for NYMEX Henry Hub Natural Gas (NG) (``NYMEX NG'')
that permits a market participation that does not hold any positions
in the physically-settled NYMEX NG referenced contract to hold: (1)
10,000 NYMEX NG equivalent-sized referenced contracts per exchange
that lists a cash-settled NYMEX NG referenced contract; and (2) an
additional position in cash-settled economically equivalent swaps
with respect to NYMEX NG that has a notional amount equal to 10,000
contracts.
    \615\ Currently, the cash-settled natural gas contracts are
subject to an exchange-set spot month position limit level of 1,000
equivalent-sized contracts per exchange. Currently, there are three
exchanges that list cash-settled natural gas contracts--NYMEX, IFUS,
and Nodal. As a result, a market participant may hold up to 3,000
equivalent-sized cash-settled natural gas contracts. The exchanges
also have a conditional position limit framework for natural gas.
The conditional position limit permits up to 5,000 cash-settled
equivalent-sized natural gas contracts per exchange that lists such
contracts, provided that the market participant does not hold a
position in the physically-settled NYMEX NG contract.
---------------------------------------------------------------------------

BILLING CODE 6351-01-C

[[Page 3318]]

    The proposed Federal spot month position limit levels for all
referenced contracts were set at 25% or less of updated EDS and were
derived from the recommendations by CME Group,\616\ IFUS,\617\ and
MGEX\618\ for each of their respective core referenced futures
contracts. Federal spot month position limit levels for any contract
with a proposed level above 100 contracts were rounded up to the
nearest 100 contracts from the exchange-recommended limit level or from
25% of updated EDS, as applicable.
---------------------------------------------------------------------------

    \616\ See Summary DSE Proposed Limits, CME Group Comment Letter
(Nov. 26, 2019), available at https://comments.cftc.gov (comment
file for Proposed Rule 85 FR 11596). CME Group formally provided
recommended Federal spot month position limit levels for each of its
core referenced futures contracts.
    \617\ See IFUS--Estimated Deliverable Supply--Softs Methodology,
IFUS Comment Letter (May 14, 2019) and Reproposal--Position Limits
for Derivatives (RIN 3038-AD99) and ICE Comment Letter (Feb. 28,
2017) (attached Sept. 28, 2016 comment letter), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596 and
Proposed Rule 81 FR 96704, respectively). IFUS did not formally
provide recommended Federal spot month position limit levels for
each of IFUS's core referenced futures contracts. However, ICE had
previously recommended setting Federal spot month position limit
levels for IFUS's core referenced futures contracts at 25% of EDS in
its comment letter in connection with the 2016 Reproposal and
Commission staff also confirmed with ICE/IFUS's representatives that
ICE/IFUS's position has remained the same with respect to the
Federal spot month position limit levels since the 2016 Reproposal.
The Commission notes, however, with respect to ICE Cotton No. 2
(CT), that IFUS has submitted a supplemental comment letter
recommending that the Federal spot month position limit level be set
at 900 contracts, instead of at 25% of EDS. See IFUS--Estimated
Deliverable Supply--Cotton Methodology, August 2020, IFUS Comment
Letter (August 27, 2020), available at https://comments.cftc.gov
(comment file for Proposed Rule 85 FR 11596).
    \618\ See Updated Deliverable Supply Data--Potential Position
Limits Rulemaking, MGEX Comment Letter (Aug. 31, 2018), available at
https://comments.cftc.gov (comment file for Proposed Rule 85 FR
11596). MGEX did not formally provide a recommended Federal spot
month position limit level for its core referenced futures contract
(MGEX Hard Red Spring Wheat (MWE)) because it was opposed to
providing a static number for the Federal spot month position limit
level that was based on a fixed formula. Instead, MGEX sought to be
able to adjust the Federal spot month position limit level based on
updated EDS figures and market conditions. However, MGEX stated that
the Federal spot month position limit level for MGEX Hard Red Spring
Wheat (MWE) should be no lower than 1,000 contracts and also
submitted calculations for setting the Federal spot month position
limit level at 25% of EDS. Furthermore, MGEX supported setting the
Federal spot month position limit level for MGEX Hard Red Spring
Wheat (MWE) at 25% of EDS level in its comment letter. MGEX at 3.
---------------------------------------------------------------------------

    As discussed in the 2020 NPRM, the existing Federal spot month
position limit levels have remained constant for decades, but the
markets have changed significantly during that time period.\619\ As a
result, some of the deliverable supply estimates on which the existing
Federal spot month position limits were originally based were decades
out of date.\620\
---------------------------------------------------------------------------

    \619\ 85 FR at 11625.
    \620\ Id.
---------------------------------------------------------------------------

ii. Summary of the Commission Determination--Federal Spot Month
Position Limit Levels
a. Federal Spot Month Position Limit Levels Adopted as Proposed, Except
for ICE Cotton No. 2 (CT) and NYMEX Henry Hub Natural Gas (NG)
    The Commission is adopting the Federal spot month position limit
levels as proposed, except for modifications with respect to ICE Cotton
No. 2 (CT) and NYMEX NG. Specifically, the Federal spot month position
limit levels for all 25 core referenced futures contracts are set at or
below 25% of EDS, except for the cash-settled NYMEX NG referenced
contracts.
    With respect to ICE Cotton No. 2 (CT), the Commission is adopting a
lower Federal spot month position limit level of 900 contracts instead
of the proposed 1,800 contracts. The reasons for this change are
discussed in Section II.B.3.v.
    With respect to NYMEX NG, the Final Rule is adopting the same
Federal spot month position limit level as proposed in the 2020 NPRM,
but the Final Rule is applying the cash-settled portion of the Federal
spot month position limit for NYMEX NG separately for each exchange
that lists a cash-settled NYMEX NG referenced contract, as well as the
cash-settled NYMEX NG OTC swaps market, rather than on an aggregate
basis across all exchanges and the OTC swaps market as it does for each
of the other core referenced futures contracts. The reasons for this
change are discussed in Section II.B.3.vi.
(1) The Final Rule Achieves the Four Statutory Objectives in CEA
Section 4a(a)(3)(B)
    Before summarizing and addressing comments below regarding the
proposed Federal spot month position limit levels, the Commission
states at the outset that the final Federal spot month position limit
levels, in conjunction with the rest of the Federal position limits
framework, will achieve the four policy objectives in CEA section
4a(a)(3)(B). Namely, they will: (1) Diminish, eliminate, or prevent
excessive speculation; (2) deter and prevent market manipulation,
squeezes, and corners; (3) ensure sufficient market liquidity for bona
fide hedgers; and (4) ensure that the price discovery function of the
underlying market is not disrupted.\621\
---------------------------------------------------------------------------

    \621\ 7 U.S.C. 6a(a)(3)(B).
---------------------------------------------------------------------------

    In achieving these four statutory objectives, the Commission first
believes that the Federal spot month position limit levels are low
enough to prevent excessive speculation and also protect price
discovery. Setting the Federal spot month position limit levels at or
below 25% of EDS is critically important because it would be difficult,
in the absence of other factors, for a market participant to corner or
squeeze a market if the participant holds less than or equal to 25% of
deliverable supply.\622\ This is because, among other things, any
potential economic gains resulting from the manipulation may be
insufficient to justify the potential costs, including the costs of
acquiring and ultimately offloading the positions used to effectuate
the manipulation.\623\ By restricting positions to a proportion of the
deliverable supply of the commodity, the Federal spot month position
limits require that no one speculator can hold a position larger than
25% of deliverable supply, reducing the possibility that a market
participant can use derivatives, including referenced contracts, to
affect the price of the cash commodity (and vice versa). Limiting a
speculative position based on a percentage of deliverable supply also
restricts a speculative trader's ability to establish a leveraged
position in cash-settled derivative contracts, reducing that trader's
incentive to manipulate the cash settlement price. Further, by
finalizing levels that are sufficiently low to prevent market
manipulation, including corners and squeezes, the levels also help
ensure that the price discovery function of the underlying market is
not disrupted, because markets that are free from corners, squeezes,
and other manipulative activity reflect fundamentals of supply and
demand, rather than artificial pressures.
---------------------------------------------------------------------------

    \622\ 85 FR at 11625-11626.
    \623\ Id.
---------------------------------------------------------------------------

    The Commission also believes that the Federal spot month position
limit levels adopted herein are high enough to ensure that there is
sufficient market liquidity for bona fide hedgers.\624\ The

[[Page 3319]]

Commission has not observed a general lack of liquidity for bona fide
hedgers in the markets for the 25 core referenced futures contracts,
which are some of the most liquid markets overseen by the
Commission.\625\ By generally increasing the existing Federal spot
month position limit levels for the nine legacy agricultural contracts
based on updated data, and by adopting Federal spot month position
limit levels that are generally equal to or higher than existing
exchange-set levels for the 16 non-legacy core referenced futures
contracts, the Commission does not expect the final Federal position
limit levels to reduce liquidity for bona fide hedgers.\626\
---------------------------------------------------------------------------

    \624\ CEA section 4a(a)(1) requires the Commission to address
``[e]xcessive speculation . . . causing sudden or unreasonable
fluctuations or unwarranted [price] changes . . . .'' Speculative
activity that is not ``excessive'' in this manner is not a focus of
CEA section 4a(a)(1). Rather, speculative activity may generate
liquidity, including liquidity for bona fide hedgers, by enabling
market participants with bona fide hedging positions to trade more
efficiently. Setting position limits too low could result in reduced
liquidity, including for bona fide hedgers. 85 FR at 11626.
    \625\ 85 FR at 11626. The Commission notes that it has observed
a brief period of illiquidity during the early part of the spot
month for ICE Cotton No. 2 (CT), which is discussed in Section
II.B.3.v.
    \626\ Id. Eighteen of the core referenced futures contracts will
have Federal spot month position limit levels that are higher than
current exchange-set spot month position limit levels. CME Live
Cattle (LC), COMEX Gold (GC), COMEX Copper (HG), CBOT Oats (O),
NYMEX Platinum (PL), and NYMEX Palladium (PA) will have Federal spot
month position limit levels that are equal to the current exchange-
set spot month position limit levels. Finally, although currently
there is technically no exchange-set spot month position limit for
ICE Sugar No. 16 (SF), this contract is subject to a single month
position limit level of 1,000 contracts, which effectively serves as
its spot month position limit level. As a result, the Federal spot
month position limit level for ICE Sugar No. 16 (SF) will
effectively be higher than its current exchange-set spot month
position limit level.
---------------------------------------------------------------------------

    Furthermore, the Commission has previously stated that ``there is a
range of acceptable limit levels,'' \627\ and continues to believe that
is true.\628\ There is no single ``correct'' spot month position limit
level for a given contract, and it is likely that a number of limit
levels within a certain range could effectively achieve the four policy
objectives in CEA section 4a(a)(3)(B).\629\ The Commission believes
that the spot month position limit levels adopted herein fall within a
range of acceptable levels.\630\ This determination is based on the
Commission's experience in administering its own Federal position
limits regime, overseeing exchange-set position limits, and being
closely involved in determining the EDS figures underlying the position
limit levels, as well as the fact that the Federal spot month position
limit levels are generally set at or below 25% of EDS.\631\
---------------------------------------------------------------------------

    \627\ See, e.g., Revision of Federal Speculative Position
Limits, 57 FR 12766, 12770 (Apr. 13, 1992).
    \628\ 85 FR at 11627.
    \629\ Id.
    \630\ Id.
    \631\ The exception to this is the cash-settled NYMEX NG
referenced contracts, which is discussed in detail in Section
II.B.3.vi.
---------------------------------------------------------------------------

    In addition, the Federal spot month position limit levels are
properly calibrated to account for differences between markets. For
example, the Commission considered the unique delivery mechanisms for
CME Live Cattle (LC) and the NYMEX metals core referenced futures
contracts in calibrating the Federal spot month position limit levels
for those contracts.\632\ The Commission also considered the volatility
of the EDS for COMEX Copper (HG) in determining its limit level.\633\
Furthermore, with respect to NYMEX NG, the Commission, in fine-tuning
the proposed limits, considered: the underlying natural gas
infrastructure vis-[agrave]-vis commodities underlying other energy
core referenced futures contracts; the relatively high liquidity in the
cash-settled markets; and the public comments received in response to
the 2020 NPRM.\634\
---------------------------------------------------------------------------

    \632\ 85 FR at 11627.
    \633\ Id. at 11628.
    \634\ Id.
---------------------------------------------------------------------------

(2) Federal Position Limit Levels Operate as Ceilings
    Finally, consistent with the 2020 NPRM and the Final Rule's
position limits framework that leverages existing exchange-level
programs and expertise, the Federal position limit levels operate as
ceilings. This framework, with Federal spot month limits layered over
exchange-set limits, achieves the Commission's objectives in preventing
market manipulation, squeezes, corners, and excessive speculation while
also ensuring sufficient market liquidity for bona fide hedgers and
avoiding a disruption of the price discovery function of the underlying
market. This is, in part, because a layered approach facilitates more
expedited responses to rapidly evolving market conditions through
exchange action. Under the Final Rule, exchanges are required to set
their own spot month position limit levels at or below the respective
Federal spot month position limit levels.\635\ They are also permitted
to adjust those levels based on market conditions as long as they are
set at or below the Federal spot month position limit levels. Exchanges
may also impose liquidity and concentration surcharges to initial
margin if they are vertically integrated with a derivatives clearing
organization.\636\ All of these exchange actions can be implemented
significantly faster than Commission action, and an immediate response
is critical in managing rapidly evolving market conditions. As a
result, by having the Federal position limit levels function as
ceilings, the position limits framework adopted in this Final Rule will
allow exchanges to lower or raise their position limit levels across a
greater range of acceptable Federal position limit levels, which will
facilitate a faster response to more varied market conditions than if
the Federal position limit levels did not operate as ceilings.
---------------------------------------------------------------------------

    \635\ Final Sec.  150.5(a). For the nine legacy agricultural
contracts, the Final Rule also requires exchanges to set their own
non-spot month position limit levels at or below the respective
Federal non-spot month position limit level. For the 16 non-legacy
core referenced futures contracts, final Sec.  150.5(b)(2) requires
exchanges to implement either position limits or position
accountability during the non-spot month for physical commodity
derivatives that are not subject to Federal position limits ``at a
level that is necessary and appropriate to reduce the potential
threat of market manipulation or price distortion of the contract's
or the underlying commodity's price or index.''
    \636\ 85 FR at 11633.
---------------------------------------------------------------------------

iii. Comments and Discussion of Final Rule--Federal Spot Month Position
Limit Levels
    Many commenters supported the proposed Federal spot month position
limit levels and the method by which the Commission determined those
limit levels.\637\ However, some commenters raised concerns or
otherwise commented with respect to: (1) The proposed Federal spot
month position limit levels and the methodology used to arrive at those
levels generally; (2) the Commission's review of exchanges' EDS figures
and their recommended spot month position limit levels; (3) a lack of a
phase-in for Federal spot month position limit levels; (4) the proposed
spot month position limit level for ICE Cotton No. 2 (CT); (5) the
proposed spot month position limit level for NYMEX NG and other issues
relating to NYMEX NG; and (6) the issue of parity among the proposed
Federal spot month position limit levels for the three wheat core
referenced futures contracts. The Commission will discuss each of these
issues, the related comments, and the Commission's corresponding
determination in greater detail below.
---------------------------------------------------------------------------

    \637\ See ASR at 2; CCI at 2; Shell at 3; EEI/EPSA at 3; Suncor
at 2, CEWG at 3; COPE at 2, 4; SIFMA AMG at 3-4; MGEX at 1; 3; MFA/
AIMA at 1; AFIA at 1; CMC at 6; NGFA at 3; PIMCO at 6; CME Group at
4-6; NOPA at 1; FIA at 2; and AQR at 8-10.
---------------------------------------------------------------------------

a. Federal Spot Month Position Limit Levels and the Commission's
Underlying Methodology, Generally
(1) Comments--Federal Spot Month Position Limit Levels and the
Commission's Underlying Methodology, Generally
    Better Markets objected to the Commission's proposed Federal spot
month position limit levels and

[[Page 3320]]

suggested that there should be a presumption that the Federal spot
month position limit levels be set at 10% of EDS, which could be
adjusted as needed.\638\ Another commenter, PMAA, requested Federal
spot month position limit levels of less than 25% of EDS, but did not
provide a specific level or a range of levels.\639\ Other commenters
believed that the proposed spot month levels were generally too high
merely because they were higher than existing levels.\640\
---------------------------------------------------------------------------

    \638\ Better Markets at 41.
    \639\ PMAA at 2.
    \640\ AFR at 2 and Rutkowski at 2.
---------------------------------------------------------------------------

    In support of its suggestion, Better Markets claimed that,
``speculative trading has been sufficient to accommodate legitimate
hedging at currently permissible levels,'' noting that the Commission
has previously stated that ``open interest and trading volume have
reached record levels'' and ``the 25 [core referenced futures
contracts] represent some of the most liquid markets overseen by the
[CFTC].'' \641\ Better Markets also claimed that, if the Commission
conducted a study as to whether the increase in open interest for
``particular [core referenced futures contracts] would warrant lower
speculative position limits,'' those studies would have shown that
substantially lower position limit levels would be warranted.\642\
Better Markets also took issue with the Commission's 25% or less of EDS
formula as a basis for determining Federal spot month position limit
levels by stating, ``while deliverable supply must be one key measure
for constraining speculation, it is not sufficient to address all
statutory objectives for Federal position limits.'' \643\
---------------------------------------------------------------------------

    \641\ Better Markets at 37-38.
    \642\ Id. at 38.
    \643\ Id. at 37.
---------------------------------------------------------------------------

(2) Discussion of Final Rule--Federal Spot Month Position Limit Levels
and the Commission's Underlying Methodology, Generally
    The Commission declines to adopt a 10% of EDS across-the-board
Federal spot month position limit level, or a general reduction in
Federal spot month position limit levels to a level below 25% of EDS
for those core referenced futures contracts with a proposed position
limit level set at 25% of EDS.
    In response to Better Markets' suggestion to adopt Federal spot
month position limit levels set at 10% of EDS, the Commission first
notes that, although Better Markets provided some arguments for why the
Commission should consider lower Federal position limit levels, Better
Markets did not provide any support for the 10% level that it
suggested, including any support for the comment letter's implication
that setting limits at or below 25% of EDS is insufficient to prevent
corners and squeezes. Likewise, PMAA did not provide any support for
adopting Federal spot month position limit levels of less than 25% of
EDS, other than claiming that a ``spot month limit of 25 percent of
deliverable supply is not sufficiently aggressive to deter excessive
speculation'' and ``prevent market manipulation.'' \644\
---------------------------------------------------------------------------

    \644\ PMAA at 2.
---------------------------------------------------------------------------

    The 25% or less of EDS formula that the Commission is utilizing,
and has utilized for many years, is a longstanding methodology that was
adopted to address corners and squeezes based on the Commission's
experience.\645\ Also, as described in detail above, the Commission
believes that the position limits framework in both the 2020 NPRM and
the Final Rule that incorporates the 25% or less of EDS formula
achieves the Commission's statutory objectives in preventing market
manipulation, squeezes, corners, and excessive speculation while also
ensuring sufficient market liquidity for bona fide hedgers and avoiding
a disruption of the price discovery function of the underlying market.
---------------------------------------------------------------------------

    \645\ See e.g., Chicago Board of Trade Futures Contracts in Corn
and Soybeans; Order To Change and To Supplement Delivery
Specifications, 62 FR 60831, 60838 (Nov. 13, 1997) (``The 2,400-
contract level of deliverable supplies constitutes four times the
speculative position limit for the contract, a benchmark
historically used by the Commission's staff in analyzing the
adequacy of deliverable supplies for new contracts'').
---------------------------------------------------------------------------

    In addition, the Final Rule's position limits framework further
addresses the statutory objectives of CEA section 4a(a)(3)(B) by
utilizing the Federal position limit levels as a ceiling and leveraging
the exchanges' expertise and experience in determining and adjusting
exchange-set position limit levels for their referenced contracts as
appropriate, as long as they are under the Federal position limit
levels.\646\ This exchange action can be effectuated significantly
faster than a Federal position limit level adjustment, which requires
the Commission to engage in a rulemaking process that includes a
notice-and-comment period. As a result, compared to the alternative
approaches suggested by commenters, this framework will generally
facilitate a more expedited response to a more varied set of market
conditions, because the exchanges can lower or raise their position
limit levels across a greater range of acceptable Federal position
limit levels.
---------------------------------------------------------------------------

    \646\ See 85 FR at 11629, 11633.
---------------------------------------------------------------------------

    In response to Better Markets' claim that the Federal spot month
position limit levels should not be adjusted upward as a result of the
higher open interest levels and trading volumes that exist today
because they demonstrate that there are sufficient levels of
speculation and liquidity under the current rules, the Commission first
notes that Better Markets did not provide a methodology based on open
interest and/or trading volume that the Commission should consider as
an alternative to the Commission's 25% or less of EDS approach.
    Regardless, the Commission believes that EDS is the more
appropriate basis by which the Commission should adjust Federal spot
month position limit levels, rather than open interest and/or trading
volume, because the likelihood of a corner or squeeze occurring in the
spot month is more closely correlated with the percentage of
deliverable supply that a market participant controls. Corners and
squeezes are possible in the spot month only because of the imminent
prospect of making or taking delivery in the physically-settled
contract. Therefore, understanding the amount of deliverable supply in
the spot month is critically important.\647\ Accordingly, the
Commission, in consultation with the exchanges, estimated the amount of
the underlying commodity available at the specified delivery points in
the core referenced futures contract that meet the quality standards
set forth in the core referenced futures contract's terms and
conditions in order to understand the size of the relevant commodity
market underlying each core referenced futures contract. Once the
Commission determined that information in the form of an EDS figure,
the Commission was able to determine whether a Federal spot month
position limit level would advance the statutory objectives of CEA
section 4a(a)(3)(B), including preventing corners and squeezes.
---------------------------------------------------------------------------

    \647\ Deliverable supply is the quantity of the commodity that
meets contract specifications that is reasonably expected to be
readily available to short traders and salable by long traders at
its market value in normal cash-marketing channels at the contract's
delivery points during the specified delivery period, barring
abnormal movements in interstate commerce. 17 CFR part 38, Appendix
C.
---------------------------------------------------------------------------

    A spot month position limit methodology based on open interest and/
or trading volume does not take into account the central factors that
make corners and squeezes possible (i.e., the imminent prospect of
delivery on a physically-settled contract and the deliverable supply of
an underlying

[[Page 3321]]

commodity). Also, open interest and trading volume in an expiring
physically-settled contract generally declines as the contract nears
expiration, as most traders are not looking to make or take delivery of
the underlying commodity. As a result, they would likely not provide
additional insights that would materially inform the Commission's
determination of Federal spot month position limit levels in a way that
is responsive to CEA section 4a(a)(3)(B).
    Furthermore, the Commission did not adjust the Federal spot month
position limit levels merely by applying a percentage to EDS. As
discussed in further detail below, the Commission proposed Federal spot
month position limit levels only after the Commission: (1) Extensively
reviewed and verified the underlying methodology for each core
referenced futures contract's EDS figure; and (2) reviewed the
recommended Federal spot month position limit levels from exchanges
that are thoroughly knowledgeable about their own respective core
referenced futures contracts' markets in order to determine whether
they advanced the policy objectives of CEA section 4a(a)(3)(B). Also,
in adopting the final Federal spot month position limit levels, the
Commission also considered comments from market participants, including
comments from the end-users of these markets.
    On a related note, Better Markets and PMAA appear to have
misunderstood the proposed Federal spot month position limit levels and
the methodology on which they were based.\648\ The Commission did not
propose an across-the-board Federal level set at 25% of EDS. As noted
above, the Commission's methodology sets Federal spot month position
limit levels at or below 25% of EDS for each particular commodity.\649\
As a result, under the Final Rule, only seven of 25 core referenced
futures contracts have Federal spot month position limit levels at 25%
of EDS. With respect to the 18 remaining core referenced futures
contracts, all 18 are set below 20% of EDS, 14 are below 15% of EDS,
and eight are already below the 10% of EDS threshold recommended by
Better Markets.\650\ With respect to the petroleum core referenced
futures contracts with which PMAA is most likely concerned (i.e., NYMEX
Light Sweet Crude Oil (CL), NYMEX NYH ULSD Heating Oil (HO), and NYMEX
RBOB Gasoline (RB)), all three levels are at or below 11.16% of EDS.
---------------------------------------------------------------------------

    \648\ See Better Markets at 39-40 and PMAA at 2.
    \649\ 85 FR at 11624.
    \650\ For CME Live Cattle (LC) and NYMEX Light Sweet Crude Oil
(CL), which have step-down Federal spot month position limit levels,
these percentages were calculated using the first and highest step.
---------------------------------------------------------------------------

b. Commission Review of Exchanges' EDS Figures and Recommended Federal
Spot Month Position Limit Levels
(1) Additional Background Information--Commission Review of Exchanges'
EDS Figures and Recommended Federal Spot Month Position Limits
    In connection with the 2020 NPRM, the Commission received
deliverable supply estimates and recommended Federal spot month
position limit levels from CME Group, ICE, and MGEX for their
respective core referenced futures contracts.\651\ Commission staff
reviewed these recommendations and conducted its own analysis of them
using its own experience, observations, and knowledge.\652\ This
included closely and independently assessing the EDS figures upon which
the recommended limit levels were based.\653\ In reviewing the
recommended spot month position limit levels, the Commission considered
the four policy objectives in CEA section 4a(a)(3)(B) and preliminarily
determined that none of the recommended levels appeared improperly
calibrated such that they might hinder liquidity for bona fide hedgers
or invite excessive speculation, manipulation, corners, or squeezes,
including activity that could impact price discovery.\654\ As a result,
the Commission proposed to adopt each of the exchange-recommended spot
month position limit levels as Federal spot month position limit
levels.\655\
---------------------------------------------------------------------------

    \651\ See supra n.616, n.617, and n.618.
    \652\ 85 FR at 11625.
    \653\ Id. at 11625-11626.
    \654\ Id. at 11625.
    \655\ Id. Also, a more detailed discussion about the methodology
employed by the Commission in determining proposed Federal spot
month position limit levels can be found at 85 FR at 11625-11628.
---------------------------------------------------------------------------

(2) Comments--Commission Review of Exchanges' EDS Figures and
Recommended Federal Spot Month Position Limit Levels
    The Commission received several comments concerning the
Commission's review and verification of the EDS figures and the
rationale used by the Commission in accepting the spot month position
limit levels that were recommended by exchanges.
    One commenter, EPSA, supported adopting CME Group's EDS figures for
energy commodities, stating that exchanges are in the ``best position
to provide accurate and current information on the markets.'' \656\
However, other commenters expressed concerns. Better Markets commented
that the Commission failed to ``explain the means by which the DCM-
provided data was collected and later `verified' in arriving at
proposed spot month position limits, nor the dependencies of the DCM
methodologies employed to arrive at those estimates.'' \657\ Similarly,
IATP commented that the 2020 NPRM provided insufficient detail about
how the Commission concluded that the exchange-recommended spot month
position limit levels were appropriate and how the Commission
determined that the EDS figures submitted by the exchanges were
reasonable.\658\ On a related note, PMAA commented that the exchanges
should not be providing EDS figures and that the Commission instead
should ``retain exclusive discretion in determining `deliverable
supply' for the purposes of establishing speculative position limits''
and ``consult with . . . market experts when determining `deliverable
supply' and formulating limits.'' \659\ Furthermore, CME Group
recommended ``that the Commission not adopt final spot month position
limit levels at 25% of deliverable supply as a rigid formula and . . .
work with the exchange to determine an appropriate limit based on the
market dynamics.'' \660\ Likewise, MGEX commented that it
``fundamentally disagrees with the 25% formulaic calculation for the
spot month position, especially if a limit is codified by rule and does
not allow for adjustments as deliverable supply changes.'' \661\
---------------------------------------------------------------------------

    \656\ EPSA at 3.
    \657\ Better Markets at 36.
    \658\ IATP at 9.
    \659\ PMAA at 2-3 (these market experts include governmental
entities, such as the Department of Energy's Energy Information
Administration and the U.S. Department of Agriculture, academics,
and representatives of industries that produce, refine, process,
store, transport, market, and consume the underlying commodity).
    \660\ CME Group at 5-6. Specifically, CME Group believed that
using a 25% of EDS formula ``as a fixed formula for establishing
recommended limits . . . is unsound as a matter of policy and
incompatible with the Commission's statutory authority to determine
that a specific position limit is necessary and set it at an
appropriate level.''
    \661\ Updated Deliverable Supply Data--Potential Position Limits
Rulemaking, MGEX Comment Letter (Aug. 31, 2018) at 2, available at
https://comments.cftc.gov (comment file for Proposed Rule 85 FR
11596).
---------------------------------------------------------------------------

    Finally, Better Markets also raised concerns about the incentives
of exchanges as public, for-profit enterprises, presumably, in part,
because the exchanges submitted the EDS figures, upon which the Federal
spot month position limit levels are

[[Page 3322]]

based.\662\ Specifically, Better Markets stated that exchanges ``must
balance the interests of their shareholders against the public interest
and their commercial interests in market integrity'' and, as a result,
may be incentivized to permit ``speculation--even excess speculation,''
because it ``is a key revenue driver.'' \663\
---------------------------------------------------------------------------

    \662\ Better Markets at 22.
    \663\ Id. at 22-23. Better Markets referenced CME Group Inc.'s
Form 10-K filings, which stated that ``[t]he adoption and
implementation of position limits rules . . . could have a
significant impact on our commodities business if Federal rules for
position limit management differ significantly from current
exchange-administered rules.''
---------------------------------------------------------------------------

(3) Discussion of Final Rule--Commission Review of Exchanges' EDS
Figures and Recommended Federal Spot Month Position Limit Levels
    The Commission declines to utilize a different methodology and
process for determining EDS figures and Federal spot month position
limit levels.
(i) Determination of EDS Figures
    In response to comments concerning the Commission's EDS
determinations, the Commission notes that its process for reviewing and
verifying the EDS figures provided by exchanges entailed extensive
independent review and analysis of each EDS figure and its underlying
methodology, and the Commission retained exclusive discretion to
determine the reasonableness of the EDS figures. This review and
analysis by Commission staff occurred prior to the exchanges' formal
EDS submissions, during which time Commission staff verified that each
exchange's EDS figure for each commodity underlying a core referenced
futures contract was reasonable. In doing so, Commission staff
confirmed that the methodology and the data \664\ for the underlying
commodity for each core referenced futures contract reflected the
commodity characteristics \665\ described in the core referenced
futures contract's terms and conditions, while also recognizing that
more than one methodology and one set of assumptions, allowances, and
data sources could result in a reasonable EDS figure for a commodity.
In addition, Commission staff replicated the exchanges' EDS figures
using the methodology provided. For some commodities, Commission staff
also determined the reasonableness of an exchange's EDS by constructing
an alternate EDS using an alternate methodology using other available
data and comparing that internal EDS with the exchange's EDS. In some
cases, Commission staff consulted industry experts and market
participants to verify that the assumptions and allowances used by the
EDS methodology were reasonable and that the EDS figure itself was
reasonable.
---------------------------------------------------------------------------

    \664\ The data underlying the EDS figures are from sources that
Commission staff had determined as accurately representing the
underlying commodity. These were typically from publicly available
sources. For example, these include data published by the U.S.
Department of Energy for NYMEX Light Sweet Crude Oil (CL), data
published by the U.S. Department of Agriculture for CBOT Soybeans
(S), data published by the Florida Department of Citrus for ICE
FCOJ-A (OJ), and data published by CME Group concerning the gold
inventories at its approved depositories for COMEX Gold (GC).
Furthermore, most data sources were also adjusted based on
interviews with market experts and market participants in order to
better reflect the actual deliverable supply by taking into
consideration the amount of time it takes to move the commodity to/
from the delivery points, quality standards, and supplies that are
not readily available due to being tied up in long-term contracts.
    \665\ These characteristics are provided in the guidance in
section (b)(1)(i) of Appendix C to part 38, and include, among other
things, the commodity's quality and grade specifications, delivery
points (including storage capacity), historic storage levels,
processing capacity, and adjustments to remove supply that is
committed for long-term contracts and not available to underlie a
futures contract. The verified EDS for each commodity reflects the
quantity of the commodity that can be reasonably expected to be
readily available to short traders and salable by long traders at
its market value in normal cash-marketing channels at the contract's
delivery points during the specified delivery period, barring
abnormal movements in interstate commerce.
---------------------------------------------------------------------------

    When Commission staff identified any issues during the review
process, they raised those concerns with the exchanges in order to
revise the methodologies, including the assumptions, allowances, and
data sources used therein. As a result, when the exchanges formally
submitted their EDS figures, both the EDS figures and the methodologies
underlying their calculations had been thoroughly reviewed and analyzed
by Commission staff, and some had been refined based on input from
Commission staff. The EDS figures and the methodologies used were
published in the comment section of the 2020 NPRM on the Commission's
website and have been available for review by the public.\666\
---------------------------------------------------------------------------

    \666\ See IFUS--Estimated Deliverable Supply--Softs Methodology,
IFUS Comment Letter (May 14, 2019); Updated Deliverable Supply
Data--Potential Position Limits Rulemaking, MGEX Comment Letter
(Aug. 31, 2018); and Summary DSE Proposed Limits, CME Group Comment
Letter (Nov. 26, 2019) (CME Group also provided separate EDS
methodology submissions for each of its 18 core referenced futures
contracts, which can also be found in the comment file), all
available at https://comments.cftc.gov (comment file for Proposed
Rule 85 FR 11596).
---------------------------------------------------------------------------

    Additionally, for the past 10 years, commenters to previous Federal
position limits rule proposals have consistently recommended that the
EDS figures should be supplied by exchanges, given the exchanges'
expertise with their own contract markets and because of the experience
they have in producing such figures.\667\ The Commission has agreed and
continues to agree with those comments. As a result, Commission staff
has also previously worked in collaboration with the exchanges as part
of an iterative process to review and refine the methodologies,
assumptions, allowances, and data sources used in calculating the EDS
figure for each commodity underlying a core referenced futures
contract.
---------------------------------------------------------------------------

    \667\ See e.g. 81 FR at 96754, n.495 (listing the commenters
that expressed the view that exchanges are best able to determine
appropriate spot month position limits and that the Commission
should defer to their expertise).
---------------------------------------------------------------------------

(ii) Determination of Federal Spot Month Position Limit Levels
    In response to comments concerning the Commission's determination
of the Federal spot month position limit levels, the Commission first
notes that exchanges were invited to submit their recommended Federal
spot month position limit levels for their respective core referenced
futures contracts. In response, CME Group,\668\ ICE,\669\ and MGEX
\670\ provided recommended levels for their core referenced futures
contracts.
---------------------------------------------------------------------------

    \668\ See supra n.616.
    \669\ See supra n.617.
    \670\ See supra n.618.
---------------------------------------------------------------------------

    When deciding whether to adopt, reject, or modify the exchange-
recommended position limit levels, the Commission considered a variety
of factors, including whether the recommended level: (i) Was consistent
with the 25% or less of EDS formula, as provided in the guidance in
Appendix C to part 38; (ii) reflected changes in the EDS of the
underlying commodity and trading activity in the core referenced
futures contract; and (iii) achieved the four policy objectives in CEA
section 4a(a)(3)(B). Furthermore, as described in detail above, the
Commission also thoroughly reviewed the methodologies for determining
the EDS figures upon which the exchange-recommended spot month position
limit levels are based.
    Finally, the Commission also considered input from market
participants concerning the EDS figures and the exchange-recommended
Federal position limit levels in recalibrating the Federal position
limit levels, as it has done for ICE Cotton No. 2 (CT) and NYMEX Henry
Hub Natural Gas (NG) in this Final Rule, as discussed further below.

[[Page 3323]]

(iii) Concern Over Exchanges' Conflict of Interest and Improper
Incentives in Maintaining Their Markets
    In response to Better Markets' concern about the incentives of
exchanges as public, for-profit businesses, as a preliminary matter,
the Commission acknowledges that exchanges have a financial interest in
increased trading volume, whether speculative or hedging, and, as a
result, may be incentivized to increase EDS figures and recommend
higher position limit levels. However, as previously discussed, the
Commission independently assessed and verified the exchanges' EDS
estimates. Specifically, the Commission: (1) Worked closely with the
exchanges to independently verify that all EDS methodologies and
figures were reasonable; \671\ and (2) reviewed each exchange-
recommended level for compliance with the requirements established by
the Commission and/or by Congress, including those in CEA section
4a(a)(3)(B).\672\ Also, as discussed at length above, the Commission
conducted its own analysis of the exchange-recommended Federal spot
month position limit levels and determined that the levels adopted
herein: (1) Are low enough to diminish, eliminate, or prevent excessive
speculation and also protect price discovery; (2) are high enough to
ensure that there is sufficient market liquidity for bona fide hedgers;
(3) fall within a range of acceptable limit levels; and (4) are
properly calibrated to account for differences between markets. Thus,
the Commission believes that the impact, if any, of such financial
incentives were sufficiently mitigated through the Commission's close
review of the methodology underlying the EDS figures, the EDS figures
themselves, and the recommended Federal position limit levels.
---------------------------------------------------------------------------

    \671\ As discussed in detail above, the verification involved:
Confirming that the methodology and data for the underlying
commodity reflected the commodity characteristics described in the
core referenced futures contract's terms and conditions; replicating
exchange EDS figures using the methodology provided by the exchange;
and working with the exchanges to revise the methodologies as
needed.
    \672\ See Section II.B.3.iii.b.(3).
---------------------------------------------------------------------------

    The Commission also notes that exchanges have significant
incentives and obligations to maintain well-functioning markets as
self-regulatory organizations that are themselves subject to regulatory
requirements. Specifically, the DCM and SEF Core Principles, as
applicable, require exchanges to, among other things, list contracts
that are not readily susceptible to manipulation, and surveil trading
on their markets to prevent market manipulation, price distortion, and
disruptions of the delivery or cash-settlement process.\673\ Exchanges
also have significant incentives to maintain well-functioning markets
to remain competitive with other exchanges. Market participants may
choose exchanges that are less susceptible to sudden or unreasonable
fluctuations or unwarranted changes caused by excessive speculation or
corners, squeezes, and manipulation, which could, among other things,
harm the price discovery function of the commodity derivative contracts
and negatively impact the delivery of the underlying commodity, bona
fide hedging strategies, and market participants' general risk
management.\674\ Furthermore, several academic studies, including one
concerning futures exchanges and another concerning demutualized stock
exchanges, support the conclusion that exchanges are able to both
satisfy shareholder interests and meet their self-regulatory
organization responsibilities.\675\
---------------------------------------------------------------------------

    \673\ 17 CFR 38.200; 17 CFR 38.250; 17 CFR 37.300; and 17 CFR
37.400.
    \674\ Kane, Stephen, Exploring price impact liquidity for
December 2016 NYMEX energy contracts, n.33, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@economicanalysis/documents/file/oce_priceimpact.pdf.
    \675\ See David Reiffen and Michel A. Robe, Demutualization and
Customer Protection at Self-Regulatory Financial Exchanges, Journal
of Futures Markets, Vol. 31, 126-164, Feb. 2011 (in many
circumstances, an exchange that maximizes shareholder (rather than
member) income has a greater incentive to aggressively enforce
regulations that protect participants from dishonest agents); and
Kobana Abukari and Isaac Otchere, Has Stock Exchange Demutualization
Improved Market Quality? International Evidence, Review of
Quantitative Finance and Accounting, Dec 09, 2019, https://doi.org/10.1007/s11156-019-00863-y (demutualized exchanges have realized
significant reductions in transaction costs in the post-
demutualization period).
---------------------------------------------------------------------------

iv. Phase-In of Federal Spot Month Position Limit Levels
a. Summary of the 2020 NPRM--Phase-In of Federal Spot Month Position
Limit Levels
    The 2020 NPRM did not include a phase-in mechanism in which the
Commission would gradually adjust the Federal position limit levels
over a period of time. As a result, under the 2020 NPRM, the proposed
Federal spot month position limit levels for all core referenced
futures contracts would immediately go into effect on the proposed
effective date.
b. Summary of the Commission Determination--Phase-In of Federal Spot
Month Position Limit Levels
    The Commission declines to adopt a formal phase-in for the Federal
spot month position limit levels, because it believes that the markets
would operate in an orderly fashion with the Federal position limit
levels adopted under this Final Rule. However, as a practical matter,
the Commission notes that the operative spot month position limit
levels for market participants trading in exchange-listed referenced
contracts will be the exchange-set spot month position limit levels,
which will continue to remain at their existing levels unless and until
an exchange affirmatively modifies its exchange-set spot month position
limit levels pursuant to part 40 of the Commission's regulations.\676\
---------------------------------------------------------------------------

    \676\ 17 CFR part 40.
---------------------------------------------------------------------------

c. Comments--Phase-In of Federal Spot Month Position Limit Levels
    The Commission received comments requesting that the Commission
``consider phasing in these adjustments for agricultural commodities to
assess the impacts of increasing limits on contract performance.''
\677\ CMC also noted that, ``A phased approach could provide market
participants, exchanges, and the Commission a way to build in scheduled
pauses to evaluate the effects of increased limits, thereby fostering
confidence and trust in the markets.'' \678\
---------------------------------------------------------------------------

    \677\ AFIA at 2 and CMC at 6.
    \678\ CMC at 6. Although commenters did not provide specific
details about what they meant by ``phase-in,'' the Commission
understands these comments to mean that they are requesting a
gradual, step-up increase in Federal spot month and non-spot month
position limit levels over time for agricultural core referenced
futures contracts, instead of having an abrupt change to the new
Federal position limit levels. This section only addresses the
Commission's response to commenters' request for phased-in Federal
spot month position limit levels. The Commission separately
addresses commenters' request for phased-in Federal non-spot month
position limit levels below in Section II.B.4.iv.a.(2)(v).
---------------------------------------------------------------------------

d. Discussion of the Final Rule--Phase-In of Federal Spot Month
Position Limit Levels
    In response to comments, the Commission first notes that, although
the Federal spot month position limit levels will generally be higher
than existing Federal and/or exchange-set spot month position limit
levels, the Commission believes that the referenced contract markets
will be able to function in an orderly fashion when the final Federal
spot month position limit levels

[[Page 3324]]

go into effect.\679\ This is because, among other things, these final
Federal spot month position limit levels are supported by the updated
EDS figures and are set at or below 25% of EDS.\680\
---------------------------------------------------------------------------

    \679\ A phase-in is unnecessary with respect to the Federal spot
month position limit level for CBOT Oats (O), because the Federal
spot month position limit level for the contract remains at the
current level.
    \680\ The final Federal spot month position limit levels for
cash-settled NYMEX NG referenced contracts may exceed 25% of EDS
because the Federal spot month position limit level is being applied
separately for each exchange and OTC swaps market, but the
Commission believes that this approach will not cause any issues, in
part, because of the highly liquid nature of that particular market.
For additional details concerning the NYMEX NG market, see Section
II.B.3.vi.a.
---------------------------------------------------------------------------

    However, as a practical matter, the operative spot month position
limit level for market participants with respect to exchange-listed
referenced contracts is not the Federal spot month position limit
levels, but the exchange-set spot month position limit levels, which
must be set at or below the corresponding Federal spot month position
limit levels. As a result, despite the changes in the Federal spot
month position limit levels (or the imposition of a Federal spot month
position limit level for the first time) in this Final Rule, there will
be no practical impact on market participants trading in exchange-
listed referenced contracts unless and until an exchange affirmatively
modifies its exchange-set spot month position limit levels through a
rule submission to the Commission pursuant to part 40 of the
Commission's regulations.\681\
---------------------------------------------------------------------------

    \681\ 17 CFR part 40.
---------------------------------------------------------------------------

v. ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level
a. Summary of the 2020 NPRM--ICE Cotton No. 2 (CT) Federal Spot Month
Position Limit Level
    The Commission proposed to increase the Federal spot month position
limit level for ICE Cotton No. 2 (CT) from the existing Federal
position limit of 300 contracts to 1,800 contracts. Like all of the
Federal spot month position limit levels, the Commission's proposed
level for ICE Cotton No. 2 (CT) was based on Commission staff's review,
analysis, and verification of IFUS's updated EDS figure and Commission
staff's review and analysis of IFUS's initial recommended Federal spot
month position limit level.\682\
---------------------------------------------------------------------------

    \682\ See IFUS--Estimated Deliverable Supply--Softs Methodology,
IFUS Comment Letter (May 14, 2019) and Reproposal--Position Limits
for Derivatives (RIN 3038-AD99); ICE Comment Letter (Feb. 28, 2017)
(attached Sept. 28, 2016 comment letter), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596 and
Proposed Rule 81 FR 96704, respectively). IFUS did not formally
provide recommended Federal spot month position limit levels for
each of its core referenced futures contracts. However, ICE had
previously recommended setting Federal spot month position limit
levels for IFUS's core referenced futures contracts at 25% of EDS in
its comment letter in connection with the 2016 Reproposal and
Commission staff also confirmed with ICE/IFUS's representatives that
ICE/IFUS's position has remained the same with respect to the
Federal spot month position limit levels since the 2016 Reproposal.
The Commission notes, however, with respect to ICE Cotton No. 2
(CT), IFUS submitted an updated recommended Federal spot month
position limit level recommending a Federal spot month position
limit level of 900 contracts. See IFUS--Estimated Deliverable
Supply--Cotton Methodology, August 2020, IFUS Comment Letter (August
27, 2020), available at https://comments.cftc.gov (comment file for
Proposed Rule 85 FR 11596).
---------------------------------------------------------------------------

b. Summary of the Commission Determination--ICE Cotton No. 2 (CT)
Federal Spot Month Position Limit Level
    In the Final Rule, the Commission is adopting a Federal spot month
position limit level of 900 contracts instead of the proposed level of
1,800 contracts for ICE Cotton No. 2 (CT). The reasons for this change
are based on the comments received in response to the 2020 NPRM.
c. Comments--ICE Cotton No. 2 (CT) Federal Spot Month Position Limit
Level
    The Commission received numerous comments objecting to the higher
proposed Federal spot month position limit level for ICE Cotton No. 2
(CT) in the 2020 NPRM.\683\ The commenters requested that the
Commission either maintain the current 300 contract limit level or
drastically lower the limit from the proposed 1,800 contract limit
level.\684\ In doing so, commenters argued that they disagreed with the
EDS figure for ICE Cotton No. 2 (CT) because it does ``not reflect the
cotton industry's historical ability to deliver the physical
commodity.'' \685\ AMCOT similarly noted that the ``methodology used in
determining the limits is flawed and lacks consideration of the
industry's intricacies including the non-fungible quality as well as
warehousing, location, and logistical challenges.'' \686\ Furthermore,
AMCOT believed that the Federal spot month position limit level ``would
likely be disruptive to orderly market flows.'' \687\ Likewise, ACSA
noted that, ``[i]n a smaller market like cotton, such a drastic
increase and high limit will cause excessive volatility and hinder
convergence in the spot month.'' \688\
---------------------------------------------------------------------------

    \683\ AMCOT at 1-2; ACSA at 8; Ecom at 1; Southern Cotton at 2;
NCC at 1; Mallory Alexander at 2; Canale Cotton at 2; IMC at 2; Olam
at 3; DECA at 2; Moody Compress at 1; ACA at 2; Choice at 1; East
Cotton at 2; Jess Smith at 2; McMeekin at 2; Memtex at 2; NCC at 2;
Omnicotton at 2; Toyo at 2; Texas Cotton at 2; Walcot at 2; White
Gold at 1; LDC at 1; SW Ag at 2; NCTO at 2; and Parkdale at 2.
    \684\ Id.
    \685\ See, e.g., ACA at 2.
    \686\ AMCOT at 1.
    \687\ Id.
    \688\ ACSA at 8.
---------------------------------------------------------------------------

    In addition to the market participants, IFUS also submitted a
comment letter with respect to ICE Cotton No. 2 (CT), in which it
provided an updated recommended Federal spot month position limit level
of 900 contracts.\689\
---------------------------------------------------------------------------

    \689\ IFUS--Estimated Deliverable Supply--Cotton Methodology,
August 2020, IFUS Comment Letter (Aug. 14, 2020), available at
https://comments.cftc.gov (comment file for Proposed Rule 85 FR
11596).
---------------------------------------------------------------------------

d. Discussion of Final Rule--ICE Cotton No. 2 (CT) Federal Spot Month
Position Limit Level
    As a preliminary matter, and as discussed previously, the
Commission believes that there is a range of acceptable Federal
position limit levels that will achieve the objectives of CEA section
4a(a)(3)(B). Thus, the Commission acknowledges that there may be other
acceptable Federal spot month position limit levels in addition to the
proposed 1,800 contract level for ICE Cotton No. 2 (CT). Commenters to
the 2020 NPRM suggested three alternatives to the proposed Federal spot
month position limit level for ICE Cotton No. 2 (CT): (1) 300
contracts; (2) 900 contracts; or (3) a level ``drastically lower'' than
1,800 contracts. All of these alternatives are below 25% of EDS. The
Commission considered the two specifically enumerated levels (i.e., 300
contracts and 900 contracts) and the proposed 1,800 contract level, and
has determined that the 900 contract level is the most appropriate
among the three for ICE Cotton No. 2 (CT).
(1) ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level
Should Be Above 300 Contracts
    The Commission believes that it is more appropriate to raise the
Federal spot month position limit level than to maintain its existing
level of 300 contracts, as long as that level is set at or below 25% of
EDS. One reason is because the current 300 contract Federal spot month
position limit level for ICE Cotton No. 2 (CT) has been in place since
at least 1987 while the size of the ICE Cotton No. 2 (CT) market has
significantly increased over the years, as evidenced by the material
increases in deliverable supply and open interest.\690\
---------------------------------------------------------------------------

    \690\ For example, between the periods of 1994-1999 and 2015-
2018, the maximum open interest in ICE Cotton No. 2 (CT) increased
from 122,989 contracts to 344,302 contracts. Also, the EDS for ICE
Cotton No. 2 (CT) increased from 6,005 contracts to 6,948 contracts
between 2016 and 2019.

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

[[Page 3325]]

    A second reason why the Commission believes that it is appropriate
to raise the Federal spot month position limit level above the existing
level of 300 contracts for ICE Cotton No. 2 (CT) is because of
potential liquidity concerns. At 300 contracts, the Federal spot month
position limit level for ICE Cotton No. 2 (CT) would be set at 4.32% of
EDS, which would be the lowest Federal spot month position limit level,
by far, in terms of percentage of EDS among all core referenced futures
contracts.\691\ At such a low level, the Commission is concerned that
this could hamper liquidity in the market, especially if the ICE Cotton
No. 2 (CT) market continues to grow as it has done over the years. This
concern is supported by the Commission's observation that there has
been a lack of liquidity at the start of the spot month period in
recent years as speculative traders exited the market or reduced their
positions to the Federal spot month position limit level of 300
contracts. The Commission's observation is based on its assessment of
the daily price impact liquidity in basis points with the gauge: \692\
---------------------------------------------------------------------------

    \691\ CBOT KC HRS Wheat (KW) generally has the lowest Federal
spot month position limit level in terms of percentage of EDS at
6.82%, which is 58% higher than 4.32%. However, following the close
of trading on the business day prior to the last two trading days of
the contract month, CME Live Cattle (LC) has the lowest Federal spot
month position limit level in terms of percentage of EDS at 5.29%,
which is 22% higher than 4.32%.
    \692\ Pi is the price of trade i. Pi* is the proxy for the
current market price (the price of the last trade,
Pi--1). Q1 is the quantity traded (the number of futures
contracts traded in trade i). See Kane, Stephen, Exploring price
impact liquidity for December 2016 NYMEX energy contracts, p.5-6,
available at https://www.cftc.gov/sites/default/files/idc/groups/public/@economicanalysis/documents/file/oce_priceimpact.pdf.
[GRAPHIC] [TIFF OMITTED] TR14JA21.030

    Raising the limit level above 300 contracts to a higher level, such
as 900 contracts, should help alleviate some of the liquidity problems
that market participants have experienced because they will not have to
reduce their positions to such a low level (i.e., 300 contracts).
    A third reason for raising the Federal spot month position limit
level above its existing level of 300 contracts is because a 300
contract level may not provide adequate headroom under which exchanges
may set and adjust their own position limit levels, up or down, in
response to market conditions within this position limits framework.
This is an especially acute issue because, as noted above, a Federal
spot month position limit level of 300 contracts is extremely low in
terms of percentage of EDS when compared to other core referenced
futures contracts, and there is no market-based reason (e.g., higher
susceptibility for corners and squeezes) for why the level should be
set so low.
    A final reason for supporting a Federal spot month position limit
level higher than 300 contracts is because IFUS, which is the exchange
that lists ICE Cotton No. 2 (CT), has recommended a level higher than
300 contracts.\693\ This is significant because exchanges have deep
knowledge about their markets and are particularly well-positioned to
recommend position limit levels for the Commission's
consideration.\694\
---------------------------------------------------------------------------

    \693\ IFUS--Estimated Deliverable Supply--Cotton Methodology,
August 2020, IFUS Comment Letter (Aug. 14, 2020), available at
https://comments.cftc.gov (comment file for Proposed Rule 85 FR
11596).
    \694\ 85 FR at 11598. However, as noted before, the Commission
independently reviewed and analyzed the exchange-recommended levels,
including the EDS figures that support such levels.
---------------------------------------------------------------------------

    The Commission recognizes that the comments from the end-users of
ICE Cotton No. 2 (CT) unanimously requested that the Commission
consider, among other options, maintaining the 300 contract Federal
position limit level. The main justifications underlying this request
are that: (1) The ICE Cotton No. 2 (CT) market is small; and (2) the
EDS figure is extremely high. In response to commenters' claim about
the size of the market, the Commission notes that the market for ICE
Cotton No. 2 (CT) is not as small as suggested. Open interest data
indicate that the ICE Cotton No. 2 (CT) futures market had a larger
average notional open interest in 2019 than nine other core referenced
futures contracts.\695\ Six of these contracts have higher Federal
position limit levels in terms of percentage of EDS in this Final
Rule.\696\
---------------------------------------------------------------------------

    \695\ These are CBOT Oats (O), CBOT KC HRW Wheat (KW), MGEX HRS
Wheat (MWE), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE FCOJ-A (OJ),
ICE Sugar No. 16 (SF), NYMEX Platinum (PL), and NYMEX Palladium
(PA). See Section III.C.
    \696\ These are CBOT Oats (O), MGEX HRS Wheat (MWE), ICE Cocoa
(CC), ICE FCOJ-A (OJ), ICE Sugar No. 16 (SF), and NYMEX Platinum
(PL).
---------------------------------------------------------------------------

    In response to commenters' issue with the EDS, the Commission notes
that the cotton merchants may have focused on too narrow of a scope in
their comment letters. The commenters appear to focus on the actual
cotton that was delivered pursuant to holding the physically-settled
ICE Cotton No. 2 (CT) core referenced futures contract to expiration,
and they use that data as evidence that the EDS is extremely high.\697\
The Commission's EDS figures are not meant to reflect the actual
commodity delivered. Rather, as the term estimated deliverable supply
indicates, it is the quantity of the commodity that meets contract
specifications that is reasonably expected to be readily available to
short traders and salable by long traders at its market value in normal
cash-marketing channels at the contract's delivery points during the
specified delivery period, barring abnormal movements in interstate
commerce.\698\ The Commission believes that limiting a speculative
trader from controlling more than 25% of this supply, and not the
actual commodity delivered, is critical for ensuring that corners and
squeezes do not happen.\699\
---------------------------------------------------------------------------

    \697\ See ACSA at 7-8.
    \698\ 17 CFR part 38, Appendix C.
    \699\ Generally, only a small percentage of futures contracts
actually go to delivery. Basing a speculative position limit on past
deliveries for a futures contract would be far too limiting for a
speculative position limit and would not reasonably achieve the four
policy objectives of CEA section 4a(a)(3)(B).

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

[[Page 3326]]

    Furthermore, commenters did not provide specific issues with
respect to the methodology used to determine EDS for ICE Cotton No. 2
(CT), which has been available for review by the public since the 2020
NPRM was published.\700\ As a result, the Commission believes that the
EDS for ICE Cotton No. 2 (CT) is appropriate and reasonable based on
its review and analysis of the methodology used.\701\
---------------------------------------------------------------------------

    \700\ IFUS--Estimated Deliverable Supply--Softs Methodology,
IFUS Comment Letter (May 14, 2019), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596).
    \701\ Specifically, the estimate took into account cotton
certified stocks, which are reported daily for the five delivery
points specified in the contract specifications, as well as the
exchange estimated deliverable stocks close to the delivery points
that are not included as certified stocks based on the USDA's Weekly
Bales Made Available to Ship (``BMAS'') Summary report. The exchange
estimated the deliverable stocks contained in or near exchange
warehouses, both certified and non-certified, during notice and
delivery periods for the futures contract. BMAS deliverable stocks
data was also adjusted to exclude cotton at locations that were far
away from the delivery points.
---------------------------------------------------------------------------

(2) ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level
Should Be Below 1,800 Contracts
    However, the Commission believes that it is appropriate to lower
the Federal spot month position limit for ICE Cotton No. 2 (CT) from
the proposed 1,800 contract level. First, as noted previously, the
Commission received an updated recommended Federal spot month position
limit level from IFUS that is lower than 1,800 contracts.\702\ Second,
although the Commission believes that there are issues with the cotton
industry commenters' justifications for lowering the Federal spot month
position limit level, the Commission still believes that their comments
are informative. Specifically, the Commission believes that the
unanimous comments from the end-users of the ICE Cotton No. 2 (CT) core
referenced futures contract suggest that lowering the Federal spot
month position limit level from 1,800 contracts will not have a
material detrimental effect on liquidity for bona fide hedgers in the
market. All things being equal, a lower spot month position limit level
will better protect the markets against corners and squeezes, but at
the expense of a reduction in liquidity for bona fide hedgers as
positions held by speculators will be more constrained. However, in
this instance, the Commission believes that it could improve
protections against corners and squeezes without materially impacting
liquidity for bona fide hedgers by adopting a Federal spot month
position limit level that is lower than 1,800 contracts, based on the
comments received.\703\
---------------------------------------------------------------------------

    \702\ IFUS--Estimated Deliverable Supply--Cotton Methodology,
August 2020, IFUS Comment Letter (Aug. 14, 2020), available at
https://comments.cftc.gov (comment file for Proposed Rule 85 FR
11596).
    \703\ However, for the reasons discussed previously, the
Commission does not believe that lowering the Federal spot month
position limit level to 300 contracts is appropriate, given the
observed issues in liquidity during the early part of the spot month
period.
---------------------------------------------------------------------------

(3) ICE Cotton No. 2 (CT) Federal Spot Month Position Limit Level
Should Be Set at 900 Contracts
    Given that the Commission believes that it is preferable to set a
Federal spot month position limit level higher than 300 contracts but
lower than 1,800 contracts for the aforementioned reasons, the
Commission believes that a Federal position limit level of 900
contracts is preferable to those alternatives. Specifically, the
Commission notes that IFUS, which has deep knowledge about the ICE
Cotton No. 2 (CT) market and is particularly well-positioned to
recommend the position limit level for the Commission's consideration,
has recommended a Federal spot month position limit level of 900
contracts. This is also supported by commenters who requested a
``drastically lower'' Federal spot month position limit level as an
alternative to maintaining a Federal spot month position limit level of
300 contracts.
    The Commission also believes that a level of 900 contracts is
sufficiently high to address concerns about a lack of liquidity. This
is, in part, because a Federal spot month position limit level of 900
contracts would result in a level that is set at 12.95% of EDS, which
would coincidentally place ICE Cotton No. 2 (CT) exactly at the median
among the legacy agricultural contracts and all core referenced futures
contracts in terms of percentage of EDS. Finally, based on the comments
received and because, all things being equal, lower spot month position
limit levels provide better protection against corners and squeezes,
the Commission believes that a level of 900 contracts will provide
stronger protection against corners and squeezes without materially
impacting liquidity for bona fide hedgers vis-[agrave]-vis a level of
1,800 contracts.\704\
---------------------------------------------------------------------------

    \704\ The Commission recognizes that this will limit the range
through which an exchange may set and adjust its own exchange-set
position limit level. However, based on the comments received, the
Commission believes that the stronger protections against corners
and squeezes is appropriate.
---------------------------------------------------------------------------

vi. NYMEX Henry Hub Natural Gas (NG)
    This section will address the following issues concerning NYMEX NG:
(i) The Federal spot month position limit level for NYMEX NG; (ii) the
conditional spot month position limit exemption for positions in
natural gas referenced contracts, which is located in final Sec. 
150.3(a)(4); and (iii) NYMEX NG penultimate referenced contracts. The
Commission is addressing the latter two issues in this section in order
to allow the reader to review all discussions regarding natural gas in
one place in this Final Rule.
a. NYMEX Henry Hub Natural Gas (NG) Federal Spot Month Position Limit
Level
(1) Summary of the 2020 NPRM and Additional Background Information--
NYMEX NG Federal Spot Month Position Limit Level
    Under the existing Federal position limits framework, there are no
Federal position limits for NYMEX NG in either the spot month or the
non-spot month. There is, however, an exchange-set spot month position
limit for NYMEX NG, which is set at 1,000 contracts for the physically-
settled NYMEX NG contract and 1,000 contracts per exchange for cash-
settled equivalent-sized natural gas contracts. Because there are three
exchanges that list such cash-settled natural gas contracts (NYMEX,
IFUS, and Nodal), a market participant can currently hold up to 3,000
such cash-settled contracts during the spot month.
    In the 2020 NPRM, the Commission proposed a Federal spot month
position limit level of 2,000 contracts for NYMEX NG. The 2,000
contract level was determined based on 25% of updated EDS and was
recommended by CME Group. Consistent with the other core referenced
futures contracts, the proposed netting and aggregation requirements
permitted a market participant to hold up to 2,000 physically-settled
NYMEX NG referenced contracts and another 2,000 cash-settled NYMEX NG
referenced contracts across all exchanges and in the OTC swaps
market.\705\
---------------------------------------------------------------------------

    \705\ For further discussion of netting and aggregation, see
Section II.B.10. (Application of Netting and Related Treatment of
Cash-settled Referenced Contracts).
---------------------------------------------------------------------------

(2) Summary of the Commission Determination--NYMEX NG Federal Spot
Month Position Limit Level
    The Commission is adopting its proposed approach with respect to
physically-settled NYMEX NG referenced contracts, but is modifying its
proposed approach with respect to cash-settled NYMEX NG referenced
contracts, as discussed below.

[[Page 3327]]

(3) Comments--NYMEX NG Federal Spot Month Position Limit Level
    With respect to the proposed NYMEX NG Federal spot month position
limit level, NGSA requested that the Commission ``increase the spot
month limit on the NG Contract by recognizing the transportation
capacity available now at Henry Hub provided by displacement and the
increasing capacity which is coming from future but imminent
displacement.'' \706\ In support, NGSA noted that CME Group's EDS
figure has ``incorporated displacement into its estimate of deliverable
supply at Henry Hub for years.'' \707\
---------------------------------------------------------------------------

    \706\ NGSA at 10-11.
    \707\ Id. at 11.
---------------------------------------------------------------------------

    MFA/AIMA, Citadel, and SIFMA AMG requested that the Commission
raise the Federal spot month position limit level for NYMEX NG
referenced contracts to at least 3,000 contracts, because the 2020 NPRM
effectively decreases the total number of exchange-traded cash-settled
NYMEX NG referenced contracts that a market participant may hold in the
spot month from the current level of 3,000 contracts to 2,000
contracts.\708\ In support of this request, MFA/AIMA argued that the
2020 NPRM ``could adversely affect the ability of traders to optimize
the proportion of physically-settled and cash-settled natural gas
contracts that they wish to hold in their portfolio.'' \709\ SIFMA AMG
argued that the 2020 NPRM ``would disrupt existing trading practices
and business models without any corresponding regulatory or policy
benefit.'' \710\
---------------------------------------------------------------------------

    \708\ MFA/AIMA at 11-12; Citadel at 7-8; and SIFMA AMG at 10-11
(SIFMA AMG supported the 2,000 contract limit level for physically-
settled NYMEX NG referenced contracts, but requested at least a
3,000 contract limit level for the cash-settled NYMEX NG referenced
contracts).
    \709\ MFA/AIMA at 11-12.
    \710\ SIFMA AMG at 11.
---------------------------------------------------------------------------

(4) Discussion of Final Rule--NYMEX NG Federal Spot Month Position
Limit Level
    Under the Final Rule, market participants may hold up to 2,000
cash-settled NYMEX NG referenced contracts per exchange during the spot
month and an additional 2,000 cash-settled economically equivalent OTC
swaps, rather than being subject to an aggregate position limit level
of 2,000 cash-settled NYMEX NG referenced contracts across all
exchanges and the OTC swaps market as proposed under the 2020 NPRM.
Because there are currently three exchanges that list natural gas
referenced contracts, this will allow market participants to hold a
total of 8,000 cash-settled NYMEX NG referenced contracts between
positions held in cash-settled futures and in cash-settled economically
equivalent OTC swaps.\711\ This is in addition to the 2,000 physically-
settled NYMEX NG referenced contracts a market participant may hold
during the spot month. These amendments to the proposal are reflected
in a revised Appendix E to part 150 that the Commission is adopting in
this Final Rule.
---------------------------------------------------------------------------

    \711\ 2,000 cash-settled referenced contracts multiplied by
three exchanges plus 2,000 cash-settled economically equivalent OTC
swaps equals 8,000 cash-settled NYMEX NG referenced contracts.
---------------------------------------------------------------------------

(i) Request To Increase the Federal Spot Month Position Limit Level To
Account for Displacement
    In response to NGSA's request, the Commission first notes that CME
Group provided the EDS figure that was used as a basis for determining
its exchange-recommended Federal spot month position limit level, which
the Commission ultimately used as a basis for its own proposed Federal
spot month position limit level for NYMEX NG after independently
reviewing and assessing the methodology underlying the EDS figure and
the EDS figure itself.\712\ As NGSA noted, CME Group's EDS has
``incorporated displacement into its estimate of deliverable supply at
Henry Hub for years,'' \713\ which means that the EDS figure on which
the proposed Federal spot month position limit level was based already
``recogniz[ed] the transportation capacity available now at Henry Hub
provided by displacement.'' \714\ As a result, the proposed Federal
spot month position limit level took this into account as well. With
respect to future increases in EDS based on ``future but imminent
displacement,'' \715\ in the event that this occurs, CME Group may
submit an updated EDS figure pursuant to Sec.  150.2(f), at which time
the Commission would consider whether to modify the Federal spot month
position limit level.
---------------------------------------------------------------------------

    \712\ Summary DSE Proposed Limits, CME Group Comment Letter
(Nov. 26, 2019), available at https://comments.cftc.gov (comment
file for Proposed Rule 85 FR 11596).
    \713\ NGSA at 11.
    \714\ Id. at 10. Furthermore, CME Group's methodology for
determining EDS for NYMEX NG explicitly states, ``Additionally, the
Exchange has taken into consideration backhaul in estimating the
deliverable supply.'' New York Mercantile Exchange, Inc., Analysis
of Deliverable Supply Henry Hub Natural Gas Futures, December 2018
(Dec. 1, 2018), available at https://comments.cftc.gov (comment file
for Proposed Rule 85 FR 11596).
    \715\ NGSA at 10.
---------------------------------------------------------------------------

(ii) Request To Increase the Cash-Settled Federal Spot Month Position
Limit Level
    As previewed above, in response to comments from MFA/AIMA, Citadel,
and SIFMA AMG, the Commission is modifying the proposed NYMEX NG
Federal spot month position limit level for cash-settled NYMEX NG
referenced contracts, so that the Federal spot month position limit
applies separately per each exchange and the OTC swaps market, rather
than across exchanges and the OTC swaps market.
    The Commission believes that this modification is warranted in
order to avoid disrupting the well-developed, unique liquidity
characteristics of the natural gas derivatives markets. As detailed
below, the cash-settled natural gas market is significantly more liquid
than the physically-settled natural gas market during the spot month.
This is in contrast with typical commodity markets, in which the
physically-settled contracts are generally more liquid than the cash-
settled contracts during the spot month.\716\
---------------------------------------------------------------------------

    \716\ Typically, this is because the physically-settled contract
is established first and the natural formation of liquidity in the
physically-settled contract historically stays in the established
contract due to first mover advantage. More liquid markets provide
for better bid/ask spreads and can execute larger transaction sizes
without substantial effects on the price of the contract. Thus, in
the past, cash-settled look-alike contracts historically have not
been as liquid as the original physically-settled futures contract.
---------------------------------------------------------------------------

    The unique nature of the natural gas markets is reflected in the
current exchange-set natural gas position limit framework, in which
market participants may hold up to 1,000 cash-settled natural gas
contracts per exchange, which can result in a position of up to 3,000
cash-settled natural gas contracts (instead of 1,000 cash-settled
natural gas contracts altogether), despite only being able to hold up
to 1,000 physically-settled NYMEX NG contracts. The Commission believes
that, absent the modification adopted herein to apply the spot month
limit to NYMEX NG on a per exchange basis, the proposed Federal spot
month position limit level could disrupt the cash-settled natural gas
markets, in part, because, as commenters have noted: (1) Market
participants would be able to hold fewer cash-settled NYMEX NG
referenced contracts (i.e., 2,000 contracts) than they were previously
permitted under the exchange-set position limit framework (i.e., 3,000
contracts); and (2) some market participants may not be able to hold
the same proportion of physically-settled to cash-settled NYMEX NG
referenced contracts that they are

[[Page 3328]]

currently able to hold if they wish to maximize their positions in
physically-settled NYMEX NG referenced contracts. The Commission also
believes that it is appropriate to maintain consistency vis-[agrave]-
vis the exchange-set position limit framework in order to minimize
disruptions, since the Commission has not observed any issues with the
exchange-set position limit framework with respect to natural gas.
    Accordingly, under the Final Rule, market participants (that are
not availing themselves of the Federal spot month conditional position
limit exemption for NYMEX NG, which is discussed below) may hold up to
2,000 cash-settled NYMEX NG referenced contracts on each exchange that
lists a cash-settled NYMEX NG referenced contract (which is currently
NYMEX, IFUS, and Nodal), a total position of 6,000 exchange-listed
cash-settled NYMEX NG referenced contracts.\717\ Furthermore, under the
Final Rule, traders may also hold an additional position in cash-
settled economically equivalent NYMEX NG OTC swaps that has a notional
amount of up to 2,000 equivalent-sized contracts. The Commission is
separately permitting up to 2,000 referenced contracts in the NYMEX NG
OTC swaps market in order to avoid disruptions to that market, given
that traders may be currently participating in that market as well. As
a result, under the Final Rule, traders may hold up to a total of 8,000
cash-settled NYMEX NG referenced contracts \718\ and 2,000 physically-
settled NYMEX NG referenced contracts.\719\
---------------------------------------------------------------------------

    \717\ The Commission notes that market participants are not
permitted to net cash-settled NYMEX NG referenced contract positions
across exchanges or the OTC swaps market for Federal spot month
position limit purposes.
    \718\ 2,000 cash-settled NYMEX NG referenced contracts
multiplied by three exchanges plus 2,000 cash-settled economically
equivalent NYMEX NG OTC swaps equals 8,000 cash-settled NYMEX NG
referenced contracts.
    \719\ CME Group also commented that it ``objects to any
disparities in the spot-month limits and would rigorously disagree
if the Commission adopts any other disparities in treatment between
physically-settled and cash-settled contracts,'' in the context of
the proposed Federal conditional limit, which is discussed in the
section below. CME Group at 6. This comment could also be viewed as
an objection to the Final Rule's Federal spot month position limit
level for cash-settled NYMEX NG referenced contracts. The Commission
believes that the rationale set forth in this section and the
Federal conditional limit section below is responsive to CME Group's
possible concern with respect to the Final Rule's Federal spot month
position limit level for cash-settled NYMEX NG referenced contracts.
---------------------------------------------------------------------------

    The Commission notes that, as discussed further below, as an
initial legal matter, the Commission interprets CEA section 4a(a)(6) as
generally requiring aggregate Federal position limits across
exchanges.\720\ Notwithstanding the requirements of CEA section
4a(a)(6), the Commission is adopting this approach with respect to
NYMEX NG referenced contracts pursuant to its exemptive authority in
CEA section 4a(a)(7). In doing so, the Commission believes that, based
on the foregoing reasons, applying the Federal spot month position
limit level for cash-settled NYMEX NG referenced contracts separately
per exchange and the OTC swaps market does not undermine the purposes
of the Federal position limits framework pursuant to CEA section 4a.
---------------------------------------------------------------------------

    \720\ For further discussion of the Commission's aggregation and
netting rules, see Section II.B.10. (application of netting
section).
---------------------------------------------------------------------------

b. NYMEX NG Federal Spot Month Conditional Position Limit Level
(1) Summary of 2020 NPRM and Additional Background Information--NYMEX
NG Federal Spot Month Conditional Position Limit Level
    In addition to the proposed 2,000 contract Federal spot month
position limit level for NYMEX NG, proposed Sec.  150.3(a)(4) also
included a spot month conditional position limit exemption (``Federal
conditional limit'') from the standard Federal spot month position
limit level for NYMEX NG for market participants that do not hold a
position in the physically-settled NYMEX NG referenced contract.\721\
The proposed Federal conditional limit would allow, during the spot
month, market participants that do not hold a position in the
physically-settled NYMEX NG referenced contract to hold: (1) Up to
10,000 cash-settled NYMEX NG referenced contracts per exchange that
lists a cash-settled NYMEX NG referenced contract; and (2) an
additional position in cash-settled economically equivalent NYMEX NG
OTC swaps that has a notional amount of up to 10,000 equivalent-sized
contracts. As a result, the proposed Federal conditional limit would
permit a market participant that does not hold a physically-settled
NYMEX NG referenced contract to hold a total of 40,000 cash-settled
NYMEX NG referenced contracts (up to 10,000 contracts on each of the
three exchanges (NYMEX, IFUS, and Nodal) that lists a cash-settled
NYMEX NG referenced contract and in the OTC swaps market) during the
spot month.
---------------------------------------------------------------------------

    \721\ The Commission is adopting the Federal conditional limit
pursuant to its exemptive authority in CEA section 4a(a)(7). 7
U.S.C. 6a(a)(7).
---------------------------------------------------------------------------

    The proposed framework for the Federal conditional limit was
derived from the existing exchange-set spot month conditional position
limit framework that has been in place for approximately a decade. This
existing conditional position limit framework permits, during the spot
month, up to 5,000 equivalent-sized cash-settled natural gas contracts
per exchange that lists a cash-settled natural gas contract, provided
that the market participant does not hold a position in the physically-
settled NYMEX NG contract.\722\ The 5,000 contract conditional spot
month position limit level equals five-times the existing exchange-set
1,000 contract spot month position limit level for the physically-
settled NYMEX NG contract.\723\ Noting the unique circumstances of the
natural gas futures markets, the Commission's proposed Federal
conditional limit level applied the same multiplier of five to its
proposed Federal spot month position limit level for the physically-
settled NYMEX NG contract in order to arrive at the 10,000 contract
Federal conditional limit level that applies for each exchange and OTC
swaps market.
---------------------------------------------------------------------------

    \723\ See IFUS Rule 6.20(c), NYMEX Rule 559.F, and Nodal Rule
6.5.7. The spot month for such contracts is three days. See also
Position Limits, CMG Group website, available at https://www.cmegroup.com/market-regulation/position-limits.html (NYMEX
position limits spreadsheet); Market Resources, IFUS website,
available at https://www.theice.com/futures-us/market-resources
(IFUS position limits spreadsheet). NYMEX rules establish an
exchange-set spot month limit of 1,000 contracts for its physically-
settled NYMEX NG core referenced futures contract and a separate
spot month limit of 1,000 contracts for its cash-settled Henry Hub
Natural Gas Last Day Financial Futures contract. IFUS's natural gas
contract is one quarter the size of the NYMEX contract. IFUS thus
has rules in place establishing an exchange-set spot month limit of
4,000 contracts (equivalent to 1,000 NYMEX NG contracts) for its
cash-settled Henry Hub LD1 Fixed Price Futures contract.
---------------------------------------------------------------------------

    The 2020 NPRM included the Federal conditional limit to accommodate
certain trading dynamics unique to the natural gas contracts.\724\ For
example, the Commission has observed that, as the physically-settled
NYMEX NG core referenced futures contract approaches expiration, open
interest tends to decline in NYMEX NG and tends to increase rapidly in
ICE's cash-settled Henry Hub LD1 contract.\725\ This is in contrast
with other commodities in which the physically-settled markets are more
liquid than the cash-settled markets during the spot month. These
dynamics suggest that cash-settled natural gas contracts serve an
important function for hedgers and speculators who wish to recreate
and/or hedge the physically-settled NYMEX NG contract price during the
spot month without being required to make or take

[[Page 3329]]

delivery.\726\ In addition, the Commission also proposed the
divestiture requirement in the Federal conditional limit in order to
address historical concerns over the potential for manipulation of
physically-settled natural gas contracts during the spot month in order
to benefit positions in cash-settled natural gas contracts.\727\
---------------------------------------------------------------------------

    \724\ 85 FR at 11641.
    \725\ Id.
    \726\ Id.
    \727\ Id.
---------------------------------------------------------------------------

(2) Summary of the Commission Determination--NYMEX NG Federal Spot
Month Conditional Position Limit Level
    The Commission is adopting the Federal conditional limit as
proposed.
(3) Comments--NYMEX NG Federal Spot Month Conditional Position Limit
Level
    With respect to the proposed Federal conditional limit, several
commenters generally supported its adoption.\728\ COPE believed that
the proposed conditional limit ``permits market liquidity . . . without
sacrificing the benefits of position limits.''\729\ ICE supported the
Federal conditional limit, noting that ``cash-settled contracts present
a reduced potential for manipulation of the price of the physically-
settled contract.'' \730\ CME Group, on the other hand, objected to the
proposal, arguing that it could ``drain liquidity for bona fide hedgers
in the physically-settled market and could prevent physical delivery
markets from serving the price discovery function that they have long
provided'' and believed that it ``could incentivize the manipulation of
a cash commodity price in order to benefit a position in a cash-settled
contract.'' \731\
---------------------------------------------------------------------------

    \728\ COPE at 2-3; EEI/EPSA at 4; and ICE at 13.
    \729\ COPE at 2-3.
    \730\ ICE at 13 (referencing a sentiment previously expressed by
the Commission).
    \731\ CME Group at 6.
---------------------------------------------------------------------------

    A number of commenters also requested that the Federal conditional
limit levels be available to market participants that do not exit
positions in the physically-settled NYMEX NG referenced contract during
the spot month, which would effectively establish the Federal
conditional limit level as the operative Federal spot month limit level
for cash-settled NYMEX NG referenced contracts. In support of this
request, several commenters argued that the 2020 NPRM's approach to the
Federal conditional limit would result in liquidity leaving the
physically-settled NYMEX NG referenced contract when it is needed the
most.\732\ EEI/EPSA also commented that the Federal conditional limit
framework in the 2020 NPRM is ``excessive and is an overly rigid
solution that may unnecessarily restrict legitimate trading activity.''
\733\ NGSA commented that the 2020 NPRM ``removes important hedging
optionality for physical market participants.'' \734\ Citadel argued
that the 2020 NPRM would limit flexibility and impair market efficiency
by preventing ``market participants with a meaningful position in the
cash-settled market from participating in the physically-settled
market--limiting flexibility and impairing market efficiency.'' \735\
CCI also believed that the 2020 NPRM would ``impair price discovery''
and ``negatively impact price convergence.'' \736\
---------------------------------------------------------------------------

    \732\ ISDA at 8; SIFMA AMG at 10-11; FIA at 7-8; NGSA at 12-14;
Citadel at 7; and CCI at 4.
    \733\ EEI/EPSA at 4.
    \734\ NGSA at 12.
    \735\ Citadel at 7.
    \736\ CCI at 4.
---------------------------------------------------------------------------

    Finally, ICE requested that ``the Commission revert back to the
five-time conditional limit for cash settled contracts . . . instead of
the conditional limit of 10,000 contracts in the Proposed Rule,''
because ``[a]pplying a five-time multiplier versus a hard limit, would
allow the conditional limit to track any changes in the spot month
limits over time, which in turn will reflect changes in deliverable
supply.'' \737\
---------------------------------------------------------------------------

    \737\ ICE at 13.
---------------------------------------------------------------------------

(4) Discussion of Final Rule--NYMEX NG Federal Spot Month Conditional
Position Limit Level
(i) Availability of the Federal Conditional Limit for NYMEX NG
    In response to CME Group's comment supporting the elimination of
the Federal condition limit, the Commission is concerned that
eliminating the proposed conditional limit could result in potential
market disruptions, given that a conditional limit framework for
natural gas has been in place at the exchange level for many years. For
example, eliminating the existing conditional limit structure could
restrict the positions that market participants may hold in cash-
settled NYMEX NG referenced contracts during the spot month, resulting
in reduced liquidity, including for commercial hedgers seeking to
offset price risks but not necessarily looking to make or take
delivery. Additionally, since it was instituted approximately a decade
ago, the exchange-set conditional limit framework has functioned
well.\738\ The Commission has not observed any of the concerns raised
by CME Group come to fruition, and the physically-settled NYMEX NG
referenced contract remains highly liquid. Furthermore, as discussed
above, other commenters supported the availability of the Federal
conditional limit.
---------------------------------------------------------------------------

    \738\ 85 FR at 11640.
---------------------------------------------------------------------------

(ii) Federal Conditional Limit's Divestiture Requirement
    In response to comments requesting that the Federal conditional
limit be available to market participants that do not exit the spot
month physically-settled NYMEX NG referenced contract, the Commission
first notes that the requirement that market participants exit the
physically-settled NYMEX NG referenced contract has been reflected in
exchange rulebooks for many years, in part because the requirement is
critically important to discouraging manipulation.\739\ Without this
requirement, a trader could hold up to 40,000 cash-settled NYMEX NG
referenced contracts (or more, if additional exchanges list cash-
settled NYMEX NG referenced contracts in the future), which is at 500%
of EDS, and 2,000 physically-settled NYMEX NG referenced contracts,
which is at 25% of EDS. At these levels, it may not require much
movement in the physically-settled markets to disproportionately
benefit the cash-settled holdings. As a result, the requirement to exit
the physically-settled contract is critical for reducing the market
participant's incentive to manipulate the cash settlement price by, for
example, banging-the-close or distorting physical delivery prices in
the physically-settled contract to benefit leveraged cash-settled
positions.\740\
---------------------------------------------------------------------------

    \739\ 85 FR at 11641.
    \740\ See 85 FR 11626, 11641.
---------------------------------------------------------------------------

    With respect to commenters' concerns about removing flexibility and
options for market participants, as well as a potential decrease in
liquidity in the physically-settled NYMEX NG referenced contract, the
Commission notes that the physically-settled NYMEX NG referenced
contract remains highly liquid even in spite of the implementation of
the exchange-set conditional limit framework instituted approximately a
decade ago. Also, market participants should have more flexibility and
options than before because the Federal spot month position limit level
for NYMEX NG adopted herein will now permit up to 8,000 cash-settled
NYMEX NG referenced contracts, even if the market participant holds
2,000 physically-settled NYMEX

[[Page 3330]]

NG referenced contracts.\741\ Finally, the Commission reiterates that
Federal position limit levels only apply to speculative positions and,
as a result, bona fide hedging positions will continue to be allowed to
exceed the Federal position limit levels, including the Federal
conditional limit level, from the Federal position limits
perspective.\742\
---------------------------------------------------------------------------

    \741\ Under the Final Rule's Federal spot month position limit
level for NYMEX NG, a trader may hold 2,000 physically-settled NYMEX
NG referenced contracts, 2,000 cash-settled NYMEX NG referenced
contracts per exchange that lists such contracts, and 2,000 cash-
settled economically equivalent NYMEX NG OTC swaps. Currently, there
are three exchanges that list cash-settled NYMEX NG referenced
contracts--NYMEX, IFUS, and Nodal. As a result, a trader may hold up
to 6,000 exchange-listed cash-settled NYMEX NG referenced contracts
and 2,000 cash-settled economically equivalent NYMEX NG OTC swaps,
which brings the total number of cash-settled NYMEX NG referenced
contracts a trader may hold to 8,000 under the Federal spot month
position limit level.
    \742\ This also answers EEI/EPSA's request to confirm ``that a
participant may rely upon the conditional limit in the first
instance but may also utilize a hedge exemption to exceed the
conditional limit.'' EEI/EPSA at 4. However, the Commission notes
that exchanges have rarely, if ever, allowed a market participant to
exceed the exchange-set natural gas conditional limit by layering a
bona fide hedge position on top of the cash-settled natural gas
contract position permitted under the natural gas conditional limit.
Similar to this existing practice, the Commission expects that,
under the Final Rule, a market participant will rarely be permitted
to hold: (1) A bona fide hedge position in the physically-settled
NYMEX NG referenced contract while taking advantage of the
conditional limit for cash-settled NYMEX NG referenced contracts; or
(2) a bona fide hedge position in cash-settled NYMEX NG referenced
contracts on top of the maximum position permitted under the
conditional limit for cash-settled NYMEX NG referenced contracts.
---------------------------------------------------------------------------

(iii) Application of a Five-Times Multiplier for the Federal
Conditional Limit Level
    The Commission clarifies that, in accordance with historical
practice, if the Federal spot month position limit level for the
physically-settled NYMEX NG referenced contract is updated in the
future through rulemaking, the Commission expects to simultaneously
adjust the Federal conditional limit in the same rulemaking, such that
the Federal conditional limit level is set at a multiple of five of the
new Federal spot month position limit level for NYMEX NG, provided that
the Commission does not observe any issues in the markets.
c. NYMEX NG Penultimate Referenced Contracts
(1) Summary of the 2020 NPRM and Additional Background Information--
NYMEX NG Penultimate Referenced Contracts
    With respect to NYMEX NG, the Commission proposed that penultimate
contracts, which are cash-settled contracts that settle on the trading
day immediately preceding the final trading day of the corresponding
referenced contract, are also considered referenced contracts that are
subject to Federal spot month position limits.\743\ The Commission also
proposed a slightly broader economically equivalent swap definition for
natural gas, so that swaps with delivery dates that diverge by less
than two calendar days (instead of one calendar day) from an associated
referenced contract could still be deemed economically equivalent and
therefore subject to Federal position limits. The Commission made these
adjustments to: Recognize the active and vibrant penultimate natural
gas contract markets; prevent and disincentivize manipulation and
regulatory arbitrage; and prevent volume from shifting away from non-
penultimate cash-settled NYMEX NG markets to penultimate NYMEX NG
contract futures and/or penultimate NYMEX NG swaps markets in order to
avoid Federal position limits.\744\
---------------------------------------------------------------------------

    \743\ Such penultimate contracts include: ICE's Henry Financial
Penultimate Fixed Price Futures (PHH) and options on Henry
Penultimate Fixed Price (PHE), and NYMEX's Henry Hub Natural Gas
Penultimate Financial Futures (NPG).
    \744\ The Commission proposed a relatively narrow ``economically
equivalent swap'' definition in order to prevent market participants
from inappropriately netting positions in core referenced futures
contracts against swap positions further out on the curve. The
Commission acknowledges that liquidity could shift to penultimate
swaps as a result, but believes that, with the exception of natural
gas, this concern is mitigated since certain constraints exist that
militate against this from occurring, including basis risk between
the penultimate swap and the core referenced futures contract.
However, this constraint does not necessarily apply to the natural
gas futures markets, because natural gas has a relatively liquid
penultimate futures market that enables a market participant to
hedge or off-set its penultimate swap positions. As a result, the
Commission believes that liquidity may be incentivized to shift from
NYMEX NG to penultimate natural gas swaps in order to avoid Federal
position limits in the absence of the Commission's exception for
natural gas in the ``economically equivalent swap'' definition.
---------------------------------------------------------------------------

(2) Comments--NYMEX NG Penultimate Referenced Contracts
    In response to this part of the 2020 NPRM, ICE requested ``that the
Commission continue to allow exchanges to impose spot month
accountability levels which expire during the period when spot month
limits for the Henry Hub core-referenced futures contract are in effect
and to not aggregate penultimate options into the Henry Hub LD1 cash-
settled limit.'' \745\ One of the ways in which ICE supported this
request was by claiming that, ``The Commission states that penultimate
contracts are economically the same as the last day contract, however,
empirically, this statement is not correct as settlement prices have
demonstrated.'' \746\
---------------------------------------------------------------------------

    \745\ ICE at 14.
    \746\ Id.
---------------------------------------------------------------------------

(3) Discussion of Final Rule--NYMEX NG Penultimate Referenced Contracts
    The Commission declines to exclude NYMEX NG penultimate contracts
from Federal position limits for the reasons set forth in this Final
Rule's section addressing ``Referenced Contract.'' \747\ In doing so,
the Commission notes, in particular, that ICE's specific assertion that
penultimate natural gas contracts are not economically the same as last
day contracts based on settlement prices runs counter to the
Commission's review of a sample of the daily settlement prices for
NYMEX NG (the physically-settled natural gas contract), ICE Henry Hub
LD1 (the ICE natural gas contract cash-settled to NYMEX NG), and ICE
Henry Hub Penultimate (the ICE penultimate natural gas contract cash-
settled to NYMEX NG).\748\
---------------------------------------------------------------------------

    \747\ For further discussion of the Commission's determination
to include penultimate contracts within the Federal position limits
framework, see Section II.A.16.iii.a.(2)(iii).
    \748\ Id.
---------------------------------------------------------------------------

vii. Wheat Core Referenced Futures Contracts' Federal Spot Month
Position Limit Levels
a. Summary of the 2020 NPRM and Additional Background Information--
Wheat Federal Spot Month Position Limit Levels
    The Commission proposed to increase the Federal spot month position
limit levels for all three wheat core referenced futures contracts
(CBOT Wheat (W), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE)) from
600 contracts to 1,200 contracts. The proposed Federal limit levels
were based on the underlying EDS figures for each wheat core referenced
futures contract and CME's and MGEX's recommended Federal spot month
position limit levels of 1,200 contracts for each of their respective
wheat core referenced futures contracts.
b. Summary of the Commission Determination--Wheat Federal Spot Month
Position Limit Levels
    The Commission is adopting the Federal spot month position limit
levels for all three wheat core referenced futures contracts as
proposed.
c. Comments--Wheat Federal Spot Month Position Limit Levels
    The Commission received one comment, from MGEX, fully supporting

[[Page 3331]]

the 2020 NPRM's Federal spot month parity among the three wheat core
referenced futures contracts.\749\
---------------------------------------------------------------------------

    \749\ MGEX at 3.
---------------------------------------------------------------------------

4. Federal Non-Spot Month Position Limit Levels
i. Background--Federal Non-Spot Month Position Limit Levels
    The Commission most recently updated the Federal non-spot month
position limit levels in 2011.\750\ At that time, the Commission
utilized a formula that was called the ``10/2.5% formula,'' \751\ which
calculated the Federal non-spot month position limit levels by
multiplying the first 25,000 contracts in open interest by 10% and
multiplying the remaining contracts by 2.5% and adding the two numbers
together.\752\ The 10/2.5% formula was first adopted in 1999 based on
two primary factors: Growth in open interest and the size of large
traders' positions.\753\ The existing Federal non-spot month position
limit levels that were adopted in 2011 have not been updated to reflect
changes in open interest data in over a decade.\754\
---------------------------------------------------------------------------

    \750\ The Commission notes that the 2011 Final Rulemaking that
adopted the most recent Federal non-spot month position limit levels
was vacated by an order of the U.S. District Court for the District
of Columbia on September 28, 2012. However, that order did not apply
with respect to the 2011 Final Rulemaking's amendments to the
Federal non-spot month position limit levels in Sec.  150.2. ISDA,
887 F.Supp.2d 259 (2012).
    \751\ See, e.g., Revision of Federal Speculative Position Limits
and Associated Rules, 64 FR at 24038 (May 5, 1999) (increasing
deferred-month limit levels based on 10% of open interest up to an
open interest of 25,000 contracts, with a marginal increase of 2.5%
thereafter). Prior to 1999, the Commission had given little credence
to the size of open interest in the contract in determining the
position limit level. Instead, the Commission's traditional standard
was to set limit levels based on the distribution of speculative
traders in the market. See, e.g., 64 FR at 24039; Revision of
Federal Speculative Position Limits and Associated Rules, 63 FR at
38525, 38527 (July 17, 1998).
    \752\ For example, assume a commodity contract has an aggregate
open interest of 200,000 contracts over the past 12 month period.
Applying the 10/2.5% formula to an aggregate open interest of
200,000 contracts would yield a non-spot month position limit level
of 6,875 contracts. That is, 10% of the first 25,000 contracts would
equal 2,500 contracts (25,000 contracts x 0.10 = 2,500 contracts).
Then add 2.5% of the remaining 175,000 of aggregate open interest or
4,375 contracts (175,000 contracts x 0.025 = 4,375 contracts) for a
total non-spot month position limit level of 6,875 contracts (2,500
contracts + 4,375 contracts = 6,875 contracts).
    \753\ See 64 FR at 24038. See also 63 FR at 38525, 38527 (The
1998 proposed revisions to non-spot month levels, which were
eventually adopted in 1999, were based upon two criteria: ``(1) The
distribution of speculative traders in the markets; and (2) the size
of open interest.'').
    \754\ In setting the Federal non-spot month position limit
levels in 2011, the Commission used open interest data from 2009. 76
FR at 71642.
---------------------------------------------------------------------------

ii. Summary of the 2020 NPRM--Federal Non-Spot Month Position Limit
Levels
    Proposed Sec.  150.2(e) provided that Federal non-spot month
position limit levels were set forth in proposed Appendix E to part 150
and were as follows: \755\
---------------------------------------------------------------------------

    \755\ 85 FR at 11624. As discussed above, the proposed Federal
non-spot month position limits would apply to only the nine legacy
agricultural contracts and any associated referenced contracts. All
other referenced contracts subject to Federal position limits would
be subject to Federal position limits only during the spot month, as
specified above, and would only be subject to exchange-set position
limits or position accountability levels outside of the spot month.
[GRAPHIC] [TIFF OMITTED] TR14JA21.009


[[Page 3332]]


    In generally calculating the above levels, the Commission proposed
to maintain the existing 10/2.5% formula for non-spot month position
limit levels, but with the following limited changes: (1) The 10% rate
would apply to the first 50,000 contracts of open interest (instead of
the first 25,000 contracts); (2) the 2.5% rate would apply to open
interest above 50,000 contracts (rather than above the current level of
25,000 contracts); and (3) the modified 10/2.5% formula would apply to
updated open interest data for the applicable futures and delta-
adjusted options for the periods from July 2017 to June 2018 and July
2018 to June 2019.\756\ All Federal non-spot month position limit
levels that were calculated based on the 10/2.5% formula (i.e., all
legacy agricultural contracts, with the exception of CBOT Oats (O),
CBOT KC HRW Wheat (KW), MGEX HRS Wheat (MWE), and the single month
position limit level for ICE Cotton No. 2 (CT)) were rounded up to the
nearest 100 contracts.
---------------------------------------------------------------------------

    \756\ The 12-month period yielding the higher open interest
level is selected as the basis for the Federal non-spot month
position limit level.
---------------------------------------------------------------------------

    As outlined in the table above, the proposed Federal non-spot month
position limit levels are generally higher than the existing Federal
non-spot month position limit levels, with the exception of CBOT Oats
(O), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE), for which the
proposed limit levels would remain at existing levels. As described in
detail below, this proposed general increase is primarily due to the
increases in open interest that have occurred since the Federal non-
spot month position limit levels were last updated approximately a
decade ago.\757\
---------------------------------------------------------------------------

    \757\ See 85 FR at 11630. The 2020 NPRM's proposed modification
to the 10/2.5% formula from 25,000 to 50,000 contracts results in a
modest increase in the Federal non-spot month position limit level
of 1,875 contracts over what the limit level would be if the 10/2.5%
formula were applied at 25,000 contracts, assuming that the market
for the core referenced futures contract has an open interest of at
least 50,000 contracts.
---------------------------------------------------------------------------

iii. Summary of the Commission Determination--Federal Non-Spot Month
Position Limit Levels
    The Commission is adopting each of the Federal non-spot month
position limit levels as proposed in Sec.  150.2(e) and Appendix E to
part 150, with the exception of setting a lower single month position
limit for ICE Cotton No. 2 (CT). The Commission will first describe the
general rationale for the final Federal non-spot month position limit
levels that are being adopted. Next, the Commission will describe the
comments it received in connection with the proposed Federal non-spot
month position limit levels. Finally, the Commission will provide
responses to such comments, including further rationale for the
Commission's position concerning the final Federal non-spot month
position limit levels.
a. Rationale for the Final Federal Non-Spot Month Position Limit Levels
    As explained below, the Commission believes that the final Federal
non-spot month position limit levels, in conjunction with the rest of
the Federal position limits framework, will achieve the four policy
objectives in CEA section 4a(a)(3)(B). Namely, they will: (1) Diminish,
eliminate, or prevent excessive speculation; (2) deter and prevent
market manipulation, squeezes, and corners; (3) ensure sufficient
market liquidity for bona fide hedgers; and (4) ensure that the price
discovery function of the underlying market is not disrupted.\758\
---------------------------------------------------------------------------

    \758\ 7 U.S.C. 6a(a)(3)(B).
---------------------------------------------------------------------------

    As a preliminary matter, the Commission continues to believe that a
formula based on a percentage of open interest, such as the 10/2.5%
formula, will permit position limit levels to better reflect the
changing needs and composition of the futures markets.\759\ Open
interest is a measure of market activity that reflects the number of
contracts that are ``open'' or live, where each contract of open
interest represents both a long and a short position.\760\ The
Commission believes that limiting positions to a percentage of open
interest: (1) Helps ensure that positions are not so large relative to
observed market activity that they risk disrupting the market; (2)
allows speculators to hold sufficient contracts to provide a healthy
level of liquidity for bona fide hedgers; and (3) allows for increases
in position limits and position sizes as markets expand and become more
active.\761\
---------------------------------------------------------------------------

    \759\ 85 FR at 11630.
    \760\ Id.
    \761\ Id.
---------------------------------------------------------------------------

(1) Modification of the 10/2.5% Formula
    However, the Commission believes that the current 10/2.5% formula
should be updated based on market developments since it was adopted in
1999. As a result, the Commission proposed modifying the 10/2.5%
formula by adjusting the inflection point between the 10% rate and the
2.5% rate from 25,000 contracts to 50,000 contracts.\762\ The
Commission also proposed applying updated open interest data to the
modified 10/2.5% formula.
---------------------------------------------------------------------------

    \762\ This results in a modest increase in the Federal non-spot
month position limit level of 1,875 contracts over what the limit
level would be if the 10/2.5% formula were applied at 25,000
contracts, assuming that the market for the core referenced futures
contract has an open interest of at least 50,000 contracts.
---------------------------------------------------------------------------

    The Commission is adopting these changes as proposed because: (1)
Open interest has increased significantly since the 10/2.5% formula was
originally adopted in 1999; and (2) futures market composition has
changed significantly since 1999. The Commission discusses both
developments in turn below.
(i) Increases in Open Interest
    As noted in the 2020 NPRM, there has generally been a significant
increase in maximum open interest for each of the legacy agricultural
contracts (except for CBOT Oats (O)) since the existing 10/2.5% formula
was first adopted in 1999.\763\ Under the existing 10/2.5% formula,
because the 2.5% incremental increase applies after the first 25,000
contracts of open interest, limit levels with respect to contracts with
open interest above 25,000 contracts (i.e., all applicable core
referenced futures contracts other than CBOT Oats (O)) continue to
increase at the much slower rate of 2.5% rather than the 10% rate
that's applicable for the first 25,000 contracts. As a result, the
existing 10/2.5% formula has become proportionally more restrictive as
the percentage of open interest above 25,000 contracts increased.
---------------------------------------------------------------------------

    \763\ 85 FR at 11631.
---------------------------------------------------------------------------

    The table below provides data that describes the market environment
during the period prior to, and subsequent to, the adoption of the
existing 10/2.5% formula by the Commission in 1999. The data includes
futures contracts and the delta-adjusted options on futures open
interest.\764\ The first column of the table provides the maximum open
interest in the nine legacy agricultural contracts over the five year
period ending in 1999. The CBOT Corn (C) contract had a maximum open
interest of approximately 463,000 contracts, and the CBOT Soybeans (S)
contract had a maximum open interest

[[Page 3333]]

of approximately 227,000 contracts. The other seven contracts had
maximum open interest figures that ranged from less than 20,000
contracts for CBOT Oats (O) to approximately 172,000 for CBOT Soybean
Oil (SO). Hence, when adopting the 10/2.5% formula in 1999, the
Commission's experience in these markets was of aggregate futures and
options on futures open interest well below 500,000 contracts.
---------------------------------------------------------------------------

    \764\ Delta is a ratio comparing the change in the price of an
asset (a futures contract) to the corresponding change in the price
of its derivative (an option on that futures contract) and has a
value that ranges between zero and one. In-the-money call options
get closer to 1 as their expiration approaches. At-the-money call
options typically have a delta of 0.5, and the delta of out-of-the-
money call options approaches 0 as expiration nears. The deeper in-
the-money the call option, the closer the delta will be to 1, and
the more the option will behave like the underlying asset. Thus,
delta-adjusted options on futures will represent the total position
of those options as if they were converted to futures.
[GRAPHIC] [TIFF OMITTED] TR14JA21.010

    The table also displays the maximum open interest figures for
subsequent periods up to, and including, 2018. The maximum open
interest for all legacy agricultural contracts, except for CBOT Oats
(O), generally increased over the period. By the 2015-2018 period
covered in the last column of the table, five of the contracts had
maximum open interest greater than 500,000 contracts. Also, the
contracts for CBOT Corn (C), CBOT Soybeans (S), and CBOT Hard Red
Winter Wheat (KW) saw maximum open interest increase by a factor of
four to five times the maximum open interest observed during the 1994-
1999 period when the Commission adopted the 10/2.5% formula in 1999.
    As open interest has increased, the current Federal non-spot month
position limit levels have become significantly more restrictive over
time. In particular, as discussed above, because the 2.5% incremental
increase applies after the first 25,000 contracts of open interest
under the existing 10/2.5% formula, Federal non-spot month position
limit levels on legacy agricultural contracts with open interest above
25,000 contracts (i.e., all contracts other than CBOT Oats (O))
continue to increase at a much slower rate of 2.5% rather than the 10%
that applies for the first 25,000 contracts.
    The existing 10/2.5% formula's inflection point of 25,000 contracts
was less of a problem in the latter part of the 1990s, for example,
when open interest in each of the nine legacy agricultural contracts
was below 500,000, and in many cases below 200,000. More recently,
however, open interest has grown above 500,000 for a majority of the
legacy agricultural contracts. The existing 10/2.5% formula has thus
become more restrictive for market participants, including, as
discussed immediately below, certain banks and dealers with positions
that may not be eligible for a bona fide hedging exemption, but who
might otherwise provide valuable liquidity to commercial firms.
(ii) Changes in Market Composition
    The potentially restrictive nature of the existing Federal non-spot
month position limit levels has become more problematic over time
because dealers play a much more significant role in the market today
than at the time the Commission adopted the 10/2.5% formula. Prior to
1999, the Commission regulated physical commodity markets where the
largest participants were often large commercial interests who held
short positions. The offsetting positions were often held by small,
individual traders, who tended to be long.\765\
---------------------------------------------------------------------------

    \765\ Stewart, Blair, An Analysis of Speculative Trading in
Grain Futures, Technical Bulletin No. 1001, U.S. Department of
Agriculture (Oct. 1949). See also Draper, Dennis, ``The Small Public
Trader in Futures Markets'', pp. 211-269, Futures Markets:
Regulatory Issues (ed. Anne Peck, 1985): American Enterprise
Institute.
---------------------------------------------------------------------------

    Several years after the Commission adopted the 10/2.5% formula, the
composition of futures market participants changed as dealers began to
enter the physical commodity futures market in larger size. These
dealers, including ones affiliated with banks or large financial
institutions that are now provisionally registered and regulated as
swap dealers, sometimes held significant positions in these markets by
acting as aggregators or market makers and providing swaps to
commercial hedgers and to other market participants.\766\ The existing
10/2.5% formula has thus become particularly restrictive for dealers,
including those with positions that may not be eligible for a bona fide
hedging exemption, but

[[Page 3334]]

that might otherwise provide valuable liquidity to commercial
firms.\767\
---------------------------------------------------------------------------

    \766\ Staff Report on Commodity Swap Dealers & Index Traders
with Commission Recommendations, U.S. Commodity Futures Trading
Commission (Sept. 2008), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/cftcstaffreportonswapdealers09.pdf.
    \767\ The Commission notes that this issue with respect to swap
dealers is being addressed through a combination of a modification
of the 10/2.5% formula and the pass-through swap provision, the
latter of which is described in Section II.A.1.x. (Pass-Through Swap
and Pass-Through Swap Offset Provisions).
---------------------------------------------------------------------------

    The table below demonstrates the trend of increased dealer
participation by presenting data from the Commission's publicly
available ``Bank Participation Report'' (``BPR''), as of the December
report for 2002-2018.\768\ The table displays the number of banks
holding reportable positions for the seven futures contracts for which
Federal position limits apply and that were reported in the BPR.\769\
The report presents data for every market where five or more banks hold
reportable positions. The BPR is based on the same large-trader
reporting system database used to generate the Commission's Commitments
of Traders (``COT'') report.\770\
---------------------------------------------------------------------------

    \768\ Bank Participation Reports, available at https://www.cftc.gov/MarketReports/BankParticipationReports/index.htm.
    \769\ The term ``reportable position'' is defined in Sec. 
15.00(p) of the Commission's regulations. 17 CFR 15.00(p).
    \770\ Commitments of Traders, available at www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm. Commitments of Traders
reports indicate that there are generally still as many large
commercial traders in the markets today as there were in the 1990s.
---------------------------------------------------------------------------

    No data was reported for the seven futures contracts in December
2002, indicating that fewer than five banks held reportable positions
at the time of the report. The December 2003 report shows that five or
more banks held reportable positions in four of the commodity futures.
The number of banks with reportable positions generally increased in
the early to mid-2000s, which included dealers that operated in the
swaps markets by acting as aggregators or market makers, providing
swaps to commercial hedgers and to other market participants while
using the futures markets to hedge their own exposures.\771\ When the
Commission adopted the 10/2.5% formula in 1999, it had limited
experience with physical commodity derivatives markets in which such
banks were significant participants.
---------------------------------------------------------------------------

    \771\ Staff Report on Commodity Swap Dealers & Index Traders
with Commission Recommendations, U.S. Commodity Futures Trading
Commission (Sept. 2008), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/cftcstaffreportonswapdealers09.pdf.
---------------------------------------------------------------------------

BILLING CODE 6351-01-P
[GRAPHIC] [TIFF OMITTED] TR14JA21.011

    For 2003, which was the first year in the report with reported data
on the futures for these physical commodities, the BPR showed, as
displayed in the table below, that the reporting banks held modest
positions, totaling 3.4% of futures long open interest for CBOT Wheat
(W) and smaller positions in other futures. The positions displayed in
the table below increased over the next several years, generally
peaking around 2005/2006 as a percentage of the long open interest.

[[Page 3335]]

[GRAPHIC] [TIFF OMITTED] TR14JA21.012

BILLING CODE 6351-01-C
    The Commission believes that the application of the modified 10/
2.5% formula adopted herein to updated open interest data will prevent
the Federal non-spot month limits from becoming overly restrictive by
providing an appropriate increase in the non-spot month position limit
levels for most contracts to better reflect the above-described changes
in market dynamics observed since the late 1990s.
(2) Non-Spot Month Position Limit Levels for CBOT Oats (O), CBOT KC HRW
Wheat (KW), and MGEX HRS Wheat (MWE)
    The Commission is adopting the proposed Federal non-spot month
position limit levels with respect to CBOT Oats (O), CBOT KC HRW Wheat
(KW), and MGEX HRS Wheat (MWE). These remain at the current Federal
non-spot month position limit levels, which are 2,000 contracts for
CBOT Oats (O) and 12,000 contracts for both CBOT KC HRW Wheat (KW) and
MGEX HRS Wheat (MWE). These Federal non-spot month position limit
levels are higher than the levels that would have been determined using
the modified 10/2.5% formula and updated open interest data, which
would have resulted in 700 contracts for CBOT Oats (O), 11,900
contracts for CBOT KC HRW Wheat (KW), and 5,700 contracts for MGEX HRS
Wheat (MWE). However, the Commission saw no reason to reduce these
Federal non-spot month position limit levels in accordance with the 10/
2.5% formula because the Commission has observed that the existing
limit levels have functioned well for these core referenced futures
contracts and the Commission believes that strictly following the 10/
2.5% formula to determine Federal non-spot month position limit levels
could harm liquidity in those markets.
(3) Single Month Position Limit Level for ICE Cotton No. 2 (CT)
    The Commission is adopting a modified single month Federal position
limit level for ICE Cotton No. 2 (CT). The Commission proposed a
uniform single month and all-months-combined position limit for the ICE
Cotton No. 2 (CT) contract, as well as uniform single month and all-
months-combined position limits for the eight other legacy agricultural
contracts. However, in the 2020 NPRM the Commission requested comments
from the public concerning whether the Commission should adopt a lower
single month position limit level for ICE Cotton No. 2 (CT) compared to
the all-months-combined position limit level.\772\
---------------------------------------------------------------------------

    \772\ 85 FR 11637 (Request for Comment #26).
---------------------------------------------------------------------------

    The Commission received numerous comments from the end users of ICE
Cotton No. 2 (CT) in the cotton industry, including growers and
merchants, who requested that the Commission establish a lower Federal
single month position limit level for ICE Cotton No. 2 (CT) compared to
the all-months-combined position limit level, including establishing
the single month position limit level at 50% of the all-months-combined
position limit level.\773\ The Commission did not receive any comments
from commercial end-users opposing a lower Federal single month
position limit level for ICE Cotton No. 2 (CT) compared to the all-
months-combined position limit level. In response to the comments
received, the Commission is adopting a lower Federal single month
position limit level of 5,950 contracts for ICE Cotton No. 2 (CT),
which is 50% of the proposed Federal non-spot month position limit
level. However, the Commission is adopting the proposed all-months-

[[Page 3336]]

combined position limit level of 11,900 contracts, which is based on
the modified 10/2.5% formula. This change is discussed further below.
---------------------------------------------------------------------------

    \773\ ACSA at 2, 8; LDC at 2; Olam at 2; Ecom at 1; ACA at 2;
Canale Cotton at 2; Choice at 2; Jess Smith at 2; East Cotton at 2;
Memtex at 2; NCC at 1-2; Southern Cotton at 2-3; Texas Cotton at 2;
Toyo Cotton Co. at 2; WCSA at 2; and Omnicotton at 2.
---------------------------------------------------------------------------

(4) The Final Rule's Federal Non-Spot Month Position Limits Achieve the
Four Statutory Objectives in CEA Section 4a(a)(3)(B)
    As noted above, in the Final Rule, the Commission is not reducing
Federal non-spot month position limit levels for any of the legacy
agricultural contracts and will be raising them for six of the nine
such contracts in accordance with the updated open interest data and
the modified 10/2.5% formula.\774\ As a result, the Commission believes
that the final Federal non-spot month position limit levels will
generally improve liquidity for bona fide hedgers and, at the very
least, not harm liquidity compared to the status quo.
---------------------------------------------------------------------------

    \774\ As noted previously, the Commission is not following the
modified 10/2.5% formula for determining the single month position
limit level for ICE Cotton No. 2 (CT). However, the Final Rule still
increases that limit level compared to its existing limit level.
---------------------------------------------------------------------------

    The Commission also believes that the final Federal non-spot month
position limit levels remain low enough to diminish, eliminate, or
prevent excessive speculation, and to deter and prevent market
manipulation. This is because, as discussed above, by taking into
account the amount of observed market activity through open interest,
the modified 10/2.5% formula adopted herein helps ensure, among other
things, that positions are not so large relative to observed market
activity that they risk disrupting the market.\775\ This, in turn, also
helps ensure that the price discovery function of the underlying market
is not disrupted, because markets that are free from manipulative
activity reflect fundamentals of supply and demand rather than
artificial pressures. The Commission also notes that the 10/2.5%
formula has functioned well, based on the Commission's decades of
experience administering the formula.\776\
---------------------------------------------------------------------------

    \775\ 85 FR at 11630.
    \776\ Id. at 11675.
---------------------------------------------------------------------------

    The Commission reiterates that the modified 10/2.5% formula
provided in this Final Rule is generally a continuation of the same
approach the Commission has taken for decades. The increased levels
adopted herein are primarily driven by utilizing updated open interest
figures. With respect to the slight modification to the 10/2.5%
formula, the Commission does not believe that the modification will
negatively impact the formula's effectiveness in ensuring that the
Federal non-spot month position limit levels remain low enough to
diminish, eliminate, or prevent excessive speculation, and to deter and
prevent market manipulation. This is because the difference between
utilizing the existing 10/2.5% formula and the modified 10/2.5% formula
results in a modest increase in Federal non-spot month position limit
level of 1,875 contracts, which is generally counterbalanced by the
increased amount of open interest that is subject to the 2.5%
rate.\777\ Additionally, the Commission has previously studied prior
increases in Federal non-spot month position limit levels and concluded
that the overall impact was modest, and that any changes in market
performance were most likely attributable to factors other than changes
in the Federal position limit rules.\778\ The Commission has since
gained additional experience which supports that conclusion, including
by monitoring amendments to position limit levels by exchanges.
Further, given the significant increases in open interest and changes
in market composition that have occurred since the 1990s, the
Commission is comfortable that the Federal non-spot month position
limit levels adopted herein will adequately address each of the policy
objectives set forth in CEA section 4a(a)(3)(B), including preventing
manipulation and excessive speculation.
---------------------------------------------------------------------------

    \777\ When the Commission adopted the existing Federal non-spot
month position limit levels in 2011, the Federal non-spot month
position limit levels for four of the nine legacy agricultural
contracts were based on the existing 10/2.5% formula and utilized
open interest data from 2009. These were CBOT Corn (C), CBOT
Soybeans (S), CBOT Wheat (W), and CBOT Soybean Oil (SO). For those
four contracts, the ratio of Federal non-spot month position limit
level to open interest changes as follows: CBOT Corn (C) (the ratio
increases from 0.026 to 0.027); CBOT Soybeans (S) (the ratio
increases from 0.028 to 0.029); CBOT Wheat (W) (the ratio increases
from 0.029 to 0.031); and CBOT Soybean Oil (SO) (the ratio increases
from 0.030 to 0.032).
     The other five legacy agricultural contracts' Federal non-spot
month position limit levels deviated from the 10/2.5% formula. The
ratio changes for these five contracts are as follows (based on 2009
open interest data): ICE Cotton No. 2 (CT) (the ratio increases from
0.025 to 0.037 for the all-months-combined and decreases from 0.025
to 0.018 for the single month); CBOT Soybean Meal (SM) (the ratio
decreases from 0.038 to 0.032); CBOT Oats (O) (the ratio increases
from 0.130 to 0.291); MGEX Hard Red Spring Wheat (MWE) (the ratio
decreases from 0.323 to 0.162); and CBOT KC Hard Red Winter Wheat
(KW) (the ratio decreases from 0.113 to 0.037).
    \778\ 64 FR at 24039.
---------------------------------------------------------------------------

(5) Federal Non-Spot Month Position Limits as Ceilings
    The Commission reiterates that, under this position limits
framework, the Federal non-spot month position limit levels serve as
ceilings. Exchanges are required to establish their own non-spot month
position limit levels with respect to the nine legacy agricultural
contracts pursuant to final Sec.  150.5(a)(1). A discussion of the
implications of this approach is provided above in Section
II.B.3.ii.a(2).
iv. Comments and Discussion of Final Rule--Federal Non-Spot Month
Position Limit Levels
    Most commenters did not express concerns with respect to the
proposed Federal non-spot month position limit levels and the method by
which the Commission determined those levels.\779\ However, some
commenters raised concerns with respect to: (1) The Federal non-spot
month position limit levels, generally; (2) the proposed non-spot month
position limit level for ICE Cotton No. 2 (CT); and (3) the issue of
partial parity for the three wheat core referenced futures contracts
with respect to their Federal non-spot month position limit levels. The
Commission will discuss each of these issues, the related comments, and
the Commission's corresponding determination in greater detail below.
---------------------------------------------------------------------------

    \779\ See, e.g., COPE at 2; CMC at 6; CCI at 2; and CHS at 2.
---------------------------------------------------------------------------

a. Federal Non-Spot Month Position Limit Levels, Generally
(1) Comments--Federal Non-Spot Month Position Limit Levels, Generally
    Several commenters raised concerns about the proposed Federal non-
spot month position limit levels generally. Two commenters, NGFA and
LDC, advocated for lowering the Federal non-spot month position limit
levels for the nine legacy agricultural contracts.\780\ NGFA stated
that the proposed increases are ``very large'' and that the Commission
should not view increasing non-spot month position limit levels as a
``tradeoff'' for eliminating the risk management exemption, but should
instead establish limits that ``will telescope down to relatively much-
smaller spot-month limits in an orderly fashion.'' \781\ LDC and
several others

[[Page 3337]]

believed that adopting lower Federal single month position limit levels
would ``prevent speculative activity from concentrating in a single
contract month and thus jeopardizing convergence.'' \782\ NGFA and LDC
also offered the following alternatives to the proposed Federal non-
spot month position limit levels: (1) Set single-month limits at some
percentage of the all-months-combined limit, such as 50%; or (2)
maintain existing single-month limits while adopting the proposed all-
months-combined limits.\783\ NGFA also offered a third alternative,
which was to adopt a phased-in approach to the higher non-spot month
position limits, ``together with very active monitoring of contract
performance, though NGFA does not favor this option.'' \784\
---------------------------------------------------------------------------

    \780\ NGFA at 3 and LDC at 2.
    \781\ NGFA at 3. NGFA also commented that, ``NGFA still is not
completely convinced that open interest is the best yardstick for
this exercise,'' because ``[a]s volume and open interest grow,
Federal non-spot limits expand correspondingly . . . which leads to
yet higher volume and open interest. . .which again prompts expanded
Federal non-spot limits . . . and so on.'' However, NGFA did not
provide any alternatives to utilizing open interest for determining
Federal non-spot month position limit levels. As discussed
previously, the Commission believes that open interest is an
appropriate means of measuring market activity for a particular
contract and that a formula based on open interest, such as the 10/
2.5% formula: (1) Helps ensure that positions are not so large
relative to observed market activity that they risk disrupting the
market; (2) allows speculators to hold sufficient contracts to
provide a healthy level of liquidity for hedgers; and (3) allows for
increases in position limits and position sizes as markets expand
and become more active. Furthermore, the Commission notes that under
the Final Rule, Federal non-spot month position limit levels do not
automatically increase with higher open interest levels. In order to
make any amendments to the Federal position limit levels, the
Commission is required to engage in notice-and-comment rulemaking.
    \782\ LDC at 2. See also e.g., Moody Compress at 1; ACA at 2;
Jess Smith at 2; McMeekin at 2; Memtex at 2; Mallory Alexander at 2;
Walcot at 2; and White Gold at 1.
    \783\ NGFA at 4 and LDC at 2.
    \784\ NGFA at 4. IATP also provided a similar suggestion, by
stating that, ``it is prudent to phase in new non-spot month limit
levels so that the Commission can acquire data and experience with
how the new Federal non-spot limits are working for the commercial
hedging of those legacy contracts.'' IATP at 11.
---------------------------------------------------------------------------

    On the other hand, ISDA requested higher Federal non-spot month
position limit levels.\785\ ISDA stated that the proposed levels ``for
the legacy agricultural contracts are not high enough to provide [ ]
significant liquidity to these markets based on the experience of
market participants and anticipated growth in these markets.'' \786\
ISDA also appeared to suggest that higher levels could ``help markets
offset any liquidity that may be lost if the risk management exemption
is not retained.'' \787\ Finally, ISDA also provided a table with
suggested Federal non-spot month position limit levels that ranged from
18% to 191% higher than the proposed levels, except for CBOT Oats (O),
which remained the same.\788\
---------------------------------------------------------------------------

    \785\ ISDA at 7.
    \786\ Id.
    \787\ Id.
    \788\ Id.
---------------------------------------------------------------------------

    Another commenter, MGEX, disagreed with the 10/2.5% formula,
stating that ``a formulaic approach is too rigid and inflexible'' and
that the ``Commission needs to be flexible in the future and should not
preclude further limits or discussion.'' \789\
---------------------------------------------------------------------------

    \789\ MGEX at 3.
---------------------------------------------------------------------------

(2) Discussion of Final Rule--Federal Non-Spot Month Position Limit
Levels, Generally
    With the exception of ICE Cotton No. 2 (CT), as discussed below,
the Commission declines to modify the proposed Federal non-spot month
position limit levels or the general methodology underlying the
determination of those levels for the remaining legacy agricultural
contracts, and also declines to adopt a phase-in for Federal non-spot
month position limit levels.
(i) Request To Generally Lower Federal Non-Spot Month Position Limits
    In response to these comments, the Commission believes that the
modified 10/2.5% formula is generally an appropriate way to calculate
Federal non-spot month position limit levels. The Commission also
believes that the final non-spot month position limit levels are
supported by updated open interest data, some of which have increased
significantly since 2009.
    The Commission continues to believe that a formula based on a
percentage of open interest, such as the 10/2.5% formula, is
appropriate for establishing limit levels outside of the spot month, as
discussed above and in the 2020 NPRM.\790\ The Commission believes that
limiting positions to a percentage of open interest, such as through
the 10/2.5% formula: (1) Helps ensure that positions are not so large
relative to observed market activity that they risk disrupting the
market; (2) allows speculators to hold sufficient contracts to provide
a healthy level of liquidity for bona fide hedgers; and (3) allows for
increases in position limits and position sizes as markets expand and
become more active.\791\ Furthermore, the 10/2.5% formula has
functioned well for Federal non-spot month position limit purposes for
many years.\792\ Also, the Commission does not believe that the slight
modification to the 10/2.5% formula materially impacts the formula's
efficacy in determining an appropriate Federal non-spot month position
limit level as well,\793\ because the modification is modest and is
supported by the general increase in open interest among the legacy
agricultural contracts and the change in the composition of market
participants in those markets, as discussed above.\794\
---------------------------------------------------------------------------

    \790\ See 85 FR at 11630-11633.
    \791\ Id.
    \792\ See id. at 11675.
    \793\ The Commission notes, as discussed elsewhere in this Final
Rule, that CBOT KC HRW Wheat (KW), MGEX HRS Wheat (MWE), CBOT Oats
(O), and ICE Cotton No. 2 (CT) (single month limit only) are subject
to unique circumstances or other factors that counsel in favor of
deviating from the 10/2.5% formula.
    \794\ The modification results in a modest increase in the
Federal non-spot month position limit level of 1,875 contracts over
what the limit level would be if the inflection point for the 10/
2.5% formula was set at 25,000 contracts, assuming that the market
for the core referenced futures contract has an open interest of at
least 50,000 contracts.
---------------------------------------------------------------------------

(ii) Request To Generally Lower Single Month Position Limit Levels
    In response to comments generally requesting lower single month
position limit levels, the Commission first acknowledges that it has
set single-month position limit levels lower than all-months-combined
position limit levels in the past. However, since the Commission set
both single month and all-months-combined levels set at the same level
in 2011, the Commission has not observed any issues with respect to the
nine legacy agricultural contracts as a result of that change.
    In response to commenters' concern about possible convergence
issues from setting the single-month and all-months-combined levels set
at the same level, the Commission notes that positions in the non-spot
months have minimal impact on convergence. This is because convergence
occurs in the spot month, and, specifically, at the expiration of the
physically-settled spot month contract.\795\
---------------------------------------------------------------------------

    \795\ The Commission, however, recognizes that it is possible
that unusually large positions in contracts outside of the spot
month could distort the natural spread relationship between contract
months. For example, if traders hold unusually large positions
outside of the spot month, and if those traders exit those positions
immediately before the spot month, that could cause congestion and
also affect the pricing of the spot month contract. While such
congestion or price distortion cannot be ruled out, exchange-set
position limits and position accountability function to mitigate
against such risks.
---------------------------------------------------------------------------

    Furthermore, the Commission notes that an important benefit of
having a single Federal non-spot month limit level for both the single-
month and all-months-combined is the ability for market participants to
enter into calendar spread transactions that would normally be
constrained by the lower single month position limit level. However,
the Commission notes that, in response to comments received, it is
adopting a lower Federal single month position limit level for ICE
Cotton No. 2 (CT), the reasons for which is discussed below.

[[Page 3338]]

(iii) Request To Increase Federal Non-Spot Month Position Limit Levels
    In response to ISDA's comment that the proposed Federal non-spot
month position limit levels should be higher to compensate for the
proposed loss of risk management exemptions for swap dealers, the
Commission believes that any potential impact on existing risk
management exemption holders may be mitigated by the finalized pass-
through swap provision, to the extent swap dealers can utilize it.\796\
The Commission believes that this is a preferable approach to either a
hypothetical alternative formula or ISDA's own suggested Federal non-
spot month position limit levels that would allow higher limit levels
beyond those adopted in this Final Rule for all market participants.
This is because, while the pass-through swap provision adopted herein
is narrowly-tailored to enable liquidity providers to continue
providing liquidity to bona fide hedgers, higher limit levels beyond
those adopted in this Final Rule for all market participants could also
permit excessive speculation and increase the possibility of market
manipulation or harm to the underlying price discovery function.\797\
---------------------------------------------------------------------------

    \796\ See 85 FR at 11676. See also Section II.A.1.x. (Pass-
Through Swap and Pass-Through Swap Offset Provisions).
    \797\ See 85 FR at 11676.
---------------------------------------------------------------------------

(iv) Concern With the Commission's ``Formulaic'' Approach
    In response to MGEX's concern that the Commission's approach is too
formulaic and rigid, the Commission notes that the Federal non-spot
month position limit levels will operate as ceilings within a broader
Federal position limits framework in which exchanges, including MGEX,
are always free to determine their own exchange-set position limit
levels and position accountability levels below the Federal position
limit levels as they see fit based on market conditions. In fact, by
having the Federal position limit levels operate as ceilings, this
framework will enable exchanges to respond to market conditions through
a greater range of acceptable position limit levels than if the Federal
position limit levels did not operate as ceilings.
    In addition, as described further below, the Commission has
deviated from the 10/2.5% formula with respect to CBOT Oats (O), ICE
Cotton No. 2 (CT) (single month only), CBOT KC HRW Wheat (KW), and MGEX
HRS Wheat (MWE) based on the unique circumstances concerning those core
referenced futures contracts. Furthermore, the Commission also notes
that this Final Rule does not ``preclude further limits or
discussion.'' \798\ The Commission is also continually monitoring
market conditions to evaluate whether different Federal position limit
levels may be warranted.
---------------------------------------------------------------------------

    \798\ MGEX at 3.
---------------------------------------------------------------------------

(v) Request To Implement a Phase-In Period
    The Commission declines to adopt a formal phase-in period for
Federal non-spot month position limits, in which the Commission
gradually implements the Federal non-spot month position limit levels
over a period of time. The Commission believes that the markets will
operate in an orderly fashion with the Federal position limit levels
adopted under this Final Rule, because the final Federal non-spot month
position limit levels are supported by increased open interest and are
generally set pursuant to the modified 10/2.5% formula, which, as
discussed above, achieves the policy objectives set forth in CEA
section 4a(a)(3)(B).\799\
---------------------------------------------------------------------------

    \799\ A phase-in is not necessary with respect to the Federal
non-spot month position limit levels for CBOT Oats (O), KC HRW Wheat
(KW), and MGEX HRS Wheat (MWE), because the Federal non-spot month
position limit levels will remain at the current levels.
---------------------------------------------------------------------------

    However, as noted in the Federal spot month position limit level
phase-in discussion above, as a practical matter, the Commission
emphasizes that the operative non-spot month position limit levels for
a market participant trading in exchange-listed referenced contracts is
not the Federal non-spot month position limit levels, but the exchange-
set non-spot month position limit levels. As a result, despite the
changes in the Federal non-spot month position limit levels in this
Final Rule, there will be no practical impact on market participants
trading in exchange-listed referenced contracts unless and until an
exchange affirmatively modifies its exchange-set non-spot month
position limit levels through a rule submission to the Commission
pursuant to part 40 of the Commission's regulations.\800\
---------------------------------------------------------------------------

    \800\ 17 CFR part 40.
---------------------------------------------------------------------------

c. ICE Cotton No. 2 (CT) Federal Non-Spot Month Position Limit Level
(1) Summary of the 2020 NPRM and Additional Background Information--ICE
Cotton No. 2 (CT) Federal Non-Spot Month Position Limit Level
    In the 2020 NPRM, the Commission proposed to increase both the
Federal single month and all-months-combined position limit levels for
ICE Cotton No. 2 (CT) from the existing Federal level of 5,000
contracts to 11,900 contracts by applying the updated open interest
data into the proposed modified 10/2.5% formula. The Commission also
solicited comments asking whether the Commission should consider
lowering the Federal single month position limit level to a percentage
of the Federal all-months-combined position limit level for ICE Cotton
No. 2 (CT), and if so, what percentage of the all-months-combined
position limit level should be used.\801\
---------------------------------------------------------------------------

    \801\ 85 FR at 11637 (Request for Comment #26).
---------------------------------------------------------------------------

(2) Comments--ICE Cotton No. 2 (CT) Federal Non-Spot Month Position
Limit Level
    In response to the 2020 NPRM, numerous commenters from the cotton
industry, including growers and merchants, requested that the
Commission ``maintain its single-month limit, particularly for smaller
markets like cotton,'' \802\ or, in the alternative, set a Federal
single month position limit level of 50% of the all-months-combined
limit (i.e., 5,950 contracts).\803\ In support, commenters also noted
that the proposed non-spot month position limit level for ICE Cotton
No. 2 (CT) was ``not in line with historical limits.'' \804\ One
commenter also stated, ``Experience with modern trading has shown a
propensity by speculators to focus too heavily on the nearest futures
contract, leaving later months with poor liquidity from time to time.''
\805\ In contrast, ISDA argued that the proposed Federal non-spot month
position limit levels, including that for ICE Cotton No. 2 (CT), were
too low and asserted that the level for ICE Cotton No. 2 (CT) should be
increased to 24,000 contracts to make up for the elimination of the
risk management exemption.\806\
---------------------------------------------------------------------------

    \802\ See e.g., East Cotton at 2; Omnicotton at 2; Choice at 2;
Canale Cotton at 2; Ecom at 1; Olam at 2; Texas Cotton at 2; Toyo
Cotton at 2; Walcot Trading at 2; White Gold at 2; and NCTO at 2.
See also ACA at 2; Gerald Marshall at 1-2; Jess Smith at 2; LDC at
2; Mallory Alexander at 2; McMeekin at 2; MemTex at 2; Moody
Compress at 2; Parkdale at 2; Southern Cotton at 2-3; SW Ag at 2;
and ACSA at 8.
    \803\ ACSA at 8; LDC at 2; and Olam at 2. The following
commenters also supported ACSA's comment letter: ACA at 2; Ecom at
1; East Cotton at 2; Jess Smith at 2; IMC at 2; Mallory Alexander at
2; McMeekin at 2; Memtex at 2; Moody Compress at 2; Omnicotton at 2;
Canale Cotton at 2; SW Ag at 2; Texas Cotton at 2; Toyo Cotton at 2;
Walcot at 2; and White Gold at 2.
    \804\ AMCOT at 1-2 and Parkdale at 2.
    \805\ Gerald Marshall at 2.
    \806\ ISDA at 7 (providing specific alternative levels).
---------------------------------------------------------------------------

(3) Discussion of Final Rule--ICE Cotton No. 2 (CT) Federal Non-Spot
Month Position Limit Level
    The Commission is adopting the proposed all-months-combined
position limit level of 11,900 contracts, but is

[[Page 3339]]

adopting a modified single month position limit level of 5,950
contracts for ICE Cotton No. 2 (CT).
    The Commission is adopting the proposed 11,900 contract Federal
all-months-combined position limit level for ICE Cotton No. 2 (CT)
because, as discussed earlier, the Commission believes that a formula
based on a percentage of open interest--specifically the modified 10/
2.5% formula--is an appropriate tool for establishing limits outside of
the spot month. However, the Commission does not believe that it is
appropriate to raise either the Federal single month or all-months-
combined position limit level for ICE Cotton No. 2 (CT) to 24,000
contracts as suggested by ISDA, because the open interest levels do not
support such a drastic increase and there is no other reason to deviate
so significantly upward from the modified 10/2.5% formula.\807\
---------------------------------------------------------------------------

    \807\ The Commission acknowledges ISDA's comment that the
proposed Federal non-spot month position limit levels should be
higher to compensate for the proposed loss of risk management
exemptions for swap dealers. However, as noted previously, the
Commission believes that any potential impact on existing risk
management exemption holders may be mitigated by the pass-through
swap provision adopted herein, and that this is a preferable and
more tailored approach than increasing the non-spot month position
limit levels for all market participants.
---------------------------------------------------------------------------

    On the other hand, the Commission believes that it is appropriate
to adopt a lower Federal single month position limit level at this
time. As noted in the Commission's request for comment in the 2020
NPRM, the Commission believed that there could be concerns with respect
to the Federal single month position limit level for ICE Cotton No. 2
(CT), especially from the commercial end-users of the core referenced
futures contract.\808\ In response to the Commission's request for
comment, the Commission received approximately 25 comment letters from
the cotton industry (out of approximately 75 comment letters on the
2020 NPRM from all commenters) unanimously requesting a lower Federal
single month position limit level compared to the Federal all-months-
combined position limit level for ICE Cotton No. 2 (CT). The Commission
believes that these unanimous comments from the commercial end-users of
the ICE Cotton No. 2 (CT) core referenced futures contract are
informative, because they suggest that lowering the 2020 NPRM's Federal
single month position limit level from the proposed 11,900 contract
level to either the existing 5,000 contract level or a 5,950 contract
level (which is 50% of the all-months-combined position limit level of
11,900 contracts) may not have a material detrimental effect on
liquidity for bona fide hedgers in the market.
---------------------------------------------------------------------------

    \808\ 85 FR 11637 (Request for Comment #26).
---------------------------------------------------------------------------

    All things being equal, a lower single month position limit level
will better protect the markets against manipulation and price
distortion,\809\ but at the expense of reduced liquidity for bona fide
hedgers. However, in this instance, in light of the comments received,
the Commission believes that it could improve protections against
manipulation and price distortion without materially impacting
liquidity for bona fide hedgers by adopting a lower Federal single
month position limit level of either 5,000 contracts or 5,950
contracts. Of these two suggested levels, the Commission believes that
it is more appropriate to adopt the 5,950 contract level over the
existing 5,000 contract level to account, in part, for the increase in
open interest levels since the single month position limit level of
5,000 contracts was adopted in 2011.\810\
---------------------------------------------------------------------------

    \809\ Specifically, the Commission is referring to the price
distortion that could be caused by a speculative trader who, after
amassing a large position during the non-spot month, exits the
entire position immediately before the spot month.
    \810\ The maximum open interest for ICE Cotton No. 2 (CT) was
197,191 contracts in 2009, 161,582 contracts in 2011, and 324,952
contracts in 2019.
---------------------------------------------------------------------------

d. Wheat Core Referenced Futures Contracts' Federal Non-Spot Month
Position Limit Levels
(1) Summary of the 2020 NPRM and Additional Background Information--
Wheat Federal Non-Spot Month Position Limit Levels
    There are three wheat contracts: CBOT Wheat (W), CBOT KC HRW Wheat
(KW), and MGEX HRS Wheat (MWE). Currently, the Federal non-spot month
position limit levels for all three are set at 12,000 contracts. This
has been referred to as ``full wheat parity.''
    In the 2020 NPRM, the Commission proposed ``partial wheat parity''
by increasing the Federal non-spot month position limit level for CBOT
Wheat (W) from 12,000 contracts to 19,300 based on the application of
the modified 10/2.5% formula and updated open interest levels, while
maintaining the existing levels of 12,000 contracts for CBOT KC HRW
Wheat (KW) and MGEX HRS Wheat (MWE). The 12,000 contract Federal non-
spot month position limit levels for CBOT KC HRW Wheat (KW) and MGEX
HRS Wheat (MWE) are above the levels that would be calculated based on
the application of the modified 10/2.5% formula and recent open
interest levels, which would be 11,900 contracts for CBOT KC HRW Wheat
(KW) and 5,700 contracts for MGEX HRS Wheat (MWE).
    The Commission proposed partial wheat parity between CBOT KC HRW
Wheat (KW) and MGEX HRS Wheat (MWE) at 12,000 contracts for two
reasons. First, both contracts provide exposure to hard red wheats. As
a result, the Commission believed that drastically decreasing the
Federal non-spot month position limit level for MGEX HRS Wheat (MWE)
vis-[agrave]-vis CBOT KC HRW Wheat (KW) by following the 10/2.5%
formula could impose liquidity costs on the MGEX HRS Wheat (MWE) market
and harm bona fide hedgers, which could further harm liquidity for bona
fide hedgers in the related CBOT KC HRW Wheat (KW) market.\811\ Second,
the existing Federal non-spot month position limit levels for CBOT KC
HRW Wheat (KW) and MGEX HRS Wheat (MWE) appear to have functioned well,
and the Commission saw no market-based reason to reduce those levels
based on recent open interest data.\812\
---------------------------------------------------------------------------

    \811\ 85 FR at 11633.
    \812\ Id. at 11632.
---------------------------------------------------------------------------

(2) Comments--Wheat Federal Non-Spot Month Position Limit Levels
    The Commission received several comments concerning the proposed
Federal non-spot month position limit levels with respect to the three
wheat core referenced futures contracts. One commenter, MGEX, stated
that it ``supports maintaining partial wheat parity by keeping the
existing non-spot month limits for [MGEX HRS Wheat (MWE)] and CBOT KC
Hard Red Wheat at 12,000.'' \813\ Another commenter agreed ``with the
increase in the non-spot month for CBOT Wheat (W).'' \814\
---------------------------------------------------------------------------

    \813\ MGEX at 3.
    \814\ MFA/AIMA at 12.
---------------------------------------------------------------------------

    However, other commenters requested that the Federal non-spot month
position limit level for CBOT KC HRW Wheat (KW) be at least the same as
CBOT Wheat (W) (i.e., raise it to 19,300 contracts).\815\ In support,
commenters contended that the ``physical market for the wheat crop that
is deliverable under [CBOT KC HRW Wheat (KW)] is much larger than the
wheat crop that is deliverable under [CBOT Wheat (W)].'' \816\ Also,
commenters stated that the ``characteristics of the physical wheat that
is deliverable under [CBOT KC HRW Wheat (KW)] is more similar to the
global wheat crop than the wheat that is deliverable under [CBOT Wheat

[[Page 3340]]

(W)].'' \817\ As a result, commenters stated that, ``[CBOT KC HRW Wheat
(KW)] may be important for hedging for many market participants.''
\818\ Similarly, MFA/AIMA stated that ``open interest data and supply
data published by the USDA for hard red winter wheat, which is the
underlying commodity for [CBOT KC HRW Wheat (KW)], would also justify
an increase in the [CBOT KC HRW Wheat (KW)] non-spot month limit.''
\819\
---------------------------------------------------------------------------

    \815\ SIFMA AMG at 3-4; ISDA at 12; PIMCO at 4-5; MFA/AIMA at
12; and Citadel at 6-7.
    \816\ PIMCO at 4. See also ISDA at 12 and SIFMA AMG at 3-4.
    \817\ SIFMA AMG at 3. See also ISDA at 12 and PIMCO at 4.
    \818\ SIFMA AMG at 4. See also ISDA at 12.
    \819\ MFA/AIMA at 12. See also Citadel at 6-7.
---------------------------------------------------------------------------

(3) Discussion of Final Rule--Wheat Federal Non-Spot Month Position
Limit Levels
    The Commission declines to raise the proposed 12,000 contract
Federal non-spot month position limit level for CBOT KC HRW Wheat (KW)
to match the final Federal non-spot month position limit level of CBOT
Wheat (W) at 19,300 contracts.
    First, as noted earlier, the Federal non-spot month position limit
level for CBOT KC HRW Wheat (KW) is already set higher, albeit
slightly, than the limit level calculated under the updated open
interest figure and 10/2.5% formula, which, as discussed previously, is
a formula that the Commission believes is generally proper for
determining Federal non-spot month position limit levels.\820\ Raising
the Federal non-spot month position limit level for CBOT KC HRW Wheat
(KW) to 19,300 contracts would be a drastic increase over the existing
level that is not supported by the 10/2.5% formula or by the
Commission's observations of how that market has functioned under the
12,000 contract Federal non-spot month position limit level. As a
result, the Commission is concerned that this could result in excessive
speculation and increase the possibility of market manipulation or harm
to the underlying price discovery function with respect to that
contract.
---------------------------------------------------------------------------

    \820\ 85 FR at 11630.
---------------------------------------------------------------------------

    Second, the Commission believes that maintaining partial wheat
parity between CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) is
appropriate because the commodities underlying both of those wheat core
referenced futures contracts are hard red wheats that, together,
represent the majority of the wheat grown in both the United States and
Canada, which results in those markets being closely intertwined.\821\
This is in contrast with CBOT Wheat (W), which typically sees
deliveries of soft white wheat varieties (even though it allows for
delivery of hard red wheat).\822\
---------------------------------------------------------------------------

    \821\ Id. at 11632.
    \822\ Id.
---------------------------------------------------------------------------

    Finally, the Commission reiterates that bona fide hedging positions
will continue to be allowed to exceed the Federal position limit
levels. Intermarket spreading is also permitted as well, which should
address any concerns over the potential for loss of liquidity in the
spread trades among the three wheat core referenced futures contracts
during the non-spot months.\823\
---------------------------------------------------------------------------

    \823\ Id. at 11633.
---------------------------------------------------------------------------

5. Subsequent Spot and Non-Spot Month Limit Levels
i. Summary of the 2020 NPRM--Subsequent Spot and Non-Spot Month Limit
Levels
    Unlike in previous iterations of the position limit rules, the 2020
NPRM did not require the Commission to periodically review and revise
EDS figures or adjust the Federal spot month position limit
levels.\824\ Instead, under proposed Sec.  150.2(f), an exchange
listing a core referenced futures contract would be required to provide
EDS figures only if requested by the Commission. Proposed Sec. 
150.2(j) delegated the authority to make such requests to the Director
of the Division of Market Oversight.\825\ The 2020 NPRM also allowed
exchanges to voluntarily submit EDS figures to the Commission at any
time, and encouraged them to do so.\826\ When submitting EDS figures,
exchanges would be required to provide a description of the methodology
used to derive the EDS figures, as well as all data and data sources
used to calculate the estimate, so that the Commission could verify
that the EDS figures are reasonable.\827\
---------------------------------------------------------------------------

    \824\ See e.g., 81 FR at 96769-96771.
    \825\ 85 FR at 11633.
    \826\ Id. at 11633-11634.
    \827\ Id. at 11634.
---------------------------------------------------------------------------

    Likewise, the 2020 NPRM also did not require the Commission to
periodically review the open interest data and update the non-spot
month position limit levels for the legacy agricultural core referenced
futures contracts, unlike in previous iterations of the position limit
rules.\828\
---------------------------------------------------------------------------

    \828\ See e.g., 81 FR at 96769, 96771-96773.
---------------------------------------------------------------------------

ii. Summary of the Commission Determination--Subsequent Spot and Non-
Spot Month Limit Levels
    The Commission is adopting Sec.  150.2(f) as proposed and will not
include a formal mechanism to periodically renew or revise EDS figures
or otherwise review and update the Federal spot month or non-spot month
position limit levels. The Commission is also adopting the delegation
provision in Sec.  150.2(j) as proposed.\829\
---------------------------------------------------------------------------

    \829\ The Commission did not receive any comments on proposed
Sec.  150.2(j).
---------------------------------------------------------------------------

iii. Comments--Subsequent Spot and Non-Spot Month Limit Levels
    The Commission received several comments concerning updates to the
Federal position limit levels, with commenters requesting that the
Commission periodically review the levels and revise them if
appropriate.\830\ One commenter was concerned that the Federal position
limit levels could become too high over time,\831\ while the rest were
concerned that the levels could become too low.\832\ In addition, CME
Group also suggested that exchanges should update the EDS figures
``every two years [and] . . . DCMs should be provided the opportunity
to submit data voluntarily to the Commission on a more frequent
basis.'' \833\
---------------------------------------------------------------------------

    \830\ MFA/AIMA at 5 (``the Commission should direct exchanges to
periodically monitor the proposed new position limit levels'');
PIMCO at 6 (``we urge the CFTC to include . . . a mandatory
requirement to regularly (and at least annually) review and update
limits as markets grow and change''); SIFMA AMG at 10 (the Final
Rule should require ``that the Commission regularly consult with
exchanges and review and adjust position limits when it is necessary
to do so based on relevant market factors''); ISDA at 10 (``the
Commission must regularly convene and consult with exchanges on
deliverable supply and, if appropriate, propose notice and comment
rulemaking to adjust limit levels''); and IATP at 16-17 (the
Commission should engage in ``an annual review of position limit
levels to give [commercial hedgers] legal certainty over that
period'' and also retain ``the authority to revise position limits .
. . if data monitoring and analysis show that those annual limit
levels are failing to prevent excessive speculation and/or various
forms of market manipulation'').
    \831\ IATP at 16-17.
    \832\ MFA/AIMA at 5-6; PIMCO at 6; SIFMA AMG at 10; and ISDA at
10.
    \833\ CME Group at 5.
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Subsequent Spot and Non-Spot Month Limit
Levels
    The Commission declines to implement a periodic, predetermined
schedule to review Federal position limits because the Commission
believes that it is more appropriate to retain flexibility for both the
exchanges and the Commission itself in updating the Federal position
limit levels.
    Reviewing and adjusting the Federal spot month position limit
levels requires the Commission to review, among other things, updated
EDS figures for the core referenced futures contracts. Having worked
closely with

[[Page 3341]]

exchanges to analyze and independently verify the methodology
underlying the EDS figures and the EDS figures themselves, the
Commission recognizes that estimating deliverable supply can be a time
and resource consuming process for both the exchanges and the
Commission.\834\ Furthermore, periodic, predetermined review intervals
may not always align with market changes or other events resulting in
material changes to deliverable supply that would warrant adjusting
Federal spot month position limit levels. As a result, the Commission
believes that it would be more efficient, timely, and effective to
review the EDS figure and the Federal position limit level for a core
referenced futures contract if warranted by market conditions,
including changes in the underlying cash market, which the Commission
and exchanges continually monitor.
---------------------------------------------------------------------------

    \834\ 85 FR at 11633.
---------------------------------------------------------------------------

    Reviewing and adjusting the Federal non-spot month position limit
levels requires the Commission to review, among other things, open
interest data for the relevant core referenced futures contracts.
Unlike EDS figures, open interest is easily obtainable because it is
regularly updated by the exchanges. As a result, the output of the 10/
2.5% formula can be quickly calculated. However, the Commission does
not believe that it is appropriate to update the Federal non-spot month
position limit levels separately from the Federal spot month position
limit levels. The Commission has historically reviewed all of the
Federal position limit levels--spot month and non-spot month--together
for a particular contract because all months of a particular contract
are part of the same market. As a result, updating both the spot and
non-spot month position limits levels at the same time provides a
holistic and integrated position limit regime for each commodity
contract because the limits are based upon updated data covering the
same or overlapping time period.
    Final Sec.  150.2(f) provides flexibility and authority for the
Commission to be able to request an updated EDS figure, along with the
methodology and underlying data, for a core referenced futures contract
whenever market conditions suggest that a change in Federal position
limit levels may be warranted. The exchanges are also encouraged to
submit such information at any time as well under final Sec. 
150.2(f).\835\ Once the Commission receives the updated EDS figures,
then the Commission can undertake the appropriate review and analysis
of the EDS figures and any additional information, such as exchange
recommendations, to adjust the Federal spot month position limit
levels, if necessary, through rulemaking. At that time, the Commission
would also review the open interest data for the core referenced
futures contract and undertake the necessary analysis to ensure that
the Federal non-spot month position limit levels are set at appropriate
levels as well.
---------------------------------------------------------------------------

    \835\ In providing an updated EDS figure, exchanges should
consult the guidance concerning estimating deliverable supply set
forth in section (b)(1)(i) (``Estimating Deliverable Supplies'') of
17 CFR part 38, Appendix C.
---------------------------------------------------------------------------

    Finally, the Commission notes that, under this position limits
framework, the exchanges always have the freedom to set their exchange-
set position limit levels lower than the Federal position limit levels.
Adjusting the Federal position limit levels necessarily requires the
Commission to engage in rulemaking with notice-and-comment, which can
take a significant amount of time.\836\ Thus, an exchange may adjust
its exchange-set position limit levels lower in response to market
conditions, while waiting for the Commission to adjust the Federal
position limit levels.\837\
---------------------------------------------------------------------------

    \836\ Market participants may petition the Commission to adjust
Federal position limit levels, subject to the Commission's notice-
and-comment rulemaking, under existing Sec.  13.1, which provides
that any ``person may file a petition with . . . the Commission . .
. for the issuance, amendment or repeal of a rule of general
application.''
    \837\ However, an exchange cannot set its exchange-set position
limit levels above the Federal position limit levels, even if market
conditions may warrant raising the levels. Thus, in order to allow
market participants to hold positions higher than the Federal
position limit levels (absent an exemption), the Commission would
need to raise the Federal position limit levels through rulemaking.
---------------------------------------------------------------------------

6. Relevant Contract Month
    Proposed Sec.  150.2(c) clarified that the spot month and single
month for any given referenced contract is determined by the spot month
and single month of the core referenced futures contract to which that
referenced contract is linked.
    The Commission did not receive any comments and is adopting as
proposed. Final Sec.  150.2(c) requires that referenced contracts be
linked to the core referenced futures contract in order to be netted
for position limit purposes.
    For example, for the NYMEX NY Harbor ULSD Heating Oil (HO) core
referenced futures contract, the spot month period starts at the close
of trading three business days prior to the last trading day of the
contract. The spot month period for the NYMEX NY Harbor ULSD Financial
(MPX) futures referenced contract would thus start at the same time--
the close of trading three business days prior to the last trading day
of the core referenced futures contract.
7. Limits on ``Pre-Existing Positions''
i. Summary of the 2020 NPRM--Pre-Existing Positions
    Under proposed Sec.  150.2(g)(1) Federal spot month position limits
applied to ``pre-existing positions, other than pre-enactment swaps and
transition period swaps,'' each defined in proposed Sec.  150.1.
Accordingly, Federal spot month position limits would not apply to any
pre-existing positions in economically equivalent swaps. The 2020 NPRM
defined ``pre-existing positions'' in proposed Sec.  150.1 as positions
established in good faith prior to the effective date of a final
Federal position limits rulemaking.
    In contrast, proposed Sec.  150.2(g)(2) provided that Federal non-
spot month limits would not apply to pre-existing positions, including
pre-enactment swaps and transition period swaps, if acquired in good
faith prior to the effective date of such limit. However, other than
pre-enactment swaps and transition period swaps, any pre-existing
positions held outside the spot month would be attributed to such
person if the person's position is increased after the effective date
of a final Federal position limits rulemaking.
    The 2020 NPRM's disparate treatment of pre-existing positions
during and outside the spot month was predicated on the concern that
failing to apply spot month limits to such pre-existing positions could
result in a large, preexisting position either intentionally or
unintentionally causing a disruption to the price discovery function of
the core referenced futures contract as positions are rolled into the
spot month. In contrast, outside the spot month, large, pre-existing
positions may have a relatively less disruptive effect given that
physical delivery occurs only during the spot month.
ii. Summary of the Commission Determination--Pre-Existing Positions
    The Commission is adopting Sec.  150.2(g)(1) as proposed, and is
adopting Sec.  150.2(g)(2) with the following two changes:
    First, the Commission is amending proposed Sec.  150.2(g)(2) to
provide that non-spot month limits shall apply to pre-existing
positions, other than pre-enactment swaps and transition period swaps.
As noted above, proposed Sec.  150.2(g)(2) in the 2020 NPRM exempted
pre-existing positions from the Final Rule's Federal non-spot month
position limits. However, as discussed below, the nine legacy
agricultural

[[Page 3342]]

contracts currently are subject to the Commission's existing non-spot
month position limits, and the Commission did not intend to exclude
existing non-spot month positions in the nine legacy agricultural
contracts that would otherwise qualify as ``pre-existing positions''
under the Final Rule. As discussed, the other 16 non-legacy core
referenced futures contracts that are subject to Federal position
limits for the first time under the Final Rule are not subject to
Federal non-spot month position limits and therefore proposed Sec. 
150.2(g)(2) would not have applied to these contracts in any event.
    The Commission based the language in proposed Sec.  150.2(g) on
similar language found in the 2016 Reproposal, which imposed Federal
non-spot month position limits on all of the proposed core referenced
futures contracts (as opposed to only on the nine legacy agricultural
contracts under the Final Rule). In the context of the 2016 Reproposal,
the Commission believed it made sense to exempt pre-existing positions
in non-spot months in core referenced futures contracts that would have
been subject to Federal position limits for the first time under the
2016 Reproposal. However, as noted above, such core referenced futures
contracts that are subject to Federal position limits for the first
time under the Final Rule are not subject to Federal non-spot month
position limits. Accordingly, the Commission is modifying Sec. 
150.2(g) so that pre-existing positions in the nine legacy agricultural
contracts remain subject to Federal non-spot month position limits
under the Final Rule, as the Commission had originally intended.
    Second, since the Commission is clarifying that pre-existing
positions in the nine legacy agricultural contracts, other than pre-
enactment swaps and transition period swaps, are subject to Federal
non-spot month position limits under the Final Rule, the language in
proposed Sec.  150.2(g)(2) that would attribute to a person any
increase in their non-spot month positions after the effective date of
the Final Rule's non-spot month limits is no longer necessary. The
Commission is therefore removing this language from final Sec. 
150.2(g)(2).
iii. Comments--Pre-Existing Positions
    Commenters generally supported proposed Sec.  150.2(g), although
several commenters asked for additional clarity.\838\ MGEX and FIA both
argued that the provision could be simplified by creating only two
categories: ``pre-existing swaps'' (exempt from all spot/non-spot
Federal position limits) and ``pre-existing futures'' (exempt from all
non-spot Federal position limits, provided there is no increase in such
non-spot positions), stating that relying upon the proposed relief as
structured will be ``operationally challenging'' for market
participants.\839\ MGEX and FIA also requested that the Commission
clarify that a market participant is not required to rely upon the
exemption so that its pre-existing positions could be netted, as
applicable, with the market participant's other referenced
contracts.\840\ ISDA encouraged the Commission to provide that the
Final Rule's new Federal position limits do not apply to any pre-
existing positions, whether in futures contracts or swaps.\841\
Finally, CHS encouraged the Commission to adopt a ``safe harbor''
provision where participants could demonstrate a ``good-faith'' effort
at compliance so ``inadvertent'' violations would not trigger possible
enforcement action.\842\
---------------------------------------------------------------------------

    \838\ MGEX at 4; FIA at 9; ISDA at 8.
    \839\ FIA at 8-9; MGEX at 4.
    \840\ MGEX at 3-4; FIA at 8-9, 18-19.
    \841\ ISDA at 2, 8.
    \842\ CHS at 5.
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Pre-Existing Positions
    As stated in the 2020 NPRM, the Commission believes that the
absence of spot-month limits on pre-existing positions, other than pre-
existing swaps and transition period swaps, could render the Federal
spot month position limits ineffective. Failure to apply spot month
limits to such pre-existing positions, particularly for the 16
commodities that are not currently subject to Federal position limits
and where market participants may have pre-existing positions in excess
of the spot-month position limits adopted herein, could result in a
large, pre-existing position either intentionally or unintentionally
causing a disruption to the price discovery function of the core
referenced futures contract as positions are rolled into the spot
month.\843\ The Commission is particularly concerned about protecting
the spot month in physically delivered futures contracts from price
distortions or manipulation that would disrupt the hedging and price
discovery utility of the futures contract.\844\
---------------------------------------------------------------------------

    \843\ 85 FR at 11634.
    \844\ Id.
---------------------------------------------------------------------------

    With respect to non-spot month position limits, only the nine
legacy agricultural contracts are currently subject to such limits
under the existing Federal position limits framework and will continue
to be subject to Federal non-spot month position limits under the Final
Rule. The Commission did not intend in the 2020 NPRM to exclude such
pre-existing positions in the nine legacy agricultural contracts from
non-spot month limits. Accordingly, for the Final Rule the Commission
is modifying final Sec.  150.2(g)(2) to make clear that Federal non-
spot month position limits do apply to these pre-existing positions.
However, as noted above, the 16 non-legacy core referenced futures
contracts that are subject to Federal position limits for the first
time under this Final Rule are not subject to Federal non-spot month
position limits and so are not affected by the Commission's change in
final Sec.  150.2(g)(2).
    The Commission agrees with MGEX's and FIA's comments that pre-
existing positions can be netted. The Commission confirms that market
participants may continue to net their pre-existing positions, as
applicable, with market participants' post-effective date referenced
contract positions. In the 2020 NPRM, the Commission made explicit in
proposed Sec.  150.3(a)(5) that market participants would be permitted
to net pre-existing swap positions with post-effective date referenced
contract positions (to the extent such pre-existing swap positions
qualify as ``economically equivalent swaps'' under the Final
Rule).\845\ The Commission adopted this clarification in final Sec. 
150.3(a)(5) for the avoidance of doubt. The Commission believes this
explicit clarification with respect to swaps is helpful to market
participants since swaps are subject to Federal position limits for the
first time under this Final Rule and since it may not otherwise be
clear whether a market participant could net a pre-enactment swap or
transition period swap given that such pre-enactment and transition
period swaps are exempt from Federal position limits under final Sec. 
150.3(a)(5).
---------------------------------------------------------------------------

    \845\ Pre-existing swap positions (i.e., pre-enactment swaps and
transition period swaps) would otherwise be exempt from Federal
position limits.
---------------------------------------------------------------------------

    However, the Commission similarly intended that market participants
also would be able to net pre-existing futures contracts and option on
futures contracts against post-effective date positions. The Commission
did not feel such a clarification was necessary since futures contracts
and options thereon have been subject to the existing Federal position
limits framework. Accordingly, for the avoidance of doubt, the
Commission is affirming that market participants may continue to net
pre-existing futures contracts and option on

[[Page 3343]]

futures contracts with post-effective date positions in referenced
contracts.
    In response to ISDA's request for clarification, the Commission
notes that Federal non-spot month position limits will apply to pre-
existing positions in the nine legacy agricultural contracts (but not
to the 16 non-legacy core referenced futures contracts). However, for
the reasons articulated above, Federal position limits will apply
during the spot month for futures contracts and options on futures
contracts for all 25 core referenced futures contracts, other than pre-
enactment swaps and transition period swaps.
    While the Commission is not adopting a ``safe harbor'' provision,
it is providing a transition period, as requested by CHS,\846\ so that
market participants will have until January 1, 2022 (or January 1, 2023
for economically-equivalent swaps or positions relying on the risk-
management exemption) to comply with the Final Rule. The Commission
believes this will provide sufficient time for market participants to
implement and test new systems and processes that have been established
to comply with the Final Rule.
---------------------------------------------------------------------------

    \846\ CHS at 5.
---------------------------------------------------------------------------

8. Positions on Foreign Boards of Trade
i. Background
    CEA section 4a(a)(6)(B) directs the Commission to establish limits
on the aggregate number of positions in contracts based upon the same
underlying commodity that may be held by any person across contracts
traded on a foreign board of trade (``FBOT'') with respect to a
contract that settles against any price of at least one contract listed
for trading on a registered entity.\847\
---------------------------------------------------------------------------

    \847\ 7 U.S.C. 6a(a)(6)(B). The CEA's definition of ``registered
entity'' includes DCMs and SEFs. 7 U.S.C. 1a(40).
---------------------------------------------------------------------------

ii. Summary of the 2020 NPRM--Foreign Boards of Trade
    Proposed Sec.  150.2(h) applied the proposed Federal position
limits to a market participant's aggregate positions in referenced
contracts executed on a DCM or SEF and on, or pursuant to the rules of,
an FBOT, provided that (1) the referenced contracts settle against a
price of a contract listed for trading on a DCM or SEF and (2) the FBOT
makes such contract available in the United States through ``direct
access.'' \848\ In other words, a market participant's positions in
referenced contracts listed on a DCM or SEF and on an FBOT registered
to provide direct access would collectively have to stay below the
Federal position limit for the relevant core referenced futures
contract.
---------------------------------------------------------------------------

    \848\ Commission regulation Sec.  48.2(c) defines ``direct
access'' to mean an explicit grant of authority by an FBOT to an
identified member or other participant located in the United States
to enter trades directly into the trade matching system of the FBOT.
17 CFR 48.2(c).
---------------------------------------------------------------------------

iii. Summary of the Commission Determination--Foreign Boards of Trade
    The Commission is adopting Sec.  150.2(h) as proposed.
iv. Comments--Foreign Boards of Trade
    The Commission received comments from CEWG, Chevron, and Suncor
regarding proposed Sec.  150.2(h) and its possible effects with respect
to certain contracts listed on ICE Futures Europe (``IFEU'') that are
price-linked to the energy core referenced futures contracts.\849\ Each
of the commenters expressed concern that the extension of the proposed
Federal position limits regime to referenced contracts listed for
trading on IFEU could have unintended consequences, such as: (1)
Requiring U.S.-based market participants to comply with potentially
conflicting requirements of multiple regulators and position limits
regimes; and (2) incentivizing foreign regulators to extend their reach
into the Commission's jurisdictional markets.\850\
---------------------------------------------------------------------------

    \849\ CEWG at 28-29; Chevron at 15-16; Suncor at 14-15.
    \850\ CEWG at 28; Chevron at 16; Suncor at 15.
---------------------------------------------------------------------------

    Chevron and Suncor requested that the Commission reconsider what
they perceive to be the potential regulatory conflicts and burdens that
could be imposed on market participants who transact referenced
contracts listed on IFEU, and adopt a policy of substituted compliance
to minimize such conflicts.\851\ CEWG recommended that the Commission
adopt an approach based on substituted compliance with respect to
referenced contracts listed on FBOTs similar to that adopted for swaps
under CEA section 2(i).\852\
---------------------------------------------------------------------------

    \851\ Chevron at 16; Suncor at 15.
    \852\ CEWG at 29.
---------------------------------------------------------------------------

v. Discussion of Final Rule--Foreign Boards of Trade
    As stated above, the Commission is adopting Sec.  150.2(h) as
proposed. As stated in the 2020 NPRM,\853\ CEA section 4a(a)(6)(B)
requires the Commission to establish limits on the aggregate number or
amount of positions in contracts based upon the same underlying
commodity that may be held by any person across certain contracts
traded on an FBOT with linkages to a contract traded on a registered
entity. Final Sec.  150.2(h) simply codifies requirements set forth in
CEA section 4a(a)(6)(B), and will lessen regulatory arbitrage by
eliminating a potential loophole whereby a market participant could
accumulate positions on certain FBOTs in excess of limits in referenced
contracts.\854\
---------------------------------------------------------------------------

    \853\ 85 FR at 11634.
    \854\ In addition, CEA section 4(b)(1)(B) prohibits the
Commission from permitting an FBOT to provide direct access to its
trading system to its participants located in the United States
unless the Commission determines, in regards to any FBOT contract
that settles against any price of one or more contracts listed for
trading on a registered entity, that the FBOT (or its foreign
futures authority) adopts position limits that are comparable to the
position limits adopted by the registered entity. 7 U.S.C.
6(b)(1)(B).
---------------------------------------------------------------------------

    Accordingly, the Commission believes that Sec.  150.2(h) is
consistent with the goal set forth in CEA section 4a(a)(2)(C) to ensure
that liquidity does not move to foreign jurisdictions or place U.S.
exchanges at a competitive disadvantage to foreign competitors. If the
Commission did not attribute positions held in referenced contracts on
FBOTs, the Commission inadvertently could incentivize market
participants to shift trading and liquidity in referenced contracts to
FBOTs in order to avoid Federal position limits.
9. Anti-Evasion
i. Summary of the 2020 NPRM--Anti-Evasion
    Pursuant to the Commission's rulemaking authority in section 8a(5)
of the CEA,\855\ the Commission proposed Sec.  150.2(i), which was
intended to deter and prevent a number of potential methods of evading
Federal position limits. The proposed anti-evasion provision provided:
(1) A commodity index contract and/or location basis contract, which
would otherwise be excluded from the proposed referenced contract
definition, would be considered a referenced contract subject to
Federal position limits if used to willfully circumvent position
limits; (2) a bona fide hedge recognition or spread exemption would no
longer apply if used to willfully circumvent speculative position
limits; and (3) a swap contract used to willfully circumvent
speculative position limits would be deemed an economically equivalent
swap, and thus a referenced contract, even if the swap does not meet
the economically equivalent swap definition set forth in proposed Sec. 
150.1.
---------------------------------------------------------------------------

    \855\ 7 U.S.C. 12a(5).
---------------------------------------------------------------------------

ii. Summary of the Commission Determination--Anti-Evasion
    The Commission is adopting Sec.  150.2(i) as proposed with
conforming changes that reflect revisions to the ``referenced
contract'' definition adopted herein in

[[Page 3344]]

which the Final Rule additionally is excluding ``monthly average
pricing contracts'' and ``outright price reporting agency index
contracts'' from the ``referenced contract'' definition.\856\ A
discussion of these conforming changes appears immediately below,
followed by a summary of the comments, which addressed different
aspects of the proposed anti-evasion provision.
---------------------------------------------------------------------------

    \856\ See supra Section II.A.16.iii.b. (explanation of proposed
exclusions from the ``referenced contract'' definition).
---------------------------------------------------------------------------

a. Discussion of Conforming Changes--Anti-Evasion
    The Commission is revising proposed Sec.  150.2(i)(1), which
addressed evasion of Federal position limits by using commodity index
contracts and location basis contracts, to also cover monthly average
pricing contracts and outright price reporting agency index contracts.
This change is needed to conform the anti-evasion provision to the
``referenced contract'' definition adopted herein. In particular, while
the 2020 NPRM would exclude commodity index contracts and location
basis contracts from the ``referenced contract'' definition, the Final
Rule excludes those contracts as well as monthly average pricing
contracts and outright price reporting agency index contracts from the
``referenced contract definition.'' \857\
---------------------------------------------------------------------------

    \857\ See Section II.A.16.iii.b.
---------------------------------------------------------------------------

    Because contracts that are excluded from the final ``referenced
contract'' definition are not subject to Federal position limits, the
Commission intends that final Sec.  150.2(i)(1) will prevent a
potential loophole whereby a market participant who has reached its
limits could otherwise utilize these contract types to willfully
circumvent or evade speculative position limits. For example, a market
participant could purchase a commodity index contract in a manner that
allowed the participant to exceed limits when taking into account the
weighting in the component commodities of the index contract. The Final
Rule also will avoid creating what could otherwise be similar potential
loopholes with respect to monthly average pricing contracts, outright
price reporting agency index contracts, and location basis contracts.
    Additionally, the Commission is adopting Sec.  150.2(i)(2) as
proposed. This provision provides that a bona fide hedge recognition or
spread exemption will no longer apply if used to willfully circumvent
speculative position limits. This provision is intended to help ensure
that bona fide hedge recognitions and spread exemptions are granted and
utilized in a manner that comports with the CEA and Commission
regulations, and that the ability to obtain bona fide hedge
recognitions and spread exemptions does not become an avenue for market
participants to inappropriately exceed speculative position limits.
    The Commission is also adopting Sec.  150.2(i)(3) as proposed.
Under this provision, a swap contract used to willfully circumvent
speculative position limits is deemed an economically equivalent swap,
and thus a referenced contract, even if the swap does not meet the
economically equivalent definition set forth in final Sec.  150.1. This
provision is intended to deter and prevent the structuring of a swap in
order to willfully evade speculative position limits.
iii. Comments--Anti-Evasion
    Several commenters stated that the anti-evasion provision is
prudent, but would be difficult to apply in practice, in part due to
the subjective ``willful circumvention'' standard.\858\ FIA recommended
that, instead, the anti-evasion analysis should be based on the
presence of ``deceit, deception, or other unlawful or illegitimate
activity'' so market participants will be better equipped to evaluate
the surrounding facts and circumstances in making an evasion
determination.\859\ FIA further expressed that, because markets evolve,
it is inadvisable to consider ``historical practices behind the market
participant and transaction in question.'' \860\ FIA also asked the
Commission to confirm that it is not evasion for a market participant
to consider ``costs or regulatory burdens, including the avoidance
thereof,'' if that participant has a legitimate business purpose for a
transaction.\861\
---------------------------------------------------------------------------

    \858\ SIFMA AMG at 7, n.16 (noting that the anti-evasion
provision makes the application of the proposed ``economically
equivalent swap'' definition less clear because it incorporates a
subjective measure of intent); see also FIA at 25 (questioning how a
participant would distinguish a strategy that minimizes position
size with an evasive strategy); Better Markets at 33 (describing the
anti-evasion provision as a ``useful deterrent,'' but noting that
the willful circumvention standard would be difficult to meet and
partially turns on the Commission's consideration of the legitimate
business purpose analysis).
    \859\ FIA at 25-26.
    \860\ Id.
    \861\ Id.
---------------------------------------------------------------------------

    Specific to swaps, ISDA encouraged the Commission to expressly
acknowledge and confirm that an out-of-scope swap transaction would not
be considered evasion under any set of circumstances.\862\ FIA
recommended that, for structured swaps, the anti-evasion analysis
should ask whether the swap serves the market participant's commercial
needs or objectives.\863\ Finally, FIA suggested that the Final Rule
should provide an automatic safe harbor from a retroactive evasion
determination for all swaps entered into prior to the compliance
date.\864\
---------------------------------------------------------------------------

    \862\ ISDA at 5, n.7
    \863\ FIA at 25.
    \864\ Id.
---------------------------------------------------------------------------

iv. Discussion of Final Rule--Anti-Evasion
    The Final Rule's anti-evasion provision is not intended to capture
a trading strategy merely because the strategy may result in a smaller
position size for purposes of position limits. Instead, the anti-
evasion provision is intended to deter and prevent cases of willful
evasion of speculative position limits, the specifics of which the
Commission may be unable to anticipate. The Federal position limit
requirements adopted herein will apply during the spot month for all
referenced contracts subject to Federal position limits, while non-spot
month Federal position limit requirements will only apply for the nine
legacy agricultural contracts. Under this framework, and because the
threat of corners and squeezes is the greatest in the spot month, the
Commission anticipates that it may focus its attention on anti-evasion
activity during the spot month.
    The determination of whether particular conduct is intended to
circumvent or evade requires a facts and circumstances analysis. In
interpreting these anti-evasion rules, the Commission is guided by its
interpretations of anti-evasion provisions appearing elsewhere in the
Commission's regulations, including the interpretation of the anti-
evasion rules that the Commission adopted in its rulemakings to further
define the term ``swap'' and to establish a clearing requirement under
section 2(h)(1)(A) of the CEA.\865\
---------------------------------------------------------------------------

    \865\ See Further Definition of ``Swap, ``Security-Based Swap,''
and ''Security-Based Swap Agreement;'' Mixed Swaps; Security-Based
Swap Agreement Recordkeeping, 77 FR 48208, 48297-48303 (Aug. 13,
2012); Clearing Requirement Determination Under Section 2(h) of the
CEA, 77 FR 74284, 74317-74319 (Dec. 13, 2012).
---------------------------------------------------------------------------

    Generally, consistent with those interpretations, in evaluating
whether conduct constitutes evasion, the Commission will consider,
among other things, the extent to which the person lacked a legitimate
business purpose for structuring the transaction in that particular
manner. For example, an analysis of how a swap was structured could
reveal that a person or persons crafted derivatives transactions,
structured entities, or conducted

[[Page 3345]]

themselves in a manner without a legitimate business purpose and with
the intent to willfully evade position limits by structuring one or
more swaps such that such swap(s) would not meet the ``economically
equivalent swap'' definition in final Sec.  150.1.
    In response to FIA's comment that the Commission should confirm
that it is not evasion for a market participant with a legitimate
business purpose for a transaction to consider ``costs or regulatory
burdens,\866\ the Commission acknowledges that it fully expects that a
person acting for legitimate business purposes within its respective
industry will naturally consider a multitude of costs and benefits
associated with different types of financial transactions, entities or
instruments, including the applicable regulatory obligations.\867\ As
stated in a prior rulemaking, a person's specific consideration of, for
example, costs or regulatory burdens, including the avoidance thereof,
is not, in and of itself, dispositive that the person is acting without
a legitimate business purpose in a particular case.\868\
---------------------------------------------------------------------------

    \866\ FIA at 25.
    \867\ See 77 FR at 48301.
    \868\ See 77 FR at 74319.
---------------------------------------------------------------------------

    In response to FIA's comment \869\ that an anti-evasion analysis of
a structured swap should evaluate whether the transaction serves the
market participant's commercial needs or objectives, as stated in the
2020 NPRM, the Commission will view legitimate business purpose
considerations on a case-by-case basis in conjunction with all other
relevant facts and circumstances. Additionally, the Commission
disagrees with FIA's comment \870\ that an historical practices inquiry
is inadvisable. Because transactions and instruments are regularly
structured, and entities regularly formed, in a particular way and for
various, often times multiple, reasons, the Commission believes it is
essential that all relevant facts and circumstances be considered,
including historical practices.\871\ While historical practice is a
factor the Commission will consider as part of its facts and
circumstances analysis, it is not dispositive in determining whether
particular conduct constitutes evasion.
---------------------------------------------------------------------------

    \869\ FIA at 25.
    \870\ Id. at 25-26.
    \871\ See 77 FR at 48302.
---------------------------------------------------------------------------

    As part of its facts and circumstances analysis, the Commission
will look at factors such as the historical practices behind the market
participant and transaction in question. For example, with respect to
Sec.  150.2(i)(2) (i.e., bona fide hedges or spreads used to evade),
the Commission is adopting guidance in Appendix B to part 150 with
respect to gross versus net hedging. As discussed elsewhere in this
release, the Commission believes that measuring risk on a gross basis
to willfully circumvent or evade speculative position limits would
potentially run afoul of Sec.  150.2(i)(2).\872\ Use of gross or net
hedging that is inconsistent with an entity's historical practice, or a
change from gross to net hedging (or vice versa), could be an
indication that an entity is seeking to evade position limits
regulations.\873\ With respect to Sec.  150.2(i)(3) (i.e., swaps used
to evade), the Commission will consider whether a market participant
has a history of structuring its swaps one way, but then starts
structuring its swaps a different way around the time the participant
risked exceeding a speculative position limit as a result of its swap
position, such as by modifying the delivery date or other material
terms and conditions such that the swap no longer meets the definition
of an ``economically equivalent swap.''
---------------------------------------------------------------------------

    \872\ See Section II.A.1.ix.
    \873\ Id.
---------------------------------------------------------------------------

    Consistent with interpretive language in prior rulemakings
addressing evasion,\874\ when determining whether a particular activity
constitutes willful evasion, the Commission will consider the extent to
which the activity involves deceit, deception, or other unlawful or
illegitimate activity. Although it is likely that fraud, deceit, or
unlawful activity will be present where willful evasion has occurred,
the Commission disagrees with FIA's comment \875\ that these factors
should be a prerequisite to an evasion finding. A position that does
not involve fraud, deceit, or unlawful activity could still lack a
legitimate business purpose or involve other indicia of evasive
activity. The presence or absence of fraud, deceit, or unlawful
activity is one fact the Commission will consider when evaluating a
person's activity. That said, the final anti-evasion provision does
require willfulness, i.e. ``scienter.'' In response to commenters \876\
who expressed concern regarding the practical application of this
intent standard, the Commission will interpret ``willful'' consistently
with how the Commission has done so in the past, i.e., that acting
either intentionally or with reckless disregard constitutes acting
``willfully.'' \877\
---------------------------------------------------------------------------

    \874\ See 77 FR at 48297-48303; 77 FR at 74317-74319.
    \875\ FIA at 25.
    \876\ SIFMA AMG at 7, n.16; see also FIA at 25; Better Markets
at 33.
    \877\ See In re Squadrito, [1990-1992 Transfer Binder] Comm.
Fut. L. Rep. (CCH) ] 25,262 (CFTC Mar. 27, 1992) (adopting
definition of ``willful'' in McLaughlin v. Richland Shoe Co., 486
U.S. 128 (1987)).
---------------------------------------------------------------------------

    In determining whether a transaction has been entered into or
structured willfully to evade position limits, the Commission will not
consider the form, label, or written documentation as dispositive. The
Commission also is not requiring a pattern of evasive transactions as a
prerequisite to prove evasion, although such a pattern may be one
factor in analyzing whether evasion has occurred. In instances where
one party willfully structures a transaction to evade but the other
counterparty does not, Sec.  150.2(i) will apply to the party who
willfully structured the transaction to evade.
    Further, entering into transactions that qualify for the forward
exclusion from the swap definition, standing alone, shall not be
considered evasive. However, in circumstances where a transaction does
not, in fact, qualify for the forward exclusion, the transaction may or
may not be evasive depending on an analysis of all relevant facts and
circumstances.
    The Commission declines to adopt ISDA's request \878\ to carve out-
of-scope swap transactions from the anti-evasion provision. This
request was unsupported and did not address whether an out-of-scope
swap could be used to evade position limits.
---------------------------------------------------------------------------

    \878\ ISDA at 5, n.7.
---------------------------------------------------------------------------

    Finally, the Commission declines to adopt FIA's request \879\ that
all swaps entered into prior to the compliance date be granted an
automatic safe harbor from a retroactive finding of evasion. This
change is unnecessary given that under final Sec.  150.3, pre-enactment
swaps and transition period swaps will not be subject to Federal
position limits at all during or outside the spot month.\880\
---------------------------------------------------------------------------

    \879\ FIA at 25.
    \880\ See final Sec.  150.3(a)(5).
---------------------------------------------------------------------------

10. Application of Netting and Related Treatment of Cash-Settled
Referenced Contracts
i. Background
    Under the existing Federal framework, Federal position limits apply
only to the nine legacy agricultural contracts, which are all
physically-settled. However, existing part 150 does not include the
equivalent concept of a ``referenced contract,'' and therefore existing
Federal position limits do not apply to any cash-settled look-alike
contracts as they would under the Final Rule. Accordingly, the issue of
netting across look-alike contracts that may be located across

[[Page 3346]]

different exchanges is not addressed under the existing framework.
ii. Summary of the 2020 NPRM--Netting and Related Treatment of Cash-
Settled Referenced Contracts
    Under the 2020 NPRM, the referenced contract definition in proposed
Sec.  150.1 included, among other things, (i) cash-settled contracts
that are linked, either directly or indirectly, to a core referenced
futures contract, and (ii) ``economically equivalent swaps.'' \881\
---------------------------------------------------------------------------

    \881\ See Section II.A.16. (discussion of the proposed
referenced contract definition).
---------------------------------------------------------------------------

    Proposed Sec.  150.2(a) provided that during the spot month,
Federal position limits would apply ``separately'' to physically
delivered referenced contracts and cash-settled referenced contracts.
Under the 2020 NPRM, positions in a physically-settled core referenced
futures contract would not be required to be added to, nor permitted to
be netted down by, positions in corresponding cash-settled referenced
contracts (and vice-versa).
    Proposed Sec.  150.2(b), in contrast, provided that during the non-
spot months, including the single month and all-months-combined,
Federal position limits would apply in the aggregate to both
physically-delivered referenced contracts and cash-settled referenced
contracts. This meant that for the purposes of determining whether a
market participant complies with the Federal non-spot month position
limits, a person's physically-settled and cash-settled referenced
contract positions would be added together and could net against each
other.
    Under both proposed Sec. Sec.  150.2(a) and (b), positions in
referenced contracts would be aggregated across exchanges for purposes
of determining one's net position for Federal position limit purposes.
iii. Summary of the Commission Determination--Netting and Related
Treatment of Cash-Settled Referenced Contracts
    The Commission is finalizing Sec.  150.2(a) and (b) of the 2020
NPRM as proposed.\882\
---------------------------------------------------------------------------

    \882\ As discussed above, the Commission is making an exception
for natural gas referenced contracts to the general netting rules
discussed below. For further discussion on the Final Rule's
treatment of natural gas referenced contracts, see Section
II.B.3.vi.
---------------------------------------------------------------------------

iv. Comments--Netting and Related Treatment of Cash-Settled Referenced
Contracts
    PIMCO, SIFMA AMG, and ISDA contended that cash-settled referenced
contracts should not be subject to Federal position limits at all
because cash-settled contracts do not introduce the same risk of market
manipulation. They argued that subjecting cash-settled referenced
contracts to Federal position limits would reduce market liquidity and
depth in these instruments.\883\
---------------------------------------------------------------------------

    \883\ PIMCO at 3; SIFMA AMG at 4-7; ISDA at 3-5. These entities
did not specifically argue that cash-settled contracts should be
excluded from the ``referenced contract'' definition, but rather in
general that such instruments should not be subject to Federal
position limits. The Commission noted that this is technically a
different argument since cash-settled instruments could be exempt
from position limits while still technically qualifying as
``referenced contracts,'' but the end result is the same as a
practical matter.
---------------------------------------------------------------------------

    FIA and ICE argued that limits for cash-settled referenced
contracts should be higher relative to Federal position limits for
physically-settled referenced contracts. They similarly argued that
cash-settled referenced contracts are ``not subject to corners and
squeezes'' and will `` `ensure market liquidity for bona fide hedgers.'
'' \884\ FIA and ICE further suggested that Federal position limits for
cash-settled referenced contracts should apply per DCM (rather than in
aggregate across DCMs).\885\ FIA additionally suggested setting a
separate Federal spot-month position limit for economically equivalent
swaps.\886\
---------------------------------------------------------------------------

    \884\ ICE at 3, 15 (also arguing that cash-settled limits should
apply per exchange, rather than across exchanges); FIA at 7-8.
    \885\ FIA at 7-8; ICE at 13.
    \886\ FIA 7-8.
---------------------------------------------------------------------------

    In contrast, CME Group supported the Commission's approach for
spot-month parity for physically-settled and cash-settled referenced
contracts across all commodity markets. CME Group explained that absent
such parity, one side of the market could be vulnerable to: Artificial
distortions from manipulations on the other side of the market;
regulatory arbitrage; and liquidity drain to the other side of the
market.\887\ CME Group warned that, ultimately, a lack of parity could
undermine the statutory goals of position limits.\888\ NEFI agreed,
arguing similarly that ``this move is essential to guard against
manipulation by a trader who holds positions in both physically-settled
and cash-settled contracts for the same underlying commodity.'' \889\
---------------------------------------------------------------------------

    \887\ CME Group at 3-4.
    \888\ Id. at 6.
    \889\ NEFI at 3.
---------------------------------------------------------------------------

v. Discussion of Final Rule--Netting and Related Treatment of Cash-
Settled Referenced Contracts
    The Commission is finalizing Sec. Sec.  150.2(a) and (b) as
proposed. Under final Sec.  150.2(a), Federal spot month limits apply
to physical-delivery referenced contracts ``separately'' from Federal
spot month limits applied to cash-settled referenced contracts, meaning
that during the spot month, positions in physically-settled contracts
may not be netted with positions in linked cash-settled contracts but
also are not required to be added to linked cash-settled contracts for
the purposes of determining compliance with Federal position limits.
Specifically, all of a trader's positions (long or short) in a given
physically-settled referenced contract (across all exchanges and OTC as
applicable) \890\ are netted and subject to the spot month limit for
the relevant commodity, and all of such trader's positions in any cash-
settled referenced contracts (across all exchanges and OTC as
applicable) linked to such physically-settled core referenced futures
contract are netted and independently (rather than collectively along
with the physically-settled positions) subject to the Federal spot
month limit for that commodity.\891\
---------------------------------------------------------------------------

    \890\ In practice, the only physically-settled referenced
contracts subject to the Final Rule will be the 25 core referenced
futures contracts, none of which are listed on multiple DCMs,
although there could potentially be physically-settled OTC swaps
that would satisfy the ``economically equivalent swap'' definition
and therefore would also qualify as referenced contracts. For
further discussion on economically equivalent swaps, see Section
II.A.4.
    \891\ Consistent with CEA section 4a(a)(6), this would include
positions across exchanges. However, for the reasons discussed in
Section II.B.3.vi., the Commission is exercising its exemptive
authority under CEA section 4a(a)(7) to provide an exception for
natural gas to the general aggregation rule in CEA section 4a(a)(6).
As discussed above, the Commission has concluded that the natural
gas market is well-established with contracts that currently trade
across several exchanges, and is relatively liquid with significant
open interest. Accordingly, the Commission is exercising its
judgment to establish Federal position limits on a per-exchange (and
OTC as applicable) basis in order to maintain the status quo rather
than risk disturbing the existing natural gas market.
---------------------------------------------------------------------------

    Additionally, a position in a commodity contract that is not a
referenced contract, and therefore is not subject to Federal position
limits, as a consequence, cannot be netted with positions in referenced
contracts for purposes of Federal position limits.\892\ For example, a
swap that is not a referenced contract because it does not meet the
economically equivalent swap definition could not be netted with
positions in a referenced contract.
---------------------------------------------------------------------------

    \892\ Proposed Appendix C to part 150 provides guidance
regarding the referenced contract definition, including that the
following types of contracts are not deemed referenced contracts,
meaning such contracts are not subject to Federal position limits
and cannot be netted with positions in referenced contracts for
purposes of Federal position limits: Location basis contracts;
commodity index contracts; swap guarantees; trade options that meet
the requirements of 17 CFR 32.3; monthly average pricing contracts;
and outright price reporting agency index contracts.

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

[[Page 3347]]

    Allowing the netting of linked physically-settled and cash-settled
contracts during the spot month could lead to disruptions in the price
discovery function of the core referenced futures contract or allow a
market participant to manipulate the price of the core referenced
futures contract. Absent separate spot month position limits for
physically-settled and cash-settled contracts, the spot month position
limit would be rendered ineffective, as a participant could maintain
large positions in excess of limits in both the physically-settled
contract and the linked cash-settled contract, enabling the participant
to disrupt the price discovery function as the contracts go to
expiration by taking large opposite positions in the physically-settled
core referenced futures and cash-settled referenced contracts, or
potentially allowing a participant to effect a corner or squeeze.\893\
Consistent with current and historical practice, the Federal position
limits adopted herein apply to positions throughout each trading
session (i.e., on an intra-day basis during each trading session), as
well as at the close of each trading session.\894\
---------------------------------------------------------------------------

    \893\ For example, absent such a restriction in the spot month,
a trader could stand for 100 percent of deliverable supply during
the spot month by holding a large long position in the physical-
delivery contract along with an offsetting short position in a cash-
settled contract, which effectively would corner the market.
    \894\ See, e.g., Elimination of Daily Speculative Trading
Limits, 44 FR 7124, 7125 (Feb. 6, 1979).
---------------------------------------------------------------------------

    In response to the comments from PIMCO, SIFMA AMG, and ISDA that
cash-settled referenced contracts should not be subject to position
limits at all because such contracts do not introduce the same risk of
market manipulation, as discussed above under Section II.A.16.iii.a.,
the Commission has concluded that cash-settled referenced contracts
should be subject to Federal position limits since they form one market
with their corresponding physically-settled core referenced futures
contracts.\895\
---------------------------------------------------------------------------

    \895\ For further discussion, see Section II.A.16.iii.a(2).
---------------------------------------------------------------------------

    In response to ISDA's recommendation that the Final Rule only
include physically-settled referenced contracts and that the Commission
apply Federal position limits on cash-settled referenced contracts at a
later time, the Commission notes that as discussed under Section I.D.,
the Final Rule will be subject to a general compliance period until
January 1, 2022. During this period, exchanges may choose to implement
exchange-set position limits that provide for a different phased-in
approach for cash-settled versus physically-settled referenced
contracts as the exchanges may find appropriate for their respective
markets. Additionally, the compliance period will be further extended
until January 1, 2023 for economically equivalent swaps and positions
held in reliance on a risk-management exemption, which in each case the
Commission notes include mostly cash-settled positions. Accordingly, as
a practical matter, many cash-settled contracts will be subject to a
longer compliance period. However, as discussed further above under
Section II.A.16.iii.a, the Commission has determined that it is
appropriate to include cash-settled referenced contracts in Federal
position limits under this Final Rule.\896\
---------------------------------------------------------------------------

    \896\ For further discussion of the Commission's rationale for
including cash-settled referenced contracts under the Final Rule,
see Section II.A.16.iii.a.
---------------------------------------------------------------------------

    FIA and ICE similarly argued that cash-settled referenced contracts
should be subject to higher Federal position limits compared to the
physically-settled core referenced futures contracts. Their arguments
were predicated, in part, on their conclusions that market participants
cannot use cash-settled contracts to effect a corner or squeeze.\897\
---------------------------------------------------------------------------

    \897\ FIA at 7; ICE at 12-13.
---------------------------------------------------------------------------

    The Commission declines to adopt higher Federal position limits for
cash-settled referenced contracts for several reasons. First, as an
initial matter, the Commission acknowledges that preventing corners and
squeezes is a crucial focus of the Commission. However, in response to
FIA's and ICE's arguments that cash-settled referenced contracts should
be subject to higher Federal position limits compared to physically-
settled futures contracts because cash-settled contracts cannot be used
to effect a corner or squeeze, the Commission notes that there are
other forms of manipulation, such as ``banging'' or ``marking'' the
close, that cash-settled referenced contracts can effect, and the
Commission emphasizes that it endeavors to prevent all such market
manipulation, consistent with CEA section 4a(a)(3)(B)(ii).\898\ While
CEA section 4a(a)(3)(B)(ii) specifically references corners and
squeezes, the CEA section also references ``manipulation'' generally,
and neither FIA nor ICE recognized the existence of other types of
market manipulation, such as ``banging'' the close, in their analysis.
---------------------------------------------------------------------------

    \898\ For further discussion, see Sections II.A.16.,
II.A.4.iii.d(2), and II.B.10.iv.
---------------------------------------------------------------------------

    Second, the Commission believes that FIA's and ICE's arguments for
higher Federal position limits for cash-settled referenced contracts is
intrinsically related to the comments from PIMCO, SIFMA AMG, and ISDA
discussed above arguing that cash-settled referenced contracts should
not be subject to Federal position limits at all. That is, the higher
the Federal position limits for cash-settled referenced contracts that
FIA or ICE recommend establishing, the closer, as a practical matter,
it is to having no Federal position limits for cash-settled referenced
contracts.\899\ As a result, the Commission believes that its general
rationale for including cash-settled referenced contracts within the
Federal position limits framework similarly supports parity between
cash-settled and physically-settled referenced contracts.
---------------------------------------------------------------------------

    \899\ See Section II.A.16.iii.a.
---------------------------------------------------------------------------

    Third, the Commission generally agrees with the reasons articulated
in the comments from CME Group and NEFI that it is appropriate to
establish spot-month parity for physically-settled and cash-settled
referenced contracts across all commodity markets. While FIA argued
that higher position limits for cash-settled referenced contracts could
ensure liquidity for bona fide hedgers,\900\ the Final Rule has
established the Federal position limit levels in general for the 25
core referenced futures contracts (including increases for many of the
nine legacy agricultural contracts) and has expanded the enumerated
bona fide hedges and streamlined the related application process under
final Sec. Sec.  150.3 and 150.9 in order to ensure sufficient
liquidity for bona fide hedgers.
---------------------------------------------------------------------------

    \900\ FIA at 7-8.
---------------------------------------------------------------------------

    FIA and ICE similarly argued that market participants should not be
required to aggregate cash-settled positions across all exchanges but
rather should be subject to a disaggregated Federal position limit that
applies per-exchange. In other words, as the Commission understands
FIA's and ICE's request, if the Federal position limit is 1,000
contracts, FIA and ICE believe that a market participant should be able
to hold 1,000 cash-settled referenced contracts per exchange rather
than being required to aggregate positions across all exchanges. Under
this approach, a long position of 1,000 contracts on Exchange A would
not be aggregated with a long position of 1,000 contracts on Exchange
B. However, under this approach, a long position on Exchange A also
would not net with a short position on Exchange B.
    ICE specifically argued that a single, aggregate Federal position
limit for all

[[Page 3348]]

referenced contracts across exchanges may make it difficult for an
exchange to launch a new referenced contract since the hypothetical new
referenced contract would be aggregated with an existing referenced
contract for purposes of Federal position limits.\901\ According to
ICE, establishing new exchanges and/or new contracts is made more
difficult under the Commission's aggregated approach, since it is
purportedly more difficult to attract sufficient liquidity to establish
a sustainable exchange or contract.\902\ ICE also references the
Commission's obligations under CEA section 15 to consider the public
interest and antitrust laws.\903\ ICE recommends a more flexible
approach to allow an exchange to develop its own liquidity and
establish its own limits, even for similar or look-alike cash-settled
referenced contracts, to help develop robust and liquid markets while
protecting against excessive speculation.\904\
---------------------------------------------------------------------------

    \901\ ICE at 12-13.
    \902\ ICE at 12-13.
    \903\ Id.
    \904\ Id.
---------------------------------------------------------------------------

    In response to FIA and ICE, as discussed immediately below, the
Commission believes that, as a general matter, establishing aggregate
limits across exchanges promotes competition and innovation while also
better addressing the statutory goals in CEA section 4a(a)(3) as
compared to ICE's request to establish disaggregated, per-exchange
position limits. However, before discussing the Commission's underlying
policy rationale supporting aggregate Federal position limits, the
Commission has determined that as an initial legal matter that CEA
section 4a(a)(6)(B) requires the Commission to establish the
``aggregate number or amount of positions . . . that maybe held by any
person . . . for each month across . . . contracts listed by [DCMs] . .
. .'' (emphasis added).\905\ While ICE cites CEA section 15 in its
comment letter, ICE does not address CEA section 4a(a)(6)'s requirement
that the Commission generally must establish aggregate position limits
across exchanges. Accordingly, in addition to the policy rationale
discussed immediately below, the Commission further has determined that
the Final Rule's requirement to aggregate positions across exchanges
does not on its face violate CEA section 15.\906\
---------------------------------------------------------------------------

    \905\ 7 U.S.C. 6a(a)(6); CEA 4a(a)(6).
    \906\ See Section IV.D. As discussed elsewhere in this release,
the Commission is exercising its exemptive authority pursuant to CEA
Section 4a(a)(7) to establish an exception to this rule in
connection with, and based on the particular circumstances of the
natural gas market. See Section II.B.3.iv (discussing natural gas).
---------------------------------------------------------------------------

    As noted above, the Commission also believes it is appropriate to
aggregate positions across exchanges for Federal position limit
purposes for the same general reasons that the Commission has
determined both to include cash-settled referenced contracts within the
Federal position limits framework and also to maintain parity for
Federal position limit levels between physically-settled and cash-
settled referenced contracts. For example, applying a per-exchange
Federal position limit, rather than aggregating across exchanges,
effectively increases the applicable Federal position limit.
Accordingly, the Commission likewise believes it generally is
inappropriate to permit per-exchange Federal position limits for cash-
settled referenced contracts.
    In response to ICE's concern regarding liquidity formation and that
aggregating cash-settled positions across exchanges would harm
competitiveness and innovation by making it more difficult to attract
enough liquidity to become sustainable on an ongoing basis,\907\ the
Commission believes that to the extent Federal position limit levels
under the Final Rule have been correctly calibrated, the Federal
position limits framework should promote--or at least not
disincentivize--liquidity formation.
---------------------------------------------------------------------------

    \907\ ICE at 12-13.
---------------------------------------------------------------------------

    However, ICE's proposal to allow Federal position limits to apply
on a disaggregated, per-exchange basis risks dividing liquidity among
several liquidity pools, which itself could harm liquidity for bona
fide hedgers and reduce price discovery. The Commission also observes
that, as a practical matter, ICE's request to disaggregate positions
across exchanges would significantly increase the applicable position
limit (possibly by a multiple of two or three--or more--depending on
the number of exchanges that list referenced contracts). Consequently,
if the Commission assumes, in arguendo, that Federal position limit
levels are reasonably calibrated under the Final Rule, then applying a
per-exchange limit by definition would increase the potential risks of
excessive speculation and possible manipulation as market participants
are permitted to hold larger directional positions in referenced
contracts. Moreover, to the extent Federal position limits under this
Final Rule are not reasonably calibrated to ensure necessary liquidity
for bona fide hedgers, then the Commission, as a general matter, would
prefer to address the lack of liquidity by adjusting the Federal
position limit levels to appropriate levels rather than applying
Federal position limits on a per-exchange basis for the reasons
discussed in the paragraphs above and as discussed in the paragraph
immediately below.
    Last, the Commission believes that ICE's approach could actually
harm innovation since under ICE's rationale, Federal position limit
levels would need to be set lower than the Federal levels adopted
herein. For example, if the Commission were to allow disaggregated
netting across exchanges as a general rule, then it would likely lead
to increased excessive speculation and possible manipulation, as
discussed above.
    Accordingly, in order to avoid the threat of excessive speculation
and manipulation, the Commission would be obligated to set Federal
position limits sufficiently low in order to compensate for a per-
exchange position limit disaggregated approach. However if the
Commission were to establish Federal position limits sufficiently low
to prevent these concerns from happening, then innovation could be
adversely affected since it means that the concomitant lower Federal
position limit levels likely would make it difficult for exchanges to
develop sufficient liquidity for a new product--unless other competing
exchanges offered linked contracts to add sufficient liquidity to the
market. In such a case, the success of any new product offered by the
initial exchange could be dependent upon competing exchanges offering
competing look-alike contracts to allow for sufficient liquidity. In
contrast, the Commission believes that the Final Rule's approach to
make the full aggregated Federal position limit available to the
contract is more responsive to the needs of the market compared to a
disaggregated approach, and the Commission believes that the Final
Rule's aggregated approach promotes innovation and competition in the
marketplace. Accordingly, the Commission does not believe that applying
netting on an aggregate basis harms competition and innovation. Rather,
the Commission believes its approach supports healthy competition and
innovation while ICE's approach could harm liquidity and innovation.
    While the Commission believes the above rationale generally
applies, the Commission notes that for the reasons discussed in Section
II.B.3.vi., the Commission is exercising its exemptive authority under
CEA section 4a(a)(7) to provide an exception for natural gas to the
general aggregation rule in CEA section 4a(a)(6). The Commission does

[[Page 3349]]

not believe that the rationale above necessarily applies to the natural
gas market. As discussed above, the natural gas market has existing
natural gas commodity derivatives contracts that are well-established
with liquidity, trading, and open interest currently across several
exchanges. Accordingly, the Commission is exercising its judgment to
establish Federal position limits on a per-exchange basis in order to
maintain the status quo rather than risk disturbing the structure of
the existing natural gas market, which could harm liquidity for bona
fide hedgers or price discovery.
    In response to FIA's suggestion that economically equivalent swaps
should be subject to separate Federal spot-month position limits, as
discussed under Section II.A.4.iii., the Commission does not believe
doing so would be appropriate.\908\ As discussed above, the Commission
believes that establishing separate class position limits for futures
contracts and swaps could harm liquidity formation while establishing a
single Federal position limit promotes integration between the futures
and swaps markets.
---------------------------------------------------------------------------

    \908\ FIA 7-8.
---------------------------------------------------------------------------

11. ``Eligible Affiliates'' and Position Aggregation
i. Background
    In 2016, the Commission amended Sec.  150.4 to adopt new rules
governing the aggregation of positions for purposes of compliance with
Federal position limits.\909\ These aggregation rules currently apply
only to the nine legacy agricultural contracts previously subject to
Federal position limits, but now will also apply to the 16 new
contracts subject to Federal position limits for the first time under
this Final Rule. Under the existing aggregation rules, unless an
exemption applies, all of the positions held and trading done by the
person must be aggregated with positions for which the person controls
trading or for which the person holds a 10% or greater ownership
interest. DMO has issued time-limited no-action relief through August
12, 2022 (``NAL 19-19'') from some of the aggregation requirements
contained in that rulemaking.\910\
---------------------------------------------------------------------------

    \909\ See 81 FR at 91454.
    \910\ See CFTC Letter No. 19-19 (July 31, 2019), available at
https://www.cftc.gov/csl/19-19/download. NAL 19-19 extends NAL 17-37
and provides an additional three-year period of no-action relief
from compliance with certain position aggregation requirements under
Commission Regulation 150.4 by streamlining the compliance
requirements that must be satisfied for a person or entity to rely
on an exemption from aggregation.
---------------------------------------------------------------------------

ii. Summary of the 2020 NPRM--Eligible Affiliates and Position
Aggregation
    Proposed Sec.  150.2(k) addressed entities that would qualify as an
``eligible affiliate'' as defined in proposed Sec.  150.1. Under the
proposed definition, an ``eligible affiliate'' would include certain
entities that, among other things, are required to aggregate their
positions under Sec.  150.4 and that do not claim an exemption from
aggregation. There may be certain entities that would be eligible for
an exemption from aggregation, but that prefer to aggregate rather than
disaggregate their positions (such as when aggregation would result in
advantageous netting of positions with affiliated entities). Proposed
Sec.  150.2(k) intended to address such a circumstance by making clear
that an ``eligible affiliate'' may opt to aggregate its positions even
though it is eligible to disaggregate.
iii. Summary of the Commission Determination--Eligible Affiliates and
Position Aggregation
    The Commission is adopting Sec.  150.2(k) as proposed.
iv. Comments--Eligible Affiliates and Position Aggregation
    Although the Commission did not receive any comments on this
provision, it received a number of comments related to position
aggregation in general. These commenters urged the Commission to amend
the Federal position limits aggregation rules in existing Sec.  150.4
by codifying existing NAL 19-19.\911\ Some commenters further requested
that the Commission revisit certain aspects of NAL 19-19 and the
aggregation rules, such as the threshold ownership percentage set forth
in existing Sec.  150.4 that triggers the requirement to aggregate
positions or rely upon an exemption.\912\ Conversely, IATP argued that
before applying the existing aggregation rules, and accompanying
exemptions, to additional commodities, the Commission should study
whether the existing exemptions from aggregation have resulted in
increased speculation.\913\
---------------------------------------------------------------------------

    \911\ FIA at 28; ISDA at 11; PIMCO at 6; CMC at 12-13; and SIFMA
AMG at 2, 9.
    \912\ CMC at 12-13; FIA at 28.
    \913\ IATP at 18-19.
---------------------------------------------------------------------------

v. Discussion of Final Rule--Eligible Affiliates and Position
Aggregation
    The Commission declines to codify NAL 19-19 \914\ in this
rulemaking since NAL 19-19's relief from some of the aggregation
requirements contained in 2016 Final Aggregation Rulemaking \915\
continues to apply until August 12, 2022. DMO extended this relief for
three years to provide sufficient time to ``evaluate whether the relief
granted is hindering Commission staff's ability to conduct
surveillance; assess the impact of the relief; and consider long-term
solutions that must, appropriately, be implemented by a notice and
comment rulemaking.'' \916\ Accordingly, the Commission believes it is
appropriate to first monitor the application of the existing position
aggregation requirements before considering amendments to those
aggregation requirements, and the Commission will address the
aggregation rules, including whether to codify NAL 19-19, as needed,
after this Final Rule goes into effect.
---------------------------------------------------------------------------

    \914\ See CFTC Letter No. 19-19 (July 31, 2019), available at
https://www.cftc.gov/csl/19-19/download.
    \915\ 81 FR 91454 (December 16, 2016).
    \916\ See CFTC Letter No. 19-19 at 4.
---------------------------------------------------------------------------

C. Sec.  150.3--Exemptions From Federal Position Limits

1. Background--Existing Sec. Sec.  150.3, 1.47, and 1.48--Exemptions
From Federal Position Limits
    Existing Sec.  150.3(a), which pre-dates the Dodd-Frank Act, lists
positions that may, under certain circumstances, exceed Federal
position limits, including: (1) Bona fide hedging transactions, as
defined in the current bona fide hedging definition in Sec.  1.3; and
(2) spread or arbitrage positions, subject to certain conditions.\917\
Existing Sec.  150.3(b) provides that the Commission or certain
Commission staff may make a ``call'' to demand certain information from
exemption holders so that the Commission can effectively oversee the
use of such exemption. Section Sec.  150.3(b) also provides that any
such call may request information relating to positions owned or
controlled by that person, trading done pursuant to that exemption, the
futures, options or cash-market positions that support the claimed
exemption, and the relevant business relationships supporting a claim
of exemption.\918\
---------------------------------------------------------------------------

    \917\ 17 CFR 150.3(a).
    \918\ 17 CFR 150.3(b).
---------------------------------------------------------------------------

    The current bona fide hedge definition in existing Sec.  1.3
requires applicants who wish to receive bona fide hedging recognition
and exceed Federal position limits to apply for non-enumerated bona
fide hedges under Sec.  1.47 and to apply for anticipatory bona fide
hedges under Sec.  1.48 of the Commission's existing regulations. Under
Sec.  1.47, persons seeking recognition by the Commission of a non-

[[Page 3350]]

enumerated bona fide hedging transaction or position must file certain
initial statements with the Commission at least 30 days in advance of
the date that such transaction or position would be in excess of
Federal position limits.\919\ Similarly, persons seeking recognition by
the Commission of certain anticipatory bona fide hedges must submit
their application 10 days in advance of the date that such transactions
or positions would be in excess of Federal position limits.\920\
---------------------------------------------------------------------------

    \919\ 17 CFR 1.47.
    \920\ 17 CFR 1.48.
---------------------------------------------------------------------------

    With respect to spread exemptions, the Commission's authority and
existing regulation for exempting certain spread positions can be found
in CEA section 4a(a)(1) and existing Sec.  150.3(a)(3) of the
Commission's regulations. In particular, CEA section 4a(a)(1)
authorizes the Commission to exempt from Federal position limits
transactions ``normally known to the trade as 'spreads' or 'straddles'
or 'arbitrage.''' Similarly, in existing Sec.  150.3(a)(3), the
Commission exempts ``spread or arbitrage positions,'' and allows such
exemptions to be self-effectuating for the nine legacy agricultural
contracts currently subject to Federal position limits. The Commission
does not specify a formal process, in Sec.  150.3(a)(3), for granting
spread exemptions.\921\
---------------------------------------------------------------------------

    \921\ Since 1938, the Commission (then known as the Commodity
Exchange Commission) has recognized the use of spread positions to
facilitate liquidity and hedging. See Notice of Proposed Order in
the Matter of Limits on Position and Daily Trading in Grain for
Future Delivery, 3 FR 1408 (June 14, 1938).
---------------------------------------------------------------------------

2. Overview of Proposed Sec.  150.3, Commenters' Views, and the
Commission's Final Rule Determination

    This section provides a brief overview of proposed Sec.  150.3,
commenters' general views, and the Commission's determination. The
Commission will summarize and address each sub-section of Sec.  150.3
in greater detail further below. The Commission proposed several
changes to Sec.  150.3. First, the Commission proposed to update Sec. 
150.3 to conform to the proposed bona fide hedging definition in Sec. 
150.1 (described above) and the new streamlined process in proposed
Sec.  150.9 for recognizing non-enumerated bona fide hedging positions
(described further below). The Commission also proposed to amend Sec. 
150.3 to include new exemption types not explicitly listed in existing
Sec.  150.3, including: (i) Exemptions for financial distress
situations; (ii) conditional exemptions for certain spot month
positions in cash-settled natural gas contracts; and (iii) exemptions
for pre-enactment swaps and transition period swaps.\922\ Proposed
Sec.  150.3(b)-(g) respectively addressed: Non-enumerated bona fide
hedge and spread exemption requests submitted directly to the
Commission; previously-granted risk management exemptions to Federal
position limits; exemption-related recordkeeping and reporting
requirements; the aggregation of accounts; and the delegation of
certain authorities to the Director of the Division of Market
Oversight.
---------------------------------------------------------------------------

    \922\ The Commission revised Sec.  150.3(a) in 2016, relocating
the independent account controller aggregation exemption from Sec. 
150.3(a)(4) in order to consolidate it with the Commission's
aggregation requirements in Sec.  150.4(b)(4). See Final Aggregation
Rulemaking, 81 FR at 91489-91490.
---------------------------------------------------------------------------

    The most substantive comments on proposed Sec.  150.3 relate to the
spread transaction exemption in proposed Sec.  150.3(a)(2) and to the
natural gas conditional position limit exemption in proposed Sec. 
150.3(a)(4), as described in detail below and under the discussion of
Sec.  150.2, above.\923\ In addition, one commenter expressed general
support for the Commission's proposed approach to recognizing
exemptions under Sec.  150.3.\924\
---------------------------------------------------------------------------

    \923\ See supra Section II.B.3.vi.a. (discussing the spot-month
limit for natural gas).
    \924\ See CMC at 6.
---------------------------------------------------------------------------

    The Commission has determined to adopt Sec.  150.3 largely as
proposed, with certain modifications and clarifications in response to
commenters' views and other considerations, as described in detail
below.

3. Section 150.3(a)(1)--Exemption for Bona Fide Hedging Transaction or
Position

i. Summary of the 2020 NPRM--Exemption for Bona Fide Hedging
Transaction or Position
    First, under proposed Sec.  150.3(a)(1)(i), a bona fide hedging
transaction or position that falls within one of the proposed
enumerated hedges set forth in proposed Appendix A to part 150,
discussed above, would be self-effectuating for purposes of Federal
position limits. A market participant thus would not be required to
request Commission approval prior to exceeding Federal position limits
for such transaction or position. However, this does not affect a
market participant's obligations under proposed Sec.  150.5(a) and
under the relevant exchange's rules and thus, the market participant
would be required to request a bona fide hedge exemption from the
relevant exchange for purposes of exchange-set limits established
pursuant to proposed Sec.  150.5(a), and submit required cash-market
information to the exchange as part of that request.\925\ The
Commission also proposed to allow the existing enumerated anticipatory
bona fide hedges (some of which are not currently self-effectuating,
and must be approved by the Commission, under existing Sec.  1.48) to
be self-effectuating for purposes of Federal position limits (and thus
would not require prior Commission approval).
---------------------------------------------------------------------------

    \925\ See infra Section II.D.3. See also 85 FR at 11644
(proposed Sec.  150.5(a)(2)(ii)(A)).
---------------------------------------------------------------------------

    Second, under proposed Sec.  150.3(a)(1)(ii), for positions in
referenced contracts that do not satisfy one of the proposed enumerated
hedges in Appendix A, (i.e., non-enumerated bona fide hedges), a market
participant must request approval from the Commission either directly,
or indirectly through an exchange, prior to exceeding Federal position
limits. Such exemptions thus would not be self-effectuating and a
market participant in such cases would have one of the following two
options for requesting such a non-enumerated bona fide hedge
recognition: (1) Apply directly to the Commission in accordance with
Sec.  150.3(b) (described below), and, separately, also apply to an
exchange pursuant to exchange rules established under proposed Sec. 
150.5(a); \926\ or (2) apply through an exchange pursuant to proposed
Sec.  150.9 for a non-enumerated bona fide hedge recognition that could
ultimately be valid both for purposes of Federal and exchange-set
position limit requirements, unless the Commission (and not staff,
which would not have delegated authority) denies the application within
a limited period of time.\927\ As discussed in the 2020 NPRM, market
participants relying on enumerated or non-enumerated bona fide hedge
recognitions would no longer have to file the monthly Form 204/304 with
supporting cash-market information.\928\
---------------------------------------------------------------------------

    \926\ See infra Section II.D.3. (discussion of proposed Sec. 
150.5).
    \927\ See infra Section II.G. (discussion of proposed Sec. 
150.9).
    \928\ See infra Section II.H.2. (discussion of the proposed
elimination of Form 204).
---------------------------------------------------------------------------

ii. Comments and Discussion of Final Rule--Exemption for Bona Fide
Hedging Transactions or Positions
    The Commission did not receive any comments on proposed Sec. 
150.3(a)(1). As such, the Commission is finalizing Sec.  150.3(a)(1)
with a few grammatical and organizational changes to improve
readability. The Commission is also finalizing the introductory text in
Sec.  150.3(a) with a clarification that ``each'' of a person's
transactions or positions must satisfy at least one of the

[[Page 3351]]

exemptions in Sec.  150.3(a) in order to exceed Federal limits. None of
the technical revisions are intended to change the substance of
proposed Sec.  150.3(a)(1).
4. Section 150.3(a)(2)--Spread Exemptions
i. Summary of the 2020 NPRM--Spread Exemptions
    Under proposed Sec.  150.3(a)(2)(i), a spread position would be
self-effectuating for purposes of Federal position limits, provided
that the position fits within at least one of the types of spread
strategies listed in the ``spread transaction'' definition in proposed
Sec.  150.1,\929\ and provided further that the market participant
separately requests a spread exemption from the relevant exchange's
limits established pursuant to proposed Sec.  150.5(a).
---------------------------------------------------------------------------

    \929\ See supra Section II.A.20. (proposed definition of
``spread transaction'' in Sec.  150.1, which would cover: Intra-
market, inter-market, intra-commodity, or inter-commodity spreads,
including calendar spreads, quality differential spreads, processing
spreads (such as energy ``crack'' or soybean ``crush'' spreads),
product or by-product differential spreads, and futures-options
spreads.)
---------------------------------------------------------------------------

    Under proposed Sec.  150.3(a)(2)(ii), for a spread strategy that
does not meet the ``spread transaction'' definition in proposed Sec. 
150.1, a market participant must apply for a spread exemption directly
from the Commission in accordance with proposed Sec.  150.3(b). The
market participant must also receive a notification of the approved
spread exemption under proposed Sec.  150.3(b)(4) before exceeding the
Federal speculative position limits for that spread position. The
Commission thus did not propose a process akin to Sec.  150.9 for
spreads that do not meet the proposed ``spread transaction''
definition.
ii. Comments--Spread Exemptions
    Several commenters advocated for the Commission to expand the
proposed Sec.  150.9 process, which would allow exchanges to process
applications for non-enumerated bona fide hedge exemptions for purposes
of both Federal and exchange limits, to also allow exchanges to grant
``non-enumerated'' spread exemptions for spread positions that do not
meet the ``spread transaction'' definition.\930\ Commenters also
requested that the Commission provide an explanation for why the
Commission would not expand Sec.  150.9 to cover ``non-enumerated''
spread exemptions.\931\ Finally, commenters requested that market
participants be able to apply for spread exemptions on a late or
retroactive basis the same way they would be permitted to apply for
bona fide hedge exemptions within five days of exceeding Federal
position limits under proposed Sec. Sec.  150.3 and 150.9.\932\
---------------------------------------------------------------------------

    \930\ See MFA/AIMA at 10; FIA at 21; Citadel at 8-9; ISDA at 9;
ICE at 7-8 (suggesting that if the list of spread positions in the
spread transaction definition is determined to be an exhaustive
list, then the Commission should permit additional flexibility for
an exchange to grant additional spread exemptions--that are not
covered in the spread transaction definition--using the proposed
Sec.  150.9 process).
    \931\ See MFA/AIMA at 10.
    \932\ See ICE at 8.
---------------------------------------------------------------------------

iii. Discussion of Final Rule--Spread Exemptions
    The Commission has determined to adopt Sec.  150.3(a)(2) with non-
substantive revisions to address technical edits or improve
readability. For the reasons discussed immediately below, the
Commission has determined not to expand Sec.  150.3(a)(2) as requested
by commenters to allow market participants to apply to exchanges for
``non-enumerated'' spread exemptions that are not covered in the
``spread transaction'' definition in Sec.  150.1.
    First, as discussed above,\933\ the Commission has determined to
expand the ``spread transaction'' definition so that it covers most, if
not all, of the most common spread exemptions used by market
participants. With this expansion, the Commission expects that most
spread exemption requests will fall within the scope of the ``spread
transaction'' definition. Accordingly, the Commission expects that most
spread exemptions will thus be self-effectuating for purposes of
Federal position limits. Also, the Commission expects that any spread
exemption requests falling outside of the ``spread transaction''
definition are likely to be novel exemption requests that the
Commission--and not exchanges--should review, considering certain
statutory considerations in CEA section 4a(a)(3)(B). As explained
immediately below, the Commission cannot authorize exchanges to conduct
this analysis because exchanges would lack clear standards for
assessing whether a particular spread position satisfies the
requirements of the CEA.
---------------------------------------------------------------------------

    \933\ See supra Section II.A.20. (discussing changes to expand
the spread transaction definition).
---------------------------------------------------------------------------

    Second, bona fide hedge recognitions and spread exemptions are
subject to different legal standards. That is, under CEA section
4a(a)(c)(2), Congress provided clear criteria to the Commission for
determining what constitutes a bona fide hedging transaction or
position. In turn, the Commission has defined in detail the term bona
fide hedging transaction or position in Sec.  150.1. As a result, under
final Sec.  150.9, the Commission is permitting exchanges to evaluate
applications for non-enumerated bona fide hedges for purposes of
exchange-set limits in accordance with the same clear criteria used by
the Commission.
    In contrast, the CEA does not include clear criteria for granting
spread exemptions. Instead, CEA section 4a(a)(1) generally permits the
Commission to exempt ``transactions normally known to the trade as
``spreads'' or ``straddles'' or ``arbitrage'' from position limits
\934\ and requires the Commission to administer Federal position limits
in a manner that comports with certain policy considerations in CEA
section 4a(a)(3)(B).\935\ Analyzing novel spread exemption requests in
accordance with these general principles requires the Commission to use
its judgment to conduct a highly fact-specific analysis. And, in the
absence of any detailed statutory or regulatory criteria, the
Commission is not comfortable, at this time, with leveraging an
exchange's analysis and determination with respect to novel spread
exemption requests. As such, the Commission has determined that the
Commission should conduct a direct review of any spread exemptions that
do not meet the ``spread transaction'' definition, and the Commission
thus will not expand Sec.  150.9 to cover spreads because exchanges
would lack clear standards for assessing whether a particular spread
position satisfies the requirements of the CEA. In the future, the
Commission may, however, consider developing regulatory criteria for
spread exemptions such that novel spread exemptions could be considered
through a more streamlined process, such as Sec.  150.9.
---------------------------------------------------------------------------

    \934\ 7 U.S.C. 6a(a)(1).
    \935\ 7 U.S.C. 6a(a)(3)(b).
---------------------------------------------------------------------------

    Finally, unlike for certain bona fide hedge recognitions as
discussed below, the Commission has determined not to permit
retroactive applications for spread exemptions or other exemptions
permitted under this Sec.  150.3(a). The Commission believes that the
Federal position limits framework adopted herein provides sufficient
flexibility through expanded speculative limits, and a clear,
comprehensive set of exemptions, most of which are self-effectuating
and thus do not require prior Commission approval. As such, the
Commission believes that market participants will be able to identify
their exemption needs based on these clear regulatory requirements and
apply for

[[Page 3352]]

all such exemptions ahead of time. In addition, the Commission believes
that allowing retroactive spread exemptions and other types of
retroactive exemptions (such as the financial distress or conditional
natural gas spot month exemption) could potentially be harmful to the
market as these types of strategies may involve non-risk-reducing or
speculative activity that should be evaluated prior to a person
exceeding Federal position limits.
5. Section 150.3(a)(3)--Financial Distress Exemptions
i. Summary of the 2020 NPRM--Financial Distress Exemptions
    Proposed Sec.  150.3(a)(3) would allow for a financial distress
exemption in certain situations, including the potential default or
bankruptcy of a customer or a potential acquisition target. For
example, in periods of financial distress, such as a customer default
at an FCM or a potential bankruptcy of a market participant, it may be
beneficial for a financially-sound market participant to take on the
positions and corresponding risk of a less stable market participant,
and in doing so, exceed Federal speculative position limits. Pursuant
to authority delegated under Sec. Sec.  140.97 and 140.99, Commission
staff previously granted exemptions in these types of situations to
avoid sudden liquidations required to comply with a position
limit.\936\ Such sudden liquidations could otherwise potentially hinder
statutory objectives, including by reducing liquidity, disrupting price
discovery, and/or increasing systemic risk.\937\
---------------------------------------------------------------------------

    \936\ See, e.g., CFTC Press Release No. 5551-08, CFTC Update on
Efforts Underway to Oversee Markets, (Sept. 19, 2008), available at
http://www.cftc.gov/PressRoom/PressReleases/pr5551-08.
    \937\ See 7 U.S.C. 6a(a)(3).
---------------------------------------------------------------------------

    The proposed exemption would be available for the positions of ``a
person, or related persons,'' meaning that a financial distress
exemption request should be specific to the circumstances of a
particular person, or to persons affiliated with that person, and not a
more general request by a large group of unrelated people whose
financial distress circumstances may differ from one another. The
proposed exemption would be granted on a case-by-case basis in response
to a request submitted to the Commission pursuant to Sec.  140.99, and
would be evaluated based on the specific facts and circumstances of a
particular person or a related person or persons. Any such financial
distress position would not be a bona fide hedging transaction or
position unless it otherwise met the substantive and procedural
requirements set forth in proposed Sec. Sec.  150.1, 150.3, and 150.9,
as applicable.
ii. Comments and Summary of the Commission Determination--Financial
Distress Exemptions
    The Commission did not receive any substantive comments on proposed
Sec.  150.3(a)(3), although one commenter expressed general support for
the financial distress exemption.\938\ As such, the Commission has
determined to finalize Sec.  150.3(a)(3) as proposed, for the reasons
discussed above and in the 2020 NPRM.
---------------------------------------------------------------------------

    \938\ CCI at 2.
---------------------------------------------------------------------------

6. Section 150.3(a)(4)--Conditional Spot Month Exemption in Natural Gas
i. Summary of the 2020 NPRM--Conditional Spot Month Exemption in
Natural Gas
    Certain natural gas contracts are currently subject to exchange-set
position limits, but not Federal position limits.\939\ In the 2020
NPRM, the Commission proposed applying Federal position limits to
certain natural gas contracts for the first time by including the
physically-settled NYMEX Henry Hub Natural Gas (``NYMEX NG'') contract
as a core referenced futures contract listed in proposed Sec. 
150.2(d). The Commission also proposed, consistent with existing
exchange practice, establishing a conditional spot month exemption for
Federal position limit purposes that would permit larger positions
during the spot month for cash-settled natural gas referenced contracts
so long as the market participant held no physically-settled NYMEX NG.
---------------------------------------------------------------------------

    \939\ Some examples include natural gas contracts that use the
NYMEX NG futures contract as a reference price, such as ICE's Henry
Financial Penultimate Fixed Price Futures (PHH), options on Henry
Penultimate Fixed Price (PHE), Henry Basis Futures (HEN) and Henry
Swing Futures (HHD), NYMEX's E-mini Natural Gas Futures (QG), Henry
Hub Natural Gas Last Day Financial Futures (HH), and Henry Hub
Natural Gas Financial Calendar Spread (3 Month) Option (G3).
---------------------------------------------------------------------------

ii. Summary of the Commission Determination--Conditional Spot Month
Exemption in Natural Gas
    For the Final Rule, the Commission is adopting the conditional spot
month exemption in natural gas, as proposed. The Commission discusses
this conditional spot month exemption, as well as other issues in
connection with NYMEX NG, above under the discussion of Sec. 
150.2.\940\ The Commission is discussing all the issues related to the
NYMEX NG core referenced futures contract, including this conditional
spot month exemption, together in one place in this release for the
reader's convenience.
---------------------------------------------------------------------------

    \940\ See supra Section II.B.3.vi.a. (discussing the Federal
spot-month limit for natural gas).
---------------------------------------------------------------------------

7. Section 150.3(a)(5)--Exemption for Pre-Enactment Swaps and
Transition Period Swaps
i. Background and Summary of the 2020 NPRM--Exemption for Pre-Enactment
Swaps and Transition Period Swaps
    Currently, swaps are not subject to the existing Federal position
limits framework, and the Commission is unaware of any exchange-set
limits on swaps with respect to any of the 25 core referenced futures
contracts.
    In order to promote a smooth transition to compliance for swaps,
which were not previously subject to Federal speculative position
limits, in the 2020 NPRM, the Commission proposed to exempt pre-
enactment swaps and transition period swaps from Federal position
limits. Proposed Sec.  150.3(a)(5) provided that Federal position
limits would not apply to positions acquired in good faith in any pre-
enactment swaps or in any transition period swaps, in either case as
defined by Sec.  150.1.\941\ Under the 2020 NPRM, any pre-enactment
swap or transition period swap would be exempt from Federal position
limits--even if the swap would qualify as an economically equivalent
swap under the 2020 NPRM. This proposed exemption would be self-
effectuating and would not require a market participant to request
relief from the Commission.
---------------------------------------------------------------------------

    \941\ ``Pre-enactment swap'' would mean any swap entered into
prior to enactment of the Dodd-Frank Act of 2010 (July 21, 2010),
the terms of which have not expired as of the date of enactment of
that Act.
    ``Transition period swap'' would mean a swap entered into during
the period commencing after the enactment of the Dodd-Frank Act of
2010 (July 21, 2010), and ending 60 days after the publication in
the Federal Register of final amendments to this part implementing
section 737 of the Dodd-Frank Act of 2010, the terms of which have
not expired as of 60 days after the publication date.
---------------------------------------------------------------------------

    For purposes of complying with the proposed Federal non-spot month
limits, the 2020 NPRM would also allow both pre-enactment swaps and
transition period swaps (to the extent such swaps qualify as
``economically equivalent swaps'') to be netted with post-Effective
Date commodity derivative contracts. The 2020 NPRM did not permit s