2013-27339

Federal Register, Volume 78 Issue 221 (Friday, November 15, 2013)[Federal Register Volume 78, Number 221 (Friday, November 15, 2013)]

[Proposed Rules]

[Pages 68945-68979]

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

[FR Doc No: 2013-27339]

[[Page 68945]]

Vol. 78

Friday,

No. 221

November 15, 2013

Part III

Commodity Futures Trading Commission

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17 CFR Part 150

Aggregation of Positions; Proposed Rule

Federal Register / Vol. 78 , No. 221 / Friday, November 15, 2013 /

Proposed Rules

[[Page 68946]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 150

RIN 3038-AD82

Aggregation of Positions

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: On May 30, 2012, the Commodity Futures Trading Commission

(``Commission'' or ``CFTC'') published in the Federal Register a notice

of proposed modifications to part 151 of the Commission's regulations.

The modifications addressed the policy for aggregation under the

Commission's position limits regime for 28 exempt and agricultural

commodity futures and options contracts and the physical commodity

swaps that are economically equivalent to such contracts. In an Order

dated September 28, 2012, the District Court for the District of

Columbia vacated part 151 of the Commission's regulations. The

Commission is now proposing modifications to the aggregation provisions

of part 150 of the Commission's regulations that are substantially

similar to the aggregation modifications proposed to part 151, except

that the modifications address the policy for aggregation under the

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

nine agricultural commodities set forth in part 150. Separately, the

Commission is also proposing today to establish speculative position

limits for the 28 exempt and agricultural commodity futures and options

contracts and the physical commodity swaps that are economically

equivalent to such contracts that previously had been covered by part

151 of its regulations. If both proposals are finalized, the

modifications proposed here to the aggregation provisions of part 150

would apply to the position limits regimes for both the futures and

option contracts on nine agricultural commodities and the 28 exempt and

agricultural commodity futures and options contracts and the physical

commodity swaps that are economically equivalent to such contracts.

However, the Commission may determine to adopt the modifications

proposed here separately from any other amendment to the position

limits regime.

DATES: Comments must be received on or before January 14, 2014.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD82,

by any of the following methods:

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

Mail: Melissa D. Jurgens, Secretary of the Commission,

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

Street NW., Washington, DC 20581;

Hand delivery/courier: Same as mail, above.

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

Follow instructions for submitting comments.

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

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

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

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

information that may be exempt from disclosure under the Freedom of

Information Act, a petition for confidential treatment of the exempt

information may be submitted according to the procedures established in

CFTC regulations at 17 CFR part 145.

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

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

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

inappropriate for publication, such as obscene language. All

submissions that have been redacted or removed that contain comments on

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

file and will be considered as required under the Administrative

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

the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist,

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

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

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

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

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

Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

The Commission has long established and enforced speculative

position limits for futures and options contracts on various

agricultural commodities as authorized by the Commodity Exchange Act

(``CEA'').\1\ The part 150 position limits regime,\2\ generally

includes three components: (1) The level of the limits, which set a

threshold that restricts the number of speculative positions that a

person may hold in the spot-month, individual month, and all months

combined,\3\ (2) exemptions for positions that constitute bona fide

hedging transactions and certain other types of transactions,\4\ and

(3) rules to determine which accounts and positions a person must

aggregate for the purpose of determining compliance with the position

limit levels.\5\

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

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

regulations establishes federal position limits on certain

enumerated agricultural contracts; the listed commodities are

referred to as enumerated agricultural commodities.

\3\ See 17 CFR 150.2.

\4\ See 17 CFR 150.3.

\5\ See 17 CFR 150.4.

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The Commission's existing aggregation policy under regulation 150.4

generally requires that unless a particular exemption applies, a person

must aggregate all positions for which that person controls the trading

decisions with all positions for which that person has a 10 percent or

greater ownership interest in an account or position, as well as the

positions of two or more persons acting pursuant to an express or

implied agreement or understanding.\6\ The scope of exemptions from

aggregation include the ownership interests of limited partners in

pooled accounts,\7\ discretionary accounts and customer trading

programs of futures commission merchants (``FCM''),\8\ and eligible

entities with independent account controllers that manage customer

positions (``IAC'' or ``IAC exemption'').\9\ Market participants

claiming one of the exemptions from aggregation are subject to a call

by the Commission for information demonstrating compliance with the

conditions applicable to the claimed exemption.\10\

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

\7\ See 17 CFR 150.4(c).

\8\ See 17 CFR 150.4(d).

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

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

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B. Proposed Modifications to the Policy for Aggregation Under Part 151

of the Commission's Regulations

The Commission adopted part 151 of its regulations in November 2011

under the authority of the Dodd-Frank Wall Street Reform and Consumer

Protection Act (``Dodd-Frank Act''), which President Obama signed on

July 21, 2010.\11\ Title VII of the Dodd-Frank

[[Page 68947]]

Act \12\ amended the CEA to establish a comprehensive new regulatory

framework for swaps and security-based swaps. The legislation was

enacted to reduce risk, increase transparency, and promote market

integrity within the financial system by, among other things: (1)

Providing for the registration and comprehensive regulation of swap

dealers and major swap participants; (2) imposing clearing and trade

execution requirements on standardized derivative products; (3)

creating robust recordkeeping and real-time reporting regimes; and (4)

enhancing the Commission's rulemaking and enforcement authorities with

respect to, among others, all registered entities and intermediaries

subject to the Commission's oversight.

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\11\ See Dodd-Frank Wall Street Reform and Consumer Protection

Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm.

\12\ Pursuant to section 701 of the Dodd-Frank Act, Title VII

may be cited as the ``Wall Street Transparency and Accountability

Act of 2010.''

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As amended by the Dodd-Frank Act, sections 4a(a)(2) and 4a(a)(5) of

the CEA authorize the Commission to establish limits for futures and

option contracts traded on a designated contract market (``DCM''), as

well as swaps that are economically equivalent to such futures or

options contracts traded on a DCM. In response to this new authority,

the position limits regime adopted in part 151 would have applied to 28

physical commodity futures and option contracts and physical commodity

swaps that are economically equivalent to such contracts.\13\ The

regulations in the part 151 position limits regime are in three

components that are generally similar to the three components of part

150.\14\ With regard to determining which accounts and positions a

person must aggregate, regulation 151.7 largely adopted the

Commission's existing aggregation policy under regulation 150.4.\15\

Regulation 151.7, however, also provided additional exemptions for

underwriters of securities, and for where the sharing of information

between persons would cause either person to violate federal law or

regulations adopted thereunder.\16\ With the exception of the exemption

for underwriters, regulation 151.7 required market participants to file

a notice with the Commission demonstrating compliance with the

conditions applicable to each exemption.\17\

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\13\ See Position Limits for Futures and Swaps, 76 FR 71626

(Nov. 18, 2011). In an Order dated September 28, 2012, the District

Court for the District of Columbia vacated part 151 of the

Commission's regulations, with the exception of the revised position

limit levels in amended section 150.2. See International Swaps and

Derivatives Association v. United States Commodity Futures Trading

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

In a separate proposal approved on the same date as this

proposal, the Commission is proposing to establish speculative

position limits for 28 exempt and agricultural commodity futures and

option contracts, and physical commodity swaps that are

``economically equivalent'' to such contracts (as such term is used

in section 4a(a)(5) of the CEA). In connection with establishing

these limits, the Commission is also proposing to update some

relevant definitions; revise the exemptions from speculative

position limits, including for bona fide hedging; and extend and

update reporting requirements for persons claiming exemption from

these limits. See Position Limits for Derivatives (November 5,

2013).

The Commission is proposing these amendments to regulation 150.4

and certain related regulations separately from its proposed

amendments to position limits because it believes that these

proposed amendments regarding aggregation of provisions could be

appropriate regardless of whether the position limit amendments are

adopted. The Commission anticipates that it could adopt these

amendments related to aggregation separately from the amendments to

the position limits.

If both proposals are finalized, the modifications proposed here

to the aggregation provisions of part 150 would apply to the

position limits regimes for both the futures and option contracts on

nine agricultural commodities and the 28 exempt and agricultural

commodity futures and options contracts and the physical commodity

swaps that are economically equivalent to such contracts.

\14\ See notes 2 through 5, above, and accompanying text.

\15\ See notes 6 through 9, above, and accompanying text.

\16\ See regulations 151.7(g) and (i), respectively.

\17\ See regulation 151.7(i).

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On May 30, 2012, the Commission proposed, partially in response to

a petition for interim relief from part 151's provision for aggregation

of positions across accounts,\18\ certain modifications to its policy

for aggregation under the part 151 position limits regime (the ``Part

151 Aggregation Proposal'').\19\ In brief, the Part 151 Aggregation

Proposal included the following five elements.

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\18\ A copy of the petition (the ``aggregation petition'') can

be found on the Commission's Web site at www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgap011912.pdf. The

aggregation petition was originally filed by the Working Group of

Commercial Energy Firms; certain members of the group later

reconstituted as the Commercial Energy Working Group. Both groups

(hereinafter, collectively, the ``Working Groups'') presented one

voice with respect to the aggregation petition.

\19\ See Aggregation, Position Limits for Futures and Swaps, 77

FR 31767 (May 30, 2012).

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First, the Commission proposed to amend regulation 151.7(i) to make

clear that the exemption from aggregation for situations where the

sharing of information was restricted under law would include

circumstances in which the sharing of information would create a

``reasonable risk'' of a violation--in addition to an actual

violation--of federal law or regulations adopted thereunder. The

Commission also proposed extending the exemption to situations where

the sharing of information would create a ``reasonable risk'' of a

violation of state law or the law of a foreign jurisdiction. But the

Commission did not propose to modify the requirement that market

participants file an opinion of counsel to rely on the exemption in

regulation 151.7(i).

Second, the Commission proposed regulation 151.7(b)(1), which would

establish a notice filing procedure to permit a person in specified

circumstances to disaggregate the positions of a separately organized

entity (``owned entity''), even if such person has a 10 percent or

greater interest in the owned entity. The notice filing would need to

demonstrate compliance with certain conditions set forth in proposed

regulation 151.7(b)(1)(i), and such relief would not be available to

persons with a greater than 50 percent ownership or equity interest in

the owned entity. Similar to other exemptions from aggregation, the

Commission would be able to subsequently call for additional

information as well as reject, modify or otherwise condition such

relief. Further, such person would be obligated to amend the notice

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

in the filing. The proposed criteria to claim relief in proposed

regulation 151.7(b)(1)(i) would have required a demonstration that the

person filing for disaggregation relief and the owned entity do not

have knowledge of the trading decisions of the other; that they trade

pursuant to separately developed and independent trading systems; that

they have, and enforce, written procedures to preclude one entity from

having knowledge of, gaining access to, or receiving data about, trades

of the other; that they do not share employees that control trading

decisions and that employees do not share trading control with respect

to both entities; and that they do not have risk management systems

that permit the sharing of trades or trading strategies with the other.

Third, the Commission proposed regulation 151.7(j), which would

allow higher-tier entities to rely upon a notice for exemption filed by

the owned entity, but such reliance would only go to the accounts or

positions specifically identified in the notice. The proposed

regulation also would require that a higher-tier entity that wishes to

rely upon an owned entity's exemption notice must comply with

conditions of the applicable aggregation exemption other than the

notice filing requirements.

Fourth, the Commission proposed an aggregation exemption in

proposed

[[Page 68948]]

regulation 151.7(g) for an ownership interest of a broker-dealer

registered with the SEC, or similarly registered with a foreign

regulatory authority, in an entity based on the ownership of securities

acquired as part of reasonable activity in the normal course of

business as a dealer. However, the proposed exemption would not have

applied where a broker-dealer acquires more than a 50 percent ownership

interest in another entity.

Fifth, the Commission proposed to expand the definition of

independent account controller to include the managing member of a

limited liability company, so that ``regulation 4.13 commodity pools''

(i.e., a commodity pool, the operator of which is exempt from

registration under regulation 4.13) established as limited liability

companies would be accorded the same treatment as such pools formed as

limited partnerships.

The Commission received approximately 26 written comments on the

Part 151 Aggregation Proposal.\20\

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\20\ The written comments are available on the Commission's Web

site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1208.

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II. Proposed Rules

The Commission is now proposing to amend regulation 150.4, and

certain related regulations, to include rules to determine which

accounts and positions a person must aggregate that are substantially

similar to the corresponding rules in part 151, as it was proposed to

be amended in May 2012. In addition, the amendments now being proposed

to regulation 150.4 reflect the Commission's consideration of the

comments that were received on the Part 151 Aggregation Proposal. Thus,

the discussion below covers the amendments in the Part 151 Aggregation

Proposal, the comments on those proposed amendments, and the amendments

that the Commission is now proposing.\21\

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\21\ For additional background on part 150 and part 151 and the

existing provisions for aggregation, see the Part 151 Aggregation

Proposal.

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A. Proposed Rules on the Information Sharing Restriction

B.1. Part 151 Proposed Approach--Amendment to Regulation 151.7(i)

As noted above, regulation 151.7(i) provided exemptions from

aggregation under certain conditions where the sharing of information

would cause a violation of Federal law or regulation. These exemptions

had not previously been available. In the Part 151 Aggregation

Proposal, the Commission proposed to amend regulation 151.7(i) to make

clear that the exemption to the aggregation requirement would include

circumstances in which the sharing of information would create a

``reasonable risk'' of a violation--in addition to an actual

violation--of federal law or regulations adopted thereunder. The

Commission noted that whether a reasonable risk exists would depend on

the interconnection of the applicable statute and regulatory guidance,

as well as the particular facts and circumstances as applied to the

statute and guidance.

The proposed amendments to part 151 retained the requirement that

market participants file an opinion of counsel to rely on the exemption

in regulation 151.7(i). The Commission explained that requiring an

opinion would allow Commission staff to review the legal basis for the

asserted regulatory impediment to the sharing of information, and would

be particularly helpful where the asserted impediment arises from laws

or regulations that the Commission does not directly administer.

Further, Commission staff would have the ability to consult with other

federal regulators as to the accuracy of the opinion, and to coordinate

the development of rules surrounding information sharing and

aggregation across accounts. The Commission also noted that the

proposed clarification regarding a ``reasonable risk'' of violation

should address the concerns that obtaining an opinion of counsel could

be difficult if the Commission read the existing standard to include

only per se violations.

The Commission also noted that, notwithstanding the Commission's

facts and circumstances review of potentially conflicting federal laws

or regulations, the exemption in regulation 151.7(i) would be effective

upon filing of the notice required in regulation 151.7(h) and opinion

of counsel. Further, these provisions authorized the Commission to

request additional information beyond that contained in the notice

filing, and the Commission may amend, suspend, terminate or otherwise

modify a person's aggregation exemption upon further review. Last, the

Commission noted that as it gained further experience with the

exemption for federal law information sharing restriction in regulation

151.7(i), it anticipated providing further guidance to market

participants.

a. Part 151 Proposed Rules for Information Sharing Restriction--Foreign

Law

For the same reasons the Commission adopted the exemption for

federal information sharing restrictions, the Commission proposed

extending the exemption to the law of a foreign jurisdiction. In

addition, similar to the clarification for the exemption for federal

law information sharing restriction, the Commission also proposed an

exemption where the sharing of information creates a ``reasonable

risk'' of violating the law of a foreign jurisdiction. However, the

Commission remained concerned that certain market participants could

potentially use the existing and proposed expansion of the exemption in

regulation 151.7(i) to evade the requirements for the aggregation of

accounts. In this regard, the proposed amendment to part 151,

consistent with the exemption for federal law information sharing

restriction, included the requirement to file an opinion of counsel

specifically identifying the particular law and facts requiring a

market participant to claim the exemption.

The Commission noted that the aggregation petition references

information sharing restrictions that arise from ``international'' law,

and the Commission sought comment on the types of ``international''

law, if any, which could create information sharing restrictions other

than the law of a foreign jurisdiction. The Commission asked if the

regulation 151.7(i) exemption should include ``international'' law or

whether it was sufficient to refer to the ``law of a foreign

jurisdiction.''

b. Part 151 Proposed Rules for Information Sharing Restriction--State

Law

The Commission also proposed to establish an exemption for

situations where information sharing restrictions could trigger state

law violations. In addition, similar to the clarification related to

information sharing restrictions under federal law, the Commission also

proposed that the state law information sharing restriction apply where

the sharing of information creates a ``reasonable risk'' of violating

the state law. However, as noted above, the Commission remained

concerned about the potential for evasion within the context of this

exemption. In this regard, the Part 151 Aggregation Proposal,

consistent with the federal law information sharing restriction,

included the requirement to file an opinion of counsel specifically

identifying the restriction of law and facts particular to the market

participant claiming the exemption.

The clarification and expansion of the violation of law exemption

in the Part 151 Aggregation Proposal addressed

[[Page 68949]]

concerns raised in the aggregation petition. First, the clarification

and extension of the violation of law exemption responded to concerns

that market participants could face increased liability under state,

federal and foreign law. While the aggregation petition and other

commenters argued that an owned non-financial entity exemption would

reduce the risk of liability under antitrust and other laws, the

clarification and expansion in the Part 151 Aggregation Proposal would

also reduce risk of liability under antitrust or other laws by allowing

market participants to avail themselves of the violation of law

exemption in those circumstances where the sharing of information

created a reasonable risk of violating the above mentioned bodies of

law.

The Commission solicited comments as to the appropriateness of

extending the information sharing exemption to state law. The

Commission also considered, as an alternative, a case-by-case approach,

through petitions submitted pursuant to CEA section 4a(a)(7), where the

Commission would otherwise rely upon the preemption of state law in

administering its aggregation policy.

The Commission noted that the aggregation petition cites to Texas

Public Utility Code Substantive Rule 25.503, which provides that ``a

market participant shall not collude with other market participants to

manipulate the price or supply of power.'' \22\ That provision applies

to intra-state transactions and resembles regulations of the Federal

Energy Regulatory Commission.\23\ In this regard, the Commission asked

if it should limit application of the proposed exemption for state law

information sharing restrictions to laws that have a comparable

provision at the federal level, and what criteria it should use in

identifying state laws that a person may rely upon for an exemption

from aggregation. The Commission also solicited additional comment as

to the types of state laws, including specific laws, which could create

an information sharing restriction in conflict with the Commission's

aggregation policy.

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\22\ Aggregation petition at 24.

\23\ See, e.g., 18 CFR 1c.1 and 1c.2.

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The Commission further noted that the aggregation petition seeks to

extend the exemption to information sharing restrictions that arise

from ``local'' law.\24\ However, the aggregation petition did not

provide examples of local laws that could create restrictions on

information sharing, and the Commission was concerned that an exemption

for local law would be difficult to implement due to the large number

of such laws and/or regulations that would need to be considered and

the vast numbers of localities that might issue such laws and/or

regulations.

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\24\ Aggregation petition at 24.

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The Commission solicited comment as to the appropriateness of

extending the information sharing exemption to ``local'' law.

Commenters were asked to provide the scope of local law and identify

any specific laws that create information sharing restrictions that

would conflict with the Commission's aggregation policy. The Commission

also asked what criteria it could use in identifying local laws that a

person may rely upon for an exemption from aggregation, and if the

Commission should adopt a case-by-case approach through petitions

submitted pursuant to CEA section 4a(a)(7) and otherwise rely upon the

preemption of local law in administering its aggregation policy.

2. Commenters' Views

One commenter said that the information sharing exemption should

not be expanded, but should instead be limited to violations of federal

law.\25\ This commenter also said that the exemption from aggregation

for potential violations should not be included, because it is

impractical to determine if potential violations actually justify

disaggregation, and that if the exemption is expanded, only ``foreign

law,'' not ``international law,'' should be a basis for the exemption

since international law (such as a treaty) is not directly applicable

to information sharing.\26\

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\25\ Institute for Agriculture and Trade Policy on June 29, 2012

(``CL-IATP'').

\26\ CL-IATP.

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Other commenters said that the proposed exemptions for information

sharing requirements under state or foreign law are appropriate, and

that a ``reasonable risk'' of violation is the right standard for the

exemptions.\27\ Commenters also said that requirements under state law

should be a valid basis for an exemption regardless of whether a

comparable federal law exists, and even if federal law pre-empts state

law.\28\ These commenters cited state utility regulations and state

regulation of local gas distribution companies as examples of the types

of state laws that could prohibit information sharing. Without citing

any examples of such laws that may restrict information sharing, two

commenters said that local law should also be a valid basis for an

exemption.\29\

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\27\ EEI on June 29, 2012 (``CL-EEI''), FIA on June 29, 2012

(``CL-FIA''), International Swaps and Derivatives Association and

Securities Industry and Financial Markets Association, jointly on

June 29, 2012 (``CL-ISDA/SIFMA'').

\28\ American Gas Association on June 29, 2012 (``CL-AGA''),

American Petroleum Institute on June 29, 2012 (``CL-API''), Atmos

Energy Holdings on June 29, 2012 (erroneously dated July 29, 2012)

(``CL-Atmos''), CL-EEI, CL-FIA, Coalition of Physical Energy

Companies on June 29, 2012 (``CL-COPE'').

\29\ CL-API, Working Group of Commercial Energy Firms and

Sutherland Asbill & Brennan LLP, on behalf of The Commercial Energy

Working Group, jointly on June 29, 2012 (``CL-WGCEF'').

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Regarding which types of legal provisions should be treated as

``state law,'' commenters said it should include state statutes,

regulations and common law (including, e.g., fiduciary duties under

common law),\30\ and rules, regulations, administrative rulings and

court orders imposed by state commissions or other governmental

authorities with jurisdiction.\31\

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\30\ CL-FIA, Private Equity Growth Capital Council on June 29,

2012 (``CL-PEGCC'').

\31\ CL-AGA, Alternative Investment Management Association

Limited on July 6, 2012 (``CL-AIMA''), CL-Atmos.

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Addressing the requirement of an opinion of counsel, some

commenters said that the requirement in the existing rule should not be

changed.\32\ These commenters reasoned that the presumption should be

that aggregation is required in all but the most clear-cut cases, and

for those cases an opinion would be available.\33\

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\32\ Better Markets, Inc. on June 29, 2012 (``CL-Better

Markets''), CL-IATP.

\33\ CL-Better Markets, CL-IATP.

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Other commenters said that a memorandum of law prepared by internal

or external counsel should suffice if it sets out a legal basis for the

exemption.\34\ These commenters generally pointed out that formal legal

opinions can be expensive to obtain, typically contain many

qualifications, and otherwise are not a practical means of advancing

the goals mentioned in the Part 151 Aggregation Proposal.\35\ One

commenter said that as an alternative to a memorandum of law, a person

claiming the exemption should be allowed simply to provide a copy of

the court order, administrative ruling or other document showing the

prohibition of information sharing.\36\

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\34\ CL-API, CL-EEI, CL-FIA, CL-ISDA/SIFMA, CL-PEGCC, CL-WGCEF.

\35\ CL-API, CL-EEI, CL-FIA, CL-ISDA/SIFMA, CL-PEGCC, CL-WGCEF.

Commenters also said that persons should be able to rely on a

general legal opinion (as compared to a legal opinion or memorandum

prepared specifically for that person) with respect to laws that

impose a broadly applicable prohibition of information sharing.

\36\ CL-AIMA.

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3. Proposed Rule

The Commission is proposing to adopt rule 150.4(b)(8), which is

largely

[[Page 68950]]

similar to rule 151.7(i) as it was proposed to be amended. The

Commission notes that many of the commenters agreed that the proposed

amendment to part 151 appropriately required that the sharing of

information create ``a reasonable risk that either person could violate

state or federal law or the law of a foreign jurisdiction, or

regulations adopted thereunder.'' Based on the comments received and

further consideration, the Commission does not believe it is necessary

that the person show that a comparable federal law exists in order for

a state law to be the basis for an exemption.

The Commission has carefully considered the comments asserting that

local law and international law should be a basis for the exemption.

However, the Commission does not believe that this would be

appropriate. First, the Commission notes that the commenters were

divided on this point, and only some supported incorporating local law

and international law into the exemption. With regard to local law, the

Commission continues to believe, as stated in the Part 151 Aggregation

Proposal, that an exemption for local law would be difficult to

implement due to the number of laws and regulations that would need to

be considered and the number of localities that might issue them. Also,

even though the number of such laws and regulations may be large, the

Commission is not persuaded that there would be a significant number of

instances where these laws and regulations would prohibit information

sharing that would otherwise be permitted under federal and state

law.\37\ In this respect, the Commission notes that even commenters

supportive of including exceptions for local law did not cite any local

laws that restrict the information sharing necessary to comply with the

Commission's aggregation policy. Furthermore, the Commission is

concerned that reviewing notices of exemptions based on local laws

would create a substantial administrative burden for the Commission.

That is, balancing the possibility that including local law as a basis

for the exemption would be helpful to market participants against the

possibility that doing so would lead to confusion or inappropriate

results, the Commission preliminarily concludes that the better course

is not to provide for local law to be a basis for the exemption.

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\37\ In addition, in those instances where local law would

impose an information sharing restriction that is not present under

state or federal law, the Commission believes that it could be

inappropriate to favor the local law serving a local purpose to the

detriment of the position limits under federal law that serve a

national purpose.

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With regard to international law, the Commission is persuaded by

the commenter who pointed out that the sources of international law,

such as treaties and international court decisions, would be unlikely

to include information sharing prohibitions that would not otherwise

apply under foreign or federal law, and that therefore including

international law as a basis for the exemption is unnecessary.

The Commission's proposed rule 150.4(b)(8) differs from the

proposed amendment to rule 151.7, in that instead of requiring a person

to provide an opinion of counsel regarding the reasonable risk of a

violation of law, the proposed rule would require the person to provide

a written memorandum of law (which may be prepared by an employee of

the person or its affiliates) which explains the legal basis for

determining that information sharing creates a reasonable risk that

either person could violate federal, state or foreign law. The

Commission is persuaded by the commenters saying that requiring a

formal opinion of counsel may be expensive and may not provide

benefits, in terms of the purposes of this requirement, as compared to

a memorandum of law. As noted in the Part 151 Aggregation Proposal, the

purpose of this requirement is to allow Commission staff to review the

legal basis for the asserted regulatory impediment to the sharing of

information (which should be particularly helpful when the asserted

impediment arises from laws that the Commission does not directly

administer), to consult with other regulators as to the accuracy of the

assertion, and to coordinate the development of rules surrounding

information sharing and aggregation. The Commission expects that a

written memorandum of law would, at a minimum, contain information

sufficient to serve these purposes.

The Commission preliminarily believes that if there is a reasonable

risk that persons in general could violate a provision of federal,

state or foreign law of general applicability by sharing information

associated with position aggregation, then the written memorandum of

law may be prepared in a general manner (i.e., not specifically for the

person providing the memorandum) and may be provided by more than one

person in satisfaction of the requirement. For example, the Commission

is aware that trade associations commission law firms to provide

memoranda on various legal issues of concern to their members. Under

the proposed rule, such a memorandum (i.e., one that sets out in detail

the basis for concluding that a certain provision of federal, state or

foreign law of general applicability creates a reasonable risk of

violation arising from information sharing) could be provided by

various persons to satisfy the requirement, so long as it is clear from

the memorandum how the risk applies to the person providing the

memorandum.

On the other hand, the Commission is not persuaded that, as

suggested by some commenters, simply providing a copy of the law or

other legal authority would be sufficient, because this would not set

out the basis for a conclusion that the law creates a reasonable risk

of violation if the particular person providing the document shared

information associated with position aggregation. If the effect of the

law is clear, the written memorandum of law need not be complex, so

long as it explains in detail the effect of the law on the person's

information sharing.

Proposed rule 150.4(b)(8) also reflects the addition of a

parenthetical clause to clarify that the types of information that may

be relevant in this regard may include, only by way of example,

information reflecting the transactions and positions of a such person

and the owned entity. The Commission believes it is helpful to clarify

in the rule text what types of information may potentially be involved.

The mention of transaction and position information as examples of this

information is not intended to limit the types of information that may

be relevant.

Finally, the Commission preliminarily believes that the question of

what legal authorities, in particular, constitute ``state law'' or

``foreign law,'' where it is relevant, is a question to be addressed in

the written memorandum of law. In general, any state-level or foreign

legal authority that is binding on the person could be a basis for the

exemption.

The Commission solicits comment as to all aspects of proposed rule

150.4(b)(8). In particular, the Commission solicits comment as to the

appropriateness of requiring that a person provide a written memorandum

of law, rather than an opinion of counsel, regarding the reasonable

risk of a violation of law. Also, what types of information may

potentially be the subject of the sharing that is of concern in this

rule?

C. Ownership of Positions Generally

1. Part 151 Proposed Approach

The Part 151 Aggregation Proposal reflected the Commission's long-

[[Page 68951]]

standing incremental approach to exemptions from the aggregation

requirement for persons owning a financial interest in an entity. The

Part 151 Aggregation Proposal highlighted the relevant statutory

language of section 4a(a)(1) of the CEA, which requires aggregation of

an entity's positions on the basis of either ownership or control of

the entity, and the related legislative history and regulatory

developments which support the Commission's approach. In addition, the

Part 151 Aggregation Proposal also explained that the Commission's

historical practice has been to craft narrowly-tailored exemptions,

when and if appropriate, to the basic requirement of aggregation when

there is either ownership or control of an entity.\38\

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\38\ See also note 41, below, and accompanying text.

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Regarding the threshold level at which an exemption from

aggregation on the basis of ownership would be available, the

Commission noted in the Part 151 Aggregation Proposal that it has

generally found that an ownership or equity interest of less than 10

percent in an account or position that is controlled by another person

who makes discretionary trading decisions does not present a concern

that such ownership interest results in control over trading or can be

used indirectly to create a large speculative position through

ownership interests in multiple accounts. As such, the Commission has

exempted an ownership interest below 10 percent from the aggregation

requirement.\39\ Prior comments discussed in the Part 151 Aggregation

Proposal suggested that a similar analysis should prevail for an

ownership interest of 10 percent or more where such ownership

represents a passive investment that does not involve control of the

trading decisions of the owned entity, because such passive investments

would present a reduced concern that ownership would result in trading

pursuant to direct or indirect control, as well as a reduced risk for

persons with positions in multiple accounts to hold an unduly large

overall position.

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\39\ The Commission codified this aggregation threshold in its

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

administrative experience of the Commission's predecessor. See

Statement of Policy on Aggregation of Accounts and Adoption of

Related Reporting Rules (``1979 Aggregation Policy''), 44 FR 33839,

33843 (June 13, 1979). Note, however, that consistent with the

approach taken in 151.7(d), proposed rule 150.4(d) will separately

require aggregation of investments in accounts with identical

trading strategies.

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While other Commission rulemakings prior to the Part 151

Aggregation Proposal generally restricted exemptions from aggregation

based on ownership to FCMs, limited partner investors in commodity

pools, and independent account controllers managing customer funds for

an eligible entity, a broader passive investment exemption has

previously been considered but not enacted by the Commission.\40\

Further, the Commission reiterated its belief in incremental

development of aggregation exemptions over time.\41\ Consistent with

that incremental approach, the Commission considered the additional

information provided and the concerns raised by the aggregation

petition, and proposed relief from the ownership criteria of

aggregation.

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\40\ See, e.g., 53 FR 13290, 13292 (1988) (proposal). The 1988

proposal for the independent account controller rule requested

comment on the possibility of a broader passive investment

exemption, and specifically noted:

[Q]uestions also have been raised regarding the continued

appropriateness of the Commission's aggregation standard which

provides that a beneficial interest in an account or positions of

ten percent or more constitutes a financial interest tantamount to

ownership. This threshold financial interest serves to establish

ownership under both the ownership criterion of the aggregation

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

Aggregation Policy.

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

attention where beneficial ownership in several otherwise unrelated

accounts may be greater than ten percent, but the circumstances

surrounding the financial interest clearly exclude the owner from

control over the positions. The Commission is requesting comment on

whether further revisions to the current Commission rules and

policies regarding ownership are advisable in light of the exemption

hereby being proposed. If such financial interests raise issues not

addressed by the proposed exemption for independent account

controllers, what approach best resolves those issues while

maintaining a bright-line aggregation test?

\41\ See 77 FR 31767, 31773. This incremental approach to

account aggregation standards reflects the Commission's historical

practice. See, e.g., 53 FR 41563, 41567, Oct. 24, 1988 (the

definition of eligible entity for purposes of the IAC exemption

originally only included CPOs, or exempt CPOs or pools, but the

Commission indicated a willingness to expand the exemption after a

``reasonable opportunity'' to review the exemption.); 56 FR 14308,

14312, Apr. 9, 1991 (the Commission expanded eligible entities to

include commodity trading advisors, but did not include additional

entities requested by commenters until the Commission had the

opportunity to assess the current expansion and further evaluate the

additional entities); and 64 FR 24038, May 5, 1999 (the Commission

expanded the list of eligible entities to include many of the

entities commenters requested in the 1991 rulemaking).

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The Part 151 Aggregation Proposal would have established a notice

filing procedure to permit a person with an ownership or equity

interest in a separately organized entity (``owned entity'') of 10

percent or greater, but no more than 50 percent, to disaggregate the

positions of the owned entity in specified circumstances. Under that

proposal, the notice filing would demonstrate compliance with certain

conditions set forth in the proposed amendment to part 151. Similar to

other exemptions from aggregation, the notice filing would be effective

upon submission to the Commission, but the Commission would be able to

subsequently call for additional information as well as reject, modify

or otherwise condition such relief. Further, such person would be

obligated to amend the notice filing in the event of a material change

to the circumstances described in the filing.

a. Initial Proposed Ownership Threshold for Disaggregation Relief

The proposed amendment to part 151 would have conditioned

disaggregation relief on a demonstration that the person does not have

greater than a 50 percent ownership or equity interest in the owned

entity. The Part 151 Aggregation Proposal explained that an equity or

ownership interest above 50 percent constitutes a majority ownership or

equity interest of the owned entity and is so significant as to require

aggregation under the ownership prong of Section 4a(a)(1) of the CEA.

As noted in the Part 151 Aggregation Proposal, the proposed amendment

to part 151 would have provided certainty and an easily administrable

bright-line test, and would have addressed concerns about circumvention

of position limits by coordinated trading or direct or indirect

influence between entities. To the extent that the majority owner may

have the ability and incentive to direct, control or influence the

management of the owned entity, the proposed bright-line test would be

a reasonable approach to the aggregation of owned accounts pursuant to

Section 4a(a)(1). A person with a greater than 50 percent ownership

interest in multiple accounts would have the ability to hold and

control a significant and potentially unduly large overall position in

a particular commodity, which position limits are intended to prevent.

The owned entity exemption in the Part 151 Aggregation Proposal

would have applied to both financial and non-financial entities that

have passive ownership interests. Market participants that qualify for

the exemption could file a notice with the Commission demonstrating

independence between entities and, thereafter, forgo the development of

monitoring and tracking systems for the aggregation of accounts. The

Commission sought comment as to whether such passive interests present

a significantly reduced risk of coordinated trading compared to owned

entities that fail the criteria for the proposed

[[Page 68952]]

exemption. In addition, the Commission specifically requested comment

as to whether the proposed relief should be limited to ownership

interests in non-financial entities.

While the owned non-financial entity exemption mentioned in the

aggregation petition would permit disaggregation even if the owned

entity is wholly owned, the Commission was concerned that an ownership

interest greater than 50 percent presents heightened concerns for

coordinated trading or direct or indirect influence over an account or

position, and that permitting disaggregation at that level of ownership

would be inconsistent with the statutory requirement to aggregate on

the basis of ownership. The Part 151 Aggregation Proposal noted that

while small ownership interests of less than 10 percent do not warrant

aggregation, and although 10 percent or greater ownership has served as

a useful threshold for aggregation, the Commission believed relief may

be warranted for passive investments above 10 percent. However, for the

reasons discussed above, aggregation would be inappropriate where an

ownership interest is greater than 50 percent. Therefore, the

Commission proposed limiting the availability of the exemption to those

having an ownership interest no greater than 50 percent.

b. Initial Proposed Criteria for Disaggregation Relief

The proposed criteria to claim relief under the proposed amendment

to part 151 addressed the Commission's concerns that an ownership or

equity interest of 10 percent and above may facilitate or enable

control over trading of the owned entity or allow a person to

accumulate a large position through multiple accounts that could

overall amount to an unduly large position. The Part 151 Aggregation

Proposal grouped these criteria into four general categories.

First, the proposed amendment to part 151 would have conditioned

aggregation relief on a demonstration that the person filing for

disaggregation relief and the owned entity do not have knowledge of the

trading decisions of the other. The Commission noted that where an

entity has an ownership interest in another entity and neither entity

shares trading information, such entities demonstrate independence, but

persons with knowledge of trading decisions of another in which they

have an ownership interest are likely to take such decisions into

account in making their own trading decisions.

Second, the proposed amendment to part 151 would have conditioned

aggregation relief on a demonstration that the person seeking

disaggregation relief and the owned entity trade pursuant to separately

developed and independent trading systems. Further, a demonstration

that such person and the owned entity have, and enforce, written

procedures to preclude the one entity from having knowledge of, gaining

access to, or receiving data about, trades of the other, would also be

required. Such procedures would address document routing and other

procedures or security arrangements, including separate physical

locations, which would maintain the independence of their activities.

The Part 151 Aggregation Proposal noted that these conditions would

strengthen the independence between the two entities for the owned

entity exemption.

Third, the proposed amendment to part 151 would have conditioned

aggregation relief on a demonstration that the person does not share

employees that control the owned entity's trading decisions, and the

employees of the owned entity do not share trading control with such

persons. The Part 151 Aggregation Proposal noted that, similar to the

restriction on information sharing, the sharing of employees with

knowledge of trading decisions presents a strong risk to the

independence of trading between entities. In the Part 151 Aggregation

Proposal, the Commission sought comment regarding whether the sharing

of employees such as attorneys, accountants, risk managers, compliance

and other mid- and back-office personnel compromises independence

because it would provide each entity with knowledge of the other's

trading decisions.\42\

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\42\ In the aggregation petition, the Working Groups asserted

that entities should be permitted to share ``attorneys, accountants,

risk managers, compliance and other mid- and back-office

personnel.'' Aggregation petition at Exhibit A.

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Fourth, the proposed amendment to part 151 would have conditioned

aggregation relief on a demonstration that the person and the owned

entity do not have risk management systems that permit the sharing of

trades or trading strategies with the other. This condition, which is

similar to a condition proposed in the aggregation petition, addressed

concerns that risk management systems that permit the sharing of trades

or trading strategies with each other present a significant risk of

coordinated trading through the sharing of information. The Part 151

Aggregation Proposal did not include a condition that the risk

management systems of the two entities be separately developed, and the

Commission sought comment as to whether independence of trading between

the two entities can be maintained when their risk management systems

do not communicate trade information.

c. Initial Proposed Notice Filing Requirement

With regard to filing requirements for the exemption in the

proposed amendment to part 151, the Commission noted that market

participants would be required to file in accordance with regulation

151.7(h). As such, market participants would be required to file a

notice with the Commission with a description of how they adhere to the

criteria in the proposed amendment to part 151 and a certification that

the conditions are met. This certification, as well as any other

certification made under regulation 151.7(h), would be required to be

made by a senior officer of the market participant with knowledge as to

the contents of the notice.\43\ Further, regulation 151.7(h)(3)

requires market participants to promptly update a notice filing in the

event of a material change of the information contained in the notice

filing.\44\

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\43\ See proposed rule 151.7(h)(1)(ii), 77 FR 31767, 31782.

\44\ In this regard, the Commission clarified that a material

change would include, among other events, if the person making the

original certification is no longer employed by the company. See

also CEA sections 6(c)(2) and 9(a)(3).

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With regard to the type of material necessary to file a notice to

claim an exemption under the proposed amendment to part 151, the

Commission noted that each submission would have to be specific to the

facts of the particular entity. The person claiming the exemption would

be required to provide specific facts that demonstrate compliance with

each condition of relief. Such a demonstration would likely include an

organizational chart showing the ownership and control structure of the

involved entities, a description of the risk management system, a

description of the information-sharing systems (including bulletin

boards, and common email addresses of the entities identified), an

explanation of how and to whom the trade data and position information

is distributed (including the responsibilities of the individual

receiving such information), and the officers that receive reports of

the trade data and position information.\45\

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\45\ The Commission noted that this list was not meant to be

exhaustive of the factors that would indicate an exemption is

warranted and should not be interpreted as being solely sufficient

to claim the exemption because each filing is fact specific. And, as

noted earlier, the Commission is able to demand additional

information regarding the exemption within its discretion.

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[[Page 68953]]

d. Initial Proposed Treatment of Higher Tier Entities

In connection with its request for the Commission to include an

owned non-financial entity exemption, the aggregation petition also

requested that the Commission provide relief from the filing

requirements for claiming the exemption. Specifically, it argued that

if an entity files a notice and claims the owned non-financial entity

exemption, then ``every higher-tier company (a company that holds an

interest in the company that submitted the notice) need not aggregate

the referenced contracts of the owned non-financial entities identified

in the notice.'' \46\ After consideration of this request, the

Commission proposed rules that would provide relief to such ``higher-

tier entities'' within the context of a corporate structure.\47\

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\46\ Aggregation petition at 23.

\47\ For purposes of the discussion below, ``higher-tier''

entities include entities with a 10 percent or greater ownership

interest in an owned entity.

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The proposed amendments to part 151 would have provided that

higher-tier entities may rely upon a notice for exemption filed by the

owned entity, and such reliance would only go to the accounts or

positions specifically identified in the notice. For example, if

company A had a 30 percent interest in company B, and company B filed

an exemption notice for the accounts and positions of company C, then

company A could rely upon company B's exemption notice for the accounts

and positions of company C. Should company A wish to disaggregate the

accounts or positions of company B, company A would have to file a

separate notice for an exemption.

The proposed amendments to part 151 would have also provided that a

higher-tier entity that wishes to rely upon an owned entity's exemption

notice would be required to comply with conditions of the applicable

aggregation exemption other than the notice filing requirements.

Although higher-tier entities would not have to submit a separate

notice to rely upon the notice filed by an owned entity, the Commission

noted that it would be able, upon call, to request that a higher-tier

entity submit information to the Commission, or allow an on-site visit,

demonstrating compliance with the applicable conditions.

The Part 151 Aggregation Proposal stated that the proposed

amendments to part 151 should significantly reduce the filing

requirements for aggregation exemptions. Further, the Commission did

not anticipate that the reduction in filing would impact the

Commission's ability to effectively surveil the proper application of

exemptions from aggregation. The first filing of an owned entity

exemption notice should provide the Commission with sufficient

information regarding the appropriateness of the exemption, while

repetitive filings of higher-tier entities would not be expected to

provide additional substantive information. However, the Commission

again noted that higher-tier entities would still be required to comply

with the conditions of the exemption specified in the owned entity's

notice filing.

The Commission specifically requested comments as to the

appropriateness of the owned entity exemption as well as the conditions

applicable to the exemption, and whether the Commission should add

additional criteria and if so, what criteria and why. The Commission

also asked if it should require market participants to submit

additional information to claim the exemption, and if so, what

information and why. With regard to the owned entity exemption, the

Commission asked if it should alter the scope of the exemption, and if

so, how it should be altered and why. Further, the Commission asked

commenters to address the percentage ownership interest, if any, at

which a market participant should no longer be able to claim the

exemption in the proposed amendments to part 151, and whether there are

specific circumstances in which a percentage of ownership higher than

50 percent would be appropriate to claim the exemption notwithstanding

the concerns described above regarding coordinated trading, direct or

indirect influence, and significantly large and potentially unduly

large overall positions in a particular commodity. In addition, the

Commission invited comment on the owned non-financial entity exemption

set forth in appendix A of the aggregation petition as an alternative

to the proposed owned entity exemption.

2. Commenters' Views

a. Comments on the Initial Proposed Ownership Threshold for

Disaggregation Relief

Some commenters supported the proposed rules requiring that, to

obtain relief from the aggregation requirement, a person must own 50

percent or less of an owned entity. One commenter said that unless the

standards for an independent account controller are met, any exemption

from aggregation for greater than 50 percent-owned entities would

constitute an unacceptable weakening of the position limits regime.\48\

This commenter also noted that CEA section 4a(a)(1) requires

aggregation of positions held by any persons ``directly or indirectly''

controlled by a person, and ``ownership is the paradigm example of

indirect control.'' \49\

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\48\ CL-Better Markets.

\49\ CL-Better Markets.

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Two commenters said that the proposed rules went too far in

allowing exemptions from aggregation. These commenters were concerned

that the exemptions in the Part 151 Aggregation Proposal could impede

prevention of excessive speculation on agricultural futures, which

requires the imposition of position limits based on consistent

aggregation of positions,\50\ and that allowing owners of more than 10

percent of another entity not to aggregate could ``potentially spark

additional `herd-like' behavior, thus causing another commodities

futures boom-bust cycle.'' \51\

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\50\ CL-IATP.

\51\ International Association of Machinists and Aerospace

Workers on June 29, 2012 (``CL-IAMAW'').

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The other commenters on the Part 151 Aggregation Proposal said that

the requirement of ownership of 50 percent or less of the owned entity

should not apply, and disaggregation relief should be available to any

person demonstrating that the owned entity's trading is independent

according to criteria along the lines of proposed rule

151.7(b)(1)(i).\52\ Some of these commenters also said that, as an

alternative to providing relief for any person that could demonstrate

independent trading by the owned entity, disaggregation relief should

be available to the extent specifically provided by the Commission in

response to a specific request for relief,\53\ or if the person makes

an additional demonstration of why majority ownership of the owned

entity does not result in trading control or information sharing that

warrants

[[Page 68954]]

aggregation.\54\ One commenter representing private investment funds

suggested rules allowing disaggregation relief if a person could

demonstrate independent trading by the owned entity and one of three

alternative conditions were met: (i) The owner uses information about

the owned entity's trading only for risk management, (ii) the owned

entity only enters into bona fide hedging transactions, or (iii) the

owned entity is not consolidated on the owner's financial statements,

representatives of the owner on the owned entity's board of directors

do not control the owned entity's trading and the owned entity's

trading qualifies as bona fide hedging.\55\

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\52\ American Benefits Council on June 29, 2012 (``CL-ABC''),

CL-AGA, CL-AIMA, CL-API, Barclays Capital on June 29, 2012 (``CL-

Barclays''), Commodity Markets Council on June 29, 2012 (``CL-

CMC''), CL-COPE, CL-EEI, CL-FIA, Iberdrola Renewables, LLC and

Iberdrola Energy Services LLC, jointly on June 29, 2012 (``CL-

Iberdrola''), CL-ISDA/SIFMA, Managed Funds Association on June 28,

2012 (``CL-MFA'') and CL-WGCEF.

\53\ CL-AIMA, CL-API. Two commenters' first position (not an

alternative position) was along these lines--that disaggregation

relief should be available to the extent provided by the Commission.

CL-Atmos, CL-MFA.

\54\ CL-ISDA/SIFMA, CL-WGCEF, CL-PEGCC. One of these commenters

said that, instead of requiring aggregation of positions, the

Commission should consider requiring that additional safeguards be

in place for majority-owned entities, such as requiring that both

the person and the owned entity to make certain annual

certifications. CL-WGCEF.

\55\ CL-PEGCC and Private Equity Growth Capital Council

supplemental letter on August 20, 2012 (``CL-PEGCC Supp.'').

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The commenters opposed to the requirement of ownership of 50

percent or less of the owned entity provided various reasons for why

the requirement should not apply. Some of these commenters said that

although ownership of more than 50 percent of an entity is an indicator

of control, such ownership does not always equate to control,\56\

because ownership of an entity does not provide control unless the

owner has an ability to direct or influence management) \57\ or because

treating ownership as tantamount to control is contrary to principles

of corporate separateness.\58\ Other commenters said that aggregation

is consistent with the underlying purposes of the position limits

regime only if a person has direct and actual control of the trading of

another person or has access to information about the other entity's

trading that facilitates its own trading.\59\

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\56\ CL-AGA, CL-MFA, CL-PEGCC, CL-WGCEF.

\57\ CL-API, CL-Atmos.

\58\ CL-ISDA/SIFMA, CL-PEGCC.

\59\ CL-CMC, CL-EEI.

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Other commenters claimed that the requirement of ownership of 50

percent or less of the owned entity is inconsistent with the CEA or

past practices of the Commission. These commenters said that while CEA

section 4a(a)(1) refers to positions held by ``controlled'' persons, it

does not refer to positions held by owned persons,\60\ that the

Commission does not require aggregation of positions of owned commodity

pools, or of positions (even those held by the entity itself) if there

is an independent account controller,\61\ and that the ``bright line''

standard at 50 percent ownership is arbitrary,\62\ inconsistent with

both a 1979 policy statement of the Commission that trading control is

a question of fact and with prior practice of DCMs to allow owners to

demonstrate lack of control of an owned entity's trading,\63\ or

unnecessary in light of the Commission's Part 151 Aggregation Proposal

of factors to determine whether a person controls the trading of an

owned entity.\64\

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\60\ CL-ISDA/SIFMA, CL-PEGCC.

\61\ CL-PEGCC.

\62\ CL-AGA, CL-API, CL-COPE.

\63\ CL-API, CL-WGCEF.

\64\ CL-AIMA.

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Another reason cited by commenters against the requirement of

ownership of 50 percent or less of the owned entity is that in certain

corporate structures, majority ownership may not provide for control of

the owned entity. Commenters said, for example, that limited partners

may not control the trading of a limited partnership, even though they

own a majority equity interest in the limited partnership,\65\ or a

joint venture may contain contractual provisions that prevent the

venture partners from controlling its trading,\66\ or a passive

majority investor in a commercial company may not control the company's

trading.\67\ Commenters also said that it would be inappropriate to

treat two companies that operate in different regions or at different

levels of commerce (e.g., wholesale and retail) as trading under common

control simply because both companies are owned by a common holding

company.\68\

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\65\ CL-CMC, CL-COPE, CL-WGCEF.

\66\ CL-API, CL-CMC.

\67\ U.S. Chamber of Commerce and the Real Estate Roundtable,

jointly on June 29, 2012 (``CL-Chamber''). Other commenters along

these lines added that to requiring passive investors to aggregate

the positions of majority-owned companies would inhibit legitimate

commercial and investment activity, CL-FIA, and that providing

relief from aggregation for passive investors would be similar to

the lack of aggregation for passive owners of commodity pools. CL-

PEGCC.

\68\ CL-AGA, CL-Iberdrola. Another commenter added that since

the independent account controller exemption would generally not be

available to holding companies owning operating companies, the

requirement of ownership of 50 percent or less of the owned entity

in order to disaggregate creates a regulatory imbalance between such

holding companies and the entities to which the independent account

controller exemption is available. CL-WGCEF.

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Commenters also described other factors that they believe weigh

against the requirement of ownership of 50 percent or less of the owned

entity in order to disaggregate. One commenter said that requiring

persons to aggregate the positions of all majority-owned entities would

lead to more information sharing and coordinated trading between such

entities, which the Commission should seek to prevent, and it would

also likely lead to incorrect position reporting while disaggregation

would encourage more granular and more accurate reporting.\69\ Another

commenter was concerned that the Commission's adoption of aggregation

rules would lead DCMs and SEFs to apply similar aggregation rules for

the position limits regimes that they enforce, thereby increasing the

importance of the aggregation rules to a wider variety of firms using

many different types of swaps.\70\ A commenter representing employee

benefit plans said that the Commission should not require aggregation

of the positions of a corporate entity that is the sponsor of an

employee benefit plan with the positions of the plan even if the

employees of the plan sponsor (or its subsidiaries) control the

investments of the plan, because such employees have a legal duty to

act solely in the interests of the plan.\71\

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\69\ CL-CMC.

\70\ CL-Chamber.

\71\ CL-ABC. This commenter also asked for clarification whether

a person that owns an entity that controls the trading of an

employee benefit plan would be required to aggregate the positions

of such plan with such person's positions. Id.

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b. Comments on the Initial Proposed Criteria for Disaggregation Relief

There were a variety of comments on the criteria in the proposed

amendment to part 151 that must be met in order for a person to obtain

disaggregation relief with respect to an owned entity. One general

point raised by several commenters was that the limits on sharing

information between the person and the owned entity should not apply to

employees that do not direct or influence trading (such as attorneys or

risk management and compliance personnel), although the employees may

have knowledge of the trading of both the person and the owned

entity.\72\ A commenter representing employee benefit plan managers

said that restrictions on information sharing are, in general, a

problem for plan managers, which have a fiduciary duty to inquire as to

an owned entities' activities, so the Commission should recognize that

acting as required by fiduciary duties

[[Page 68955]]

does not constitute a violation of the information sharing

restriction.\73\

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\72\ CL-AGA, CL-API, CL-Atmos, CL-Cargill, CL-EEI. Commenters

said that shared knowledge among employees is not relevant if they

are not involved in trading and do not serve as conduit for sharing

trading information, CL-AGA, CL-AIMA, CL-Atmos, and that it is

important that risk management and compliance personnel have

continuous knowledge of trading. CL-EEI.

\73\ CL-ABC.

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Summarized below are the comments on each of the four general

categories of criteria for disaggregation relief in the proposed rule.

No shared knowledge of trading decisions. Commenters said that this

proposed amendment to part 151 should be clarified to indicate that it

prohibits the sharing only of knowledge held by personnel with the

ability to direct or participate in trading decisions by either the

person or the owned entity that would allow them to trade in

anticipation or in concert, and that it allows post-trade information

sharing for risk management, accounting, compliance, or similar

purposes and information sharing among mid- and back-office personnel

that do not control trading.\74\ Another commenter said that this

proposed amendment to part 151 should be clarified to provide that

information sharing resulting when the person and the owned entity (or

two owned entities) are counterparties in an arm's length transaction

should not be a violation of the rule.\75\

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\74\ CL-AIMA, CL-EEI, CL-MFA, CL-WGCEF.

\75\ CL-COPE.

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Trade pursuant to separately developed and independent trading

systems; have and enforce written procedures to preclude sharing of

trading information and other procedures to maintain independence,

including separate physical locations. Commenters said that this

requirement should not apply to commercial energy firms which use

similar trading systems,\76\ or where existing systems can be modified

to prevent coordinated trading,\77\ or to prevent the use of third

party ``off-the-shelf'' execution algorithms.\78\ Other commenters said

the requirement should apply only to systems that direct trading

decisions, and not trade capture, trade risk or trade facilitation

systems.\79\ One commenter said this provision of the proposed

amendment to part 151 should be deleted, because it is the use of the

system, not its development, which is relevant.\80\ Commenters also

said that this proposed amendment to part 151 should apply only with

respect to personnel directing or participating in trading

decisions,\81\ and it should permit the sharing of virtual

documentation, so long as such document can be accessed only by persons

that do not manage or control trading.\82\ Commenters said that the

requirement of separate physical locations should not require that

personnel be located in separate buildings, so long as the relevant

employees of the person and the owned entity do not have access to each

other's physical premises.\83\ One commenter said that the requirement

to have specified policies and procedures should not apply to the owned

entity, because it does not control its owner.\84\

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\76\ CL-WGCEF.

\77\ CL-API.

\78\ CL-AIMA. The commenter said that, in this case, the rule

should require only that the systems be independently operated.

\79\ CL-EEI, CL-FIA.

\80\ CL-COPE.

\81\ CL-WGCEF.

\82\ CL-FIA.

\83\ CL-API, CL-EEI, CL-WGCEF.

\84\ CL-AIMA.

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No shared employees that control trading decisions. Commenters on

this proposed amendment to part 151 said it should not prohibit sharing

of board or advisory committee members who do not influence trading

decisions, sharing of research personnel, or sharing for training,

operational or compliance purposes, so long as trading of the person

and the owned entity remains independent.\85\

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\85\ CL-API, CL-Cargill.

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No risk management systems that permit shared trading. Commenters

said that this proposed amendment to part 151 should permit continuous

sharing of position information so long as such information is used

only for risk management and surveillance purposes and is not shared

with trading personnel.\86\

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\86\ CL-FIA, CL-WGCEF.

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c. Comments on the Initial Proposed Notice Filing Requirement

Commenters also addressed the burdens that would result from the

requirement that a filing be made to support disaggregation relief for

persons owning more than 10 percent of an owned entity. Two commenters

questioned the statement in the Part 151 Aggregation Proposal that

allowing persons that own more than 50 percent of an owned entity to

file requests for disaggregation relief would be burdensome, saying

that such filings would be required only if the person were seeking

disaggregation relief, and that such filings could be tailored so as to

provide the necessary information in an efficient way.\87\ One of these

commenters also said that requiring private investment funds to

aggregate positions held by majority-owned entities would be burdensome

because it would lead to persons owning between 10 and 50 percent of

the fund to make filings to support disaggregation relief.\88\ Another

commenter said that a single aggregate notice filing (with annual

updates for material changes) should be permitted, where the person

would list all owned entities for which it claims an exemption from the

aggregation requirement and make the required certifications, that the

filing should be effective retroactively to the beginning of the prior

filing period, and that affiliates at same level of ownership should be

able to rely on each other's notice filings (as do higher tier owners)

if the filings contain the appropriate demonstrations of compliance by

the affiliates.\89\ Last, one commenter said that no filing should be

required to support disaggregation relief or, in the alternative, a

filing should be required only where the absence of control of the

owned entity is not obvious and the filing should not be required until

90 days after the threshold level of ownership of the owned entity is

obtained.\90\

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\87\ CL-Atmos, CL-PEGCC.

\88\ CL-PEGCC.

\89\ CL-FIA.

\90\ CL-Barclays. Another commenter said that requiring a person

owning 50 percent or less of an owned entity to make a filing in

support of disaggregation relief is overly burdensome, and such

filings should be required only if the person owns more than 50

percent of the owned entity. CL-ISDA/SIFMA.

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d. Comments on Other Issues Relating to Disaggregation Relief in the

Part 151 Aggregation Proposal

Commenters addressed several miscellaneous issues arising from the

proposed amendments to part 151 requiring ownership of 50 percent or

less of the owned entity in order to disaggregate. In response to the

Commission's request for comment on whether applications for exemption

from the aggregation requirements should be handled on a case-by-case

basis, several commenters said that doing so would not be efficient and

the process in the proposed rule is preferable.\91\ One commenter said

that the final regulation on aggregation adopted by the Commission

should also apply for exemptions from the aggregation requirements of

DCMs and SEFs.\92\ Another commenter requested a transition period of

at least six months after the date that compliance with the position

limits regime is required before compliance with the aggregation

requirements would be required.\93\ Several commenters said that when

aggregation of positions are required, the positions should be

attributed from the owned entity to the owner on a basis that is pro

rata to the owner's interest in

[[Page 68956]]

the owned entity, to avoid double counting and an artificial limit on

trading that may affect liquidity.\94\ Two commenters addressed

information that the Commission may request under the proposed

amendments to part 151, saying they should be amended to specifically

limit such information to that which is relevant to establishing

whether a person meets the criteria for disaggregation and will be kept

confidential.\95\

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\91\ CL-AGA, CL-EEI, CL-FIA.

\92\ CL-MFA.

\93\ CL-FIA.

\94\ CL-ABC, CL-Barclays, CL-FIA.

\95\ CL-API, CL-WGCEF.

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One commenter said that the Commission should not adopt a rule

regarding aggregation of positions of owned entities and that the

Commission should instead rely on information provided on reports on

Commission Form 40, which includes information regarding whether the

respondent controls, or is controlled by, any other entity.\96\ Another

commenter said that the position limits regime is long overdue and

there should be a general requirement of aggregation, with no

exceptions or waivers.\97\

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\96\ CL-Barclays.

\97\ CL-Ja Sto.

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3. Proposed Rule

The Commission continues to believe, as stated in the Part 151

Aggregation Proposal, that ownership of an entity is an appropriate

criterion for aggregation of that entity's positions. Section 4a(a)(1)

of the CEA provides for the general aggregation standard with regard to

position limits, and specifically provides:

In determining whether any person has exceeded such limits, the

positions held and trading done by any persons directly or

indirectly controlled by such person shall be included with the

positions held and trading done by such person; and further, such

limits upon positions and trading shall apply to positions held by,

and trading done by, two or more persons acting pursuant to an

expressed or implied agreement or understanding, the same as if the

positions were held by, or the trading were done by, a single

person.\98\

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\98\ 7 U.S.C. 6a(a)(1).

The legislative history to the enactment of this provision in 1968

states that Congress added this language to expressly incorporate prior

administrative determinations of the Commodity Exchange Authority

(predecessor to the Commission) into the statute.\99\ These prior

administrative determinations, as well as regulations of the Commodity

Exchange Authority, announced standards that included control of

trading and financial interests in positions. As early as 1957, the

Commission's predecessor issued determinations requiring that accounts

in which a person has a financial interest be included in

aggregation.\100\ In addition, the definition of ``proprietary

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

includes any account in which there is 10 percent ownership.\101\

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\99\ See S. Rep No. 947, 90th Cong., 2 Sess. 5 (1968) regarding

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

This Senate Report provides:

Certain longstanding administrative interpretations would be

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

the Commodity Exchange Commission to fix limits on the amount of

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

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

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

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

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

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

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

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

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

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

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

more persons acting pursuant to an express or implied understanding

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

\100\ See Administrative Determination (``A.D.'') 163 (Aug. 7,

1957) (``[I]n the application of speculative limits, accounts in

which the firm has a financial interest must be combined with any

trading of the firm itself or any other accounts in which it in fact

exercises control.''). In addition, the Commission's predecessor,

and later the Commission, provided the aggregation standards for

purposes of position limits in the large trader reporting rules. See

Supersedure of Certain Regulations, 26 FR 2968, Apr. 7, 1961. In

1961, then regulation 18.01 read:

(a) Multiple Accounts. If any trader holds or has a financial

interest in or controls more than one account, whether carried with

the same or with different futures commission merchants or foreign

brokers, all such accounts shall be considered as a single account

for the purpose of determining whether such trader has a reportable

position and for the purpose of reporting. 17 CFR 18.01 (1961).

In the 1979 Aggregation Policy, the Commission discussed

regulation 18.01, stating:

Financial Interest in Accounts. Consistent with the underlying

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

basically provides that if a trader holds or has a financial

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

single account for reporting purposes. Several inquiries have been

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

account requires the trader to aggregate. Traditionally, the

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

except for the financial interest of a limited partner or

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

pool, a financial interest of 10 percent or more requires

aggregation. The Commission has determined to codify this

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

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

limited partner or shareholder (other than the commodity pool

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

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

account.''

Thus, a financial interest at or above this level will

constitute the trader as an account owner for aggregation purposes.

1979 Aggregation Policy, 44 FR at 33843.

The provisions concerning aggregation for position limits

generally remained part of the Commission's large trader reporting

regime until 1999 when the Commission incorporated the aggregation

provisions into rule 150.4 with the existing position limit

provisions in part 150. See 64 FR 24038, May 5, 1999. The

Commission's part 151 rulemaking also incorporated the aggregation

provisions in rule 151.7 along with the remaining position limit

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

\101\ 17 CFR 1.3(y). This provision has been in Regulation

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

regulations of its predecessor, with ``for the most part,

procedural, housekeeping-type modifications, conforming the

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

(January 21, 1976).

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

subsequent regulatory developments, and the Commission's historical

practices in this regard, the Commission continues to believe that

section 4a requires aggregation on the basis of either ownership or

control of an entity. The Commission also believes that aggregation of

positions across accounts based upon ownership is a necessary part of

the Commission's position limit regime.\102\

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\102\ See Revision of Federal Speculative Position Limits and

Associated Rules, 64 FR 24038, 24044, May 5, 1999 (``[T]he

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

applying separately to ownership of positions or to control of

trading decisions.''). See also, Exemptions from Speculative

Position Limits for Positions which have a Common Owner but which

are Independently Controlled and for Certain Spread Positions, 53 FR

13290, 13292, Apr. 22, 1988. In response to two separate petitions,

the Commission proposed the independent account controller exemption

from speculative position limits, but declined to remove the

ownership standard from its aggregation policy.

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

provides certainty to market participants and the Commission.\103\

Without aggregation on the basis of ownership, the Commission would

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

administrative challenges to individually assess control across all

market participants. Further, the Commission considers that if the

statute required aggregation based only on control, market participants

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

influence the account or

[[Page 68957]]

position and thereby circumvent the aggregation requirement.

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\103\ In this regard, the Commission is mindful of the point

raised by some commenters that the aggregation rules adopted by the

Commission would be a precedent for aggregation rules enforced by

DCMs and SEFs, leading to the application of the aggregation rules

to a wide variety of firms. See CL-Chamber. The Commission believes

that for this reason, it is important that the aggregation rules set

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

of easy application by a wide variety of market participants while

not being susceptible to circumvention.

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

that an aggregation requirement would lead to more information sharing

and significantly increased levels of coordinated speculative trading

by the entities subject to aggregation. Among other things, the

position limits would affect the trading of only the relatively small

number of entities that hold positions in excess of the limits.\104\

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\104\ See, e.g., Position Limits for Futures and Swaps, 76 FR

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

estimated to be subject to position limits).

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For example, the following table shows the relatively small number

of persons that held positions over the applicable limit during the

period of January 17 to September 12, 2012. For comparison, the table

also shows the number of persons with positions at a level in excess of

60 percent or 80 percent of the applicable limit. It is important to

note that this table was prepared by applying the current aggregation

requirements in regulation 150.4 without applying any of the current

exemptions to aggregation that may be available. Thus, this table

reflects the maximum number of persons that may hold positions of the

level shown, assuming that no exemptions to aggregation apply.

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\105\ In this table, ``*'' means fewer than 4 unique owners

exceeded the level, and ``--'' means no unique owner exceeded the

level.

Number of Unique Persons Over 60, 80, and 100 Percent of Levels of Rule 150.2 Federal Speculative Position Limits January 17, 2012 to September 30, 2012

\105\

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

Spot month Single month All months

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

Percent of Total number Total number Total number

Contract/DCM limit level of unique Number of of unique Number of of unique Number of

persons over person-days persons over person-days persons over person-days

level level level

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

Chicago Board of Trade

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

Corn and Mini-Corn...................... 60 97 517 22 1347 26 2289

80 72 372 11 643 13 1069

100 26 198 5 315 9 822

Oats.................................... 60 * * 6 436 8 527

80 * * * * 5 283

100 * * * * 4 217

Soybeans and Mini-Soybeans.............. 60 59 316 33 2751 36 3044

80 39 223 20 1580 25 1962

100 19 102 11 979 16 1244

Wheat and Mini-Wheat.................... 60 19 95 33 2877 32 3181

80 12 53 18 1660 23 2342

100 6 32 13 1050 15 1446

Soybean Oil............................. 60 54 211 36 3291 47 3568

80 34 126 25 2161 32 2589

100 12 47 14 1281 17 1551

Soybean Meal............................ 60 26 158 33 2546 37 2690

80 18 99 18 1480 21 1645

100 8 45 7 895 12 930

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

Kansas City Board of Trade

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

Hard Winter Wheat....................... 60 10 38 6 334 7 450

80 5 28 * * * *

100 4 20 * * * *

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

Minneapolis Grain Exchange

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

Hard Red Spring Wheat................... 60 5 12 -- -- * *

80 5 12 -- -- -- --

100 * * -- -- -- --

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

ICE Futures U.S.

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

Cotton No. 2............................ 60 5 31 35 3386 39 3417

80 5 30 21 2133 25 2554

100 5 25 14 1363 17 1701

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

Also, some of the entities subject to aggregation, which is based

on common ownership or control, might already share information

regarding their trading activities. Thus, the Commission continues to

believe, as it explained in the Part 151 Aggregation Proposal, that the

regulations proposed here will not result in a significantly increased

level of information sharing that would increase coordinated

speculative trading. The Commission notes that these proposed

regulations will provide further aggregation exemptions, lessening the

need to share information regarding speculative trading to ensure

compliance with position limits.

As a final introductory point, the Commission has considered that

relief from any rule requiring the aggregation of positions held by

separate entities is

[[Page 68958]]

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

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

group of affiliated entities can take steps to maintain an aggregate

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

to seek disaggregation relief.

In other words, seeking disaggregation relief is one option for

those groups of affiliated entities that may exceed a limit on an

aggregate basis but will remain below the relevant limits on an

individual basis. Other avenues are also available to corporate groups

that seek to remain in compliance with the position limit regime. For

example, the affiliated entities may put into place procedures to avoid

exceeding the limits on an aggregate basis.\106\ One potential approach

that could be available to a holding company with multiple subsidiaries

would be to assign each subsidiary an internal limit based on a

percentage of the level of the position limit. The holding company

would allocate no more in aggregate internal limits than the level of

the position limit.\107\ Further, a breach of an internal limit would

provide the holding company with notice that it should consider filing

for bona fide hedging exemptions or taking other compliance steps, as

applicable.

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\106\ The procedures adopted by the affiliates may obviate more

complex steps such as the implementation of real-time monitoring

software to consolidate all derivative activities of the affiliates,

especially if the group currently does not have an aggregate

position approaching the size of a position limit and has

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

significant percentage of the position limit.

\107\ An even more cautious approach would be for the holding

company to limit the overall allocation to the subsidiaries to less

than 100% of the position limit. For example, a holding company with

three subsidiaries may assign each subsidiary an internal limit

equal to 30% of the level of the federal limit. Thus, the holding

company has allocated permission to subsidiaries to hold, in the

aggregate, positions equal to up to 90% of the level of the relevant

position limit. Each subsidiary would simply report at close of

business its derivative position to the holding company. The 10%

cushion provides the holding company with the ability to remain in

compliance with the limit, even if all subsidiaries slightly exceed

the internal limits on the same side of the market at the same time.

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a. Disaggregation Relief for Ownership or Equity Interests of 50

Percent or Less

The Commission is proposing to adopt rule 150.4(b)(2), which is

largely similar to proposed rule 151.7(b)(1). Proposed rule 150.4(b)(2)

would continue the Commission's longstanding rule that persons with

either an ownership or an equity interest in an account or position of

less than 10 percent need not aggregate such positions solely on the

basis of the ownership criteria, and persons with a 10 percent or

greater ownership interest would still generally be required to

aggregate the account or positions.\108\ However, rule 150.4(b)(2)

would establish a notice filing procedure, effective upon submission,

to permit a person with either an ownership or an equity interest in an

owned entity of 50 percent or less to disaggregate the positions of an

owned entity in specified circumstances, even if such person has a 10

percent or greater interest in the owned entity.\109\ The notice filing

would have to demonstrate compliance with certain conditions set forth

in proposed rule 150.4(b)(2). As discussed in the Part 151 Aggregation

Proposal, and similar to other exemptions from aggregation, the notice

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

Commission would be able to subsequently call for additional

information, and to amend, terminate or otherwise modify the person's

aggregation exemption for failure to comply with the provisions of rule

150.4(b)(2). Further, the person would be obligated to amend the notice

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

in the filing.

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\108\ For purposes of aggregation, the Commission believes that

contingent ownership rights, such as an equity call option, would

not constitute an ownership or equity interest.

\109\ Under the approach proposed here, and in a manner similar

to current regulation, if a person qualifies for disaggregation

relief, the person would nonetheless have to aggregate those same

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

accounts with substantially identical trading strategies. See

proposed rule 150.4(a)(2). The exemptions in proposed rule 150.4 are

set forth as alternatives, so that, for example, the applicability

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

applicability of a separate exemption from aggregation (e.g., the

independent account controller exemption in paragraph (b)(5)).

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The Commission preliminarily believes that a 50 percent limit on

the ownership interest in another entity is a reasonable, ``bright

line'' standard for determining when aggregation of positions is

required, even where the ownership interest is passive. As explained in

the Part 151 Aggregation Proposal, majority ownership (i.e., over 50

percent) is indicative of control, and this standard addresses the

Commission's concerns about circumvention of position limits by

coordinated trading or direct or indirect influence between entities.

To the extent that a majority owner would have the ability and

incentive to direct, control or influence the management of the owned

entity, the 50 percent limit is a reasonable approach to the

aggregation of owned accounts pursuant to Section 4a(a)(1) of the CEA.

Aggregation based upon an ownership or equity interest of greater than

50 percent is appropriate to address the heightened risk of direct or

indirect influence over the owned entity.\110\

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\110\ The Commission notes that, as stated in the Part 151

Aggregation Proposal, the requirement in proposed rule 150.4(b)(2)

of aggregation based on ownership depends on a person's ownership

interest in another entity, regardless of the person's voting

control of that entity. However, as discussed further below, the

Commission believes that relief from the aggregation requirement may

be appropriate in some circumstances, where the owned entity is not

consolidated on the owner's financial statements. Since the extent

of the owner's voting interest in the owned entity may be a factor

in determining whether financial consolidation is required, the

voting interest may indirectly be a factor in determining if

aggregation is required.

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Moreover, greater than 50 percent ownership is a standard used by

other government agencies and reflects a general understanding that

ownership at this level poses substantial potential for direct or

indirect control over an owned entity. For example, the U.S. Federal

Trade Commission and U.S. Department of Justice use a 50 percent

ownership threshold test to determine ``control'' for the purpose of

defining pre-merger and acquisition filing requirements under the Hart-

Scott-Rodino Antitrust Improvements Act of 1974.\111\

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\111\ 15 U.S.C. 18(a); see also 16 CFR 801.1(b) (defining

``control'' for purpose of implementing regulations to include

``[h]olding 50 percent or more of the outstanding voting securities

of an issuer or, in the case of any unincorporated entity, having

the right to 50 percent or more of the profits of the entity, or

having the right in the event of dissolution to 50 percent or more

of the assets of the entity''); Premerger Notification; Reporting

and Waiting Period Requirements, 43 FR 33450, 33457 (July 31, 1978)

(`` `Control' was defined at the level of 50 percent stock ownership

for two reasons. First, it supplied an objective, easily

administrable criterion. Second, except for cases in which the

holding is exactly 50 percent, majority ownership will always enable

the holder to direct the day-to-day activities of the controlled

entity, even though for many large corporations, de facto control

may arise from holdings well below 50 percent'').

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The Commission notes that a requirement of ownership of 50 percent

or less of the owned entity in order to obtain disaggregation relief by

making a notice filing would not affect a person's ability to obtain

other exemptions. For example, exemptions from position limits for bona

fide hedging positions or from aggregation for independent account

controllers, if applicable, would still be utilized to the extent an

owned entity is entering into positions for bona fide hedging or on

behalf of customers, as provided in those exemptions.

Regarding those commenters who said that if an owned entity's

positions are aggregated with the owner's position, the aggregation

should be pro rata to the ownership interest, the Commission believes

that a pro rata approach could be administratively burdensome for both

owners and the Commission. For

[[Page 68959]]

example, the level of ownership interest in a particular owned entity

may change over time for a number of reasons, including stock

repurchases, stock rights offerings, or mergers and acquisitions, any

of which may dilute or concentrate an ownership interest. Thus, it may

be burdensome to determine and monitor the appropriate pro rata

allocation on a daily basis. Moreover, the Commission has historically

interpreted the statute to require aggregation of all the relevant

positions of owned entities, absent an exemption. This is consistent

with the view that a holder of a significant ownership interest in

another entity may have the ability to influence all the trading

decisions of the entity in which such ownership interest is held.

The Commission invites commenters to address whether the Commission

should adopt an approach that would require aggregation of only a pro-

rata allocation of owned-entity positions to equity owners based on the

percentage of ownership interest. How could aggregation in a manner pro

rata to the ownership interest be effected in practice? What procedures

could be used to implement a pro rata method, and what would those

procedures entail? If procedures to implement a pro rata method are

suggested, please address the burden those procedures could place on

the owners and on the Commission.

The Commission also solicits comment on whether the Commission

should permit a person to file a notice that would inform the

Commission of that person's ownership interest in an owned entity, and

permit that person to aggregate only a pro rata allocation of the

owned-entity's positions based on that person's less than 100 percent

ownership. In light of the potential administrative burdens associated

with the adoption of an aggregation methodology based on allocation pro

rata to ownership interest, should the Commission provide for

aggregation of an owned-entity's positions to the owner based on

ownership tiers? Commenters may address, for example, the establishment

of two ownership tiers, one for an ownership interest of 10 percent to

25 percent, with an attribution of 25 percent of the owned-entity's

positions (rather than 100 percent of the affiliate's position) to the

owner, and another tier for an ownership interest of greater than 25

percent to 50 percent, with an attribution of 50 percent of the owned-

entity's positions (rather than 100 percent of the affiliate's

position) to the owner. Would a tiered approach such as this alleviate

concerns about aggregation in general? What are the potential burdens

of applying this approach? If this approach is implemented, should

owners be required to file a notice with the Commission when the

relevant ownership interest changes from one tier to another?

Regarding those commenters who said that there should be a

transition period for application of the requirement of ownership of 50

percent or less of the owned entity in order to obtain disaggregation

relief, the Commission notes that this proposal would apply to existing

position limits currently in effect, and as noted above, would provide

further aggregation exemptions.

The Commission also considered comments that aggregation of

positions is unnecessary because information about ownership and

control is available to the Commission through reports on Commission

Form 40. However, the Commission is not persuaded that these reports

are a sufficient substitute for the position limits regime. While these

reports provide some information necessary for surveillance of

positions, some owned entities may not file these reports. Also, the

obligation to provide updates to the Commission if there are material

changes to the relevant information, which is included in the proposed

revision of rule 150.4, may not necessarily apply to information

provided in the reports on Form 40. On a more fundamental level, the

Commission believes that compliance with the position limit rules,

including aggregation of the positions of owned entities, is primarily

the responsibility of the owned entities and their owners. Even if the

information on Form 40 were sufficient, it would be impractical and

inefficient for the Commission to use that information to monitor

compliance with the position limit rules, as compared to the ability of

the entities themselves to maintain compliance with the position

limits.

Similarly, the Commission is not persuaded by the commenter who

asserted that aggregation of positions would, in general, lead to

inaccurate reporting of positions. Rather, the Commission believes that

the proposed rule would facilitate accurate reporting by providing a

``bright line'' rule for determining when aggregation is required.\112\

The Commission emphasizes the responsibility of those who are subject

to the aggregation and position reporting requirements to ensure that

the information required by the Commission's regulations is provided

accurately.

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\112\ See note 103 and accompanying text, supra.

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b. Disaggregation Relief for Ownership or Equity Interests of Greater

Than 50 Percent

The Commission continues to believe, as stated in the Part 151

Aggregation Proposal, that an equity or ownership interest above 50

percent constitutes a majority ownership or equity interest of the

owned entity and is so significant as to justify aggregation under the

ownership prong of Section 4a(a)(1) of the CEA. A person with a greater

than 50 percent ownership interest in multiple accounts would have the

ability to hold and control a significant and potentially unduly large

overall position in a particular commodity, which position limits are

intended to prevent. Also, as noted above, in general this ``bright

line'' approach would provide administrative certainty.

While the Commission continues to believe that relief from the

aggregation requirement should not be available merely upon a notice

filing by a person who has a greater than 50 percent ownership or

equity interest in the owned entity, the Commission has considered the

points raised by commenters in this regard. In view of the comments,

the Commission understands that in some limited situations

disaggregation relief may be appropriate even for majority owners if

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

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

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

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

and the owned entity have procedures in place that are reasonably

effective to prevent coordinated trading. The person would have to

demonstrate that it does not control the owned entity's trading even

though the person is the majority owner of the owned entity.

To provide such limited relief in order to address issues raised by

commenters would represent a break by the Commission from past

practice. The Commission is authorized to provide such relief by the

plenary authority granted to the Commission in section 4a(a)(7) of the

CEA to provide relief from the requirements of the position limits

regime.

Consequently, the proposed rules includes a provision (proposed

rule 150.4(b)(3)) that would permit a person with a greater than 50

percent ownership of an owned entity to apply to the Commission for

relief from aggregation on a case-by-case basis. The

[[Page 68960]]

person would be required to demonstrate to the Commission that:

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

on the financial statement of the person,

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

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

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

reasonably effective to prevent coordinated trading in spite of

majority ownership,\113\

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\113\ The Commission points out that since this criterion

requires a person to certify that the person does not control

trading of its owned entity, the criterion could not be met by a

natural person or any entity, such as a partnership, where it is not

possible to separate knowledge and control of the person from that

of the owned entity.

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

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

trading of the owned entity, and

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

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

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

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

case that:

[ssquf] if this certification becomes untrue for the owned entity,

the person will aggregate the owned entity for three complete calendar

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

hedging transactions during that time the person would have the

opportunity to make the certification again and stop aggregating,

[ssquf] upon any call by the Commission, the owned entity(ies) will

make a filing responsive to the call, reflecting the owned entity's

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

Commission believes the owned entities in the aggregate may exceed a

visibility level), and

[ssquf] the person will provide additional information to the

Commission if any owned entity engages in coordinated activity, short

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

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

The Commission wishes to clarify that this relief would not be

automatic, but rather would be available only if the Commission finds,

in its discretion, that the four conditions above are met. Thus,

persons applying for this relief should not assume that relief would be

granted. The proposed rule would not impose any time limits on the

Commission's process for making the determination of whether relief is

appropriately granted, and relief would be available only if and when

the Commission acts on a particular request for relief.

The first requirement would be that the owned entity is not, and is

not required to be, consolidated on the financial statements of the

person. The Commission is aware that, for most entities, ownership of

more than 50 percent of another entity's voting shares is the point at

which consolidation of the owned entity on the owner's financial

statements is required under U.S. Generally Accepted Accounting

Principles (``GAAP'').\114\ Consequently, if a person holds an equity

or ownership interest above 50 percent in another entity, but does not

hold a greater than 50 percent voting interest in that entity, it may

be possible that the owned entity would not be required to be

consolidated on the person's financial statements and the person would,

therefore, be able to apply to the Commission for relief from the

aggregation requirement. Similarly, in some cases, limited partners

holding a greater than 50 percent equity or ownership interest in a

limited partnership are not required to consolidate the limited

partnership because it is controlled by the general partner.\115\ Also,

the Commission realizes that there are exceptions to the consolidation

requirement for certain types of entities. For example, financial

consolidation may also not be required for entities that are

``investment companies'' under GAAP, and certain broker-dealers may not

be required to consolidate certain owned entities over which the

broker-dealer is likely to have only temporary control. The Commission

reiterates that lack of financial consolidation would be only one of

the factors in determining whether aggregation relief would be granted,

and even if the owned entity is not consolidated and other requirements

for relief are satisfied, the Commission could nevertheless, in its

discretion, determine that relief is not appropriate.

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\114\ See Financial Accounting Standards Board Accounting

Standards Codification Topic 810, at paragraphs 810-10-15-8 and 10,

available at https://asc.fasb.org/. See also Accounting Research

Bulletin 51 at paragraph 3 and Statement of Financial Accounting

Standard No. 94 at paragraph 2.

\115\ Thus, proposed rule 150.4(b)(3) would address those

commenters who said that aggregation should not be required by

limited partners who own a majority equity interest in a limited

partnership but do not control its trading. Where a limited partner

does not consolidate the limited partnership on its financial

statements, and the other conditions of the proposed rule are met,

the limited partner could apply to the Commission for relief from

the aggregation requirement.

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The Commission preliminarily believes, based in part on points

raised by commenters, that the presence of certain additional factors

may, in particular circumstances, be favorable to granting relief from

the aggregation requirement (although no such factor would be

dispositive and the Commission could deny granting relief even in the

presence of any or all such factors). These factors could include

certain points raised by commenters, such as the owned entity being a

newly acquired standalone business or a joint venture subject to

special restrictions on control, or two different owned entities

conducting operations at different levels of commerce (such as retail

and wholesale).\116\ Under the proposed approach, the Commission would

interpret factors such as these to be favorable to granting relief from

the aggregation requirement.

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\116\ See generally CL-AGA, CL-API, CL-Chamber, CL-CMC, CL-

Iberdrola.

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If a person with greater than 50 percent ownership of an owned

entity could not meet the conditions in proposed rule 150.4(b)(3), the

person could apply to the Commission for relief from aggregation under

CEA section 4a(a)(7).\117\ Persons wishing to seek such relief should

apply to the Commission stating the particular facts and circumstances

that justify the relief. For example, if the owned entity is

consolidated on the financial statement of the person, the person could

describe the facts and circumstances which the person believes indicate

that the person should not be considered to own or control the owned

entity's positions, notwithstanding that financial consolidation may be

associated with ownership and control. The Commission notes that CEA

section 4a(a)(7) does not impose any time limits on the Commission's

process for determining whether relief under that section is

appropriate, nor does it prescribe or limit the factors that the

Commission may consider to be relevant in determining whether to grant

relief. The Commission solicits comment as to whether relief from

aggregation under CEA section 4a(a)(7) should be available to persons

with greater than 50 percent ownership of owned entities who cannot

meet the conditions in proposed rule 150.4(b)(3), and as to the facts

and circumstances that the Commission should take into account in

considering such relief.

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\117\ Section 4a(a)(7) of the CEA provides authority to the

Commission to grant relief from the position limits regime.

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The Commission has considered the comment that a corporate entity

that is the sponsor of an employee benefit plan should not be required

to aggregate the positions of the plan with the sponsor's

[[Page 68961]]

proprietary positions.\118\ The Commission notes that the sponsor of an

employee benefit plan is an ``eligible entity'' as defined in

regulation 150.1(d),\119\ and the Commission preliminarily believes it

is appropriate to provide relief in this regard that is similar to the

provisions that apply to positions controlled by an IAC. In particular,

the Commission proposes to treat the manager of the employee benefit

plan as an IAC and the plan's positions as client positions. To effect

this treatment, the Commission is proposing amended rule 150.1(e)(5)

and proposed rule 150.4(b)(5) that would allow managers of employee

benefit plans (i.e., persons that manage a commodity pool, the operator

of which is excluded from registration as a commodity pool operator

under rule 4.5(a)(4)) to be treated as an IAC, on the condition that an

IAC notice filing is made as required under rule 150.4(c). The

Commission emphasizes that this proposed relief would be limited to

employee benefit plans.

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\118\ CL-ABC.

\119\ The definition of ``eligible entity'' in regulation

150.1(d) includes the operator of a trading vehicle which is

excluded from the definition of the term ``pool'' under regulation

4.5, which in turn excludes, in regulation 4.5(a)(4), the sponsors

of most employee benefit plans.

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c. Proposed Criteria for Disaggregation Relief

The Commission is proposing criteria to claim disaggregation relief

in proposed rule 150.4(b)(2)(i) that are similar to the criteria set

forth in proposed rule 151.7(b)(1)(i). Essentially, the criteria are

the conditions that would have to be met in order for a person to rebut

the presumption that an ownership or equity interest of between 10 and

50 percent (inclusive) requires aggregation of the positions of the

owned entity.\120\

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\120\ As noted in the Part 151 Aggregation Proposal, the

criteria would apply to the person filing the notice as well as the

owned entity. In addition, for purposes of meeting the criteria,

such ``person'' would include any entity that such person must

aggregate pursuant to proposed rule 150.4. For example, if company A

files a notice under proposed rule 150.4(c) for company A's equity

interest of 30 percent in company B, then company A must comply with

the conditions for the exemption, including any entity with which

company A aggregates positions proposed rule 150.4. In this

connection, if company A controlled the trading of company C, then

company A's 150.4(c) notice filing must demonstrate that there is

independence between company B and company C.

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In general, the Commission proposes that these criteria would be

interpreted and applied in accordance with the Commissions' past

practices in this regard.\121\ In accordance with these precedents, the

Commission would not expect that the criteria would impose requirements

beyond a reasonable, plain-language interpretation of the criteria. For

example, routine pre- or post-trade systems to effect trading on an

operational level (such as trade capture, trade risk or order-entry

systems) would not, broadly speaking, have to be independently

developed in order to comply with the criteria. Also, employees that do

not direct or participate in an entity's trading decisions would

generally not be subject to these requirements. A brief discussion of

each of the five criteria in proposed rule 150.4(b)(2)(i) is set forth

below.

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\121\ See, e.g., 1979 Aggregation Policy, 44 FR 33839 (providing

indicia of independence); CFTC Interpretive Letter No. 92-15 (CCH ]

25,381) (ministerial capacity overseeing execution of trades not

necessarily inconsistent with indicia of independence); revision of

federal speculative position limits, 64 FR 24038, 24044 (May 5,

1999) (intent in issuing final aggregation rule ``merely to codify

the 1979 Aggregation Policy, including the continued efficacy of the

[1992] interpretative letter'').

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Proposed rule 150.4(b)(2)(i)(A) would condition aggregation relief

on a demonstration that the person filing for disaggregation relief and

the owned entity do not have knowledge of the trading decisions of the

other. The Commission preliminarily believes that where an entity has

an ownership interest in another entity and neither entity shares

trading information, such entities demonstrate independence. In

contrast, persons with knowledge of trading decisions of another in

which they have an ownership interest are likely to take such decisions

into account in making their own trading decisions, which implicates

the Commission's concern about independence and enhances the risk for

coordinated trading.\122\ As noted above, this proposed criterion would

address concerns regarding knowledge of employees who control, direct

or participate in an entity's trading decisions, and would not prohibit

information sharing solely for risk management, accounting, compliance,

or similar purposes and information sharing among mid- and back-office

personnel that do not control, direct or participate in trading

decisions. In response to comments on this criterion, the Commission

wishes to clarify that this criterion would generally not require

aggregation solely based on knowledge that a party gains during

execution of a transaction regarding the trading of the counterparty to

that transaction, nor would it encompass knowledge that an entity would

gain when carrying out due diligence under a fiduciary duty, so long as

such knowledge is not directly used to affect the entity's trading.

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\122\ As noted in the Part 151 Aggregation Proposal, the

Commission does not consider knowledge of overall end-of-day

position information to necessarily constitute knowledge of trading

decisions, so long as the position information cannot be used to

dictate or infer trading strategies. As such, the knowledge of end-

of-day positions for the purpose of monitoring credit limits for

corporate guarantees does not necessarily constitute knowledge of

trading information. However, the ability to monitor the development

of positions on a real time basis could constitute knowledge of

trading decisions because of the substantial likelihood that such

knowledge might affect trading strategies or influence trading

decisions of the other.

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Proposed rule 150.4(b)(2)(i)(B) would condition aggregation relief

on a demonstration that the person seeking disaggregation relief and

the owned entity trade pursuant to separately developed and independent

trading systems. Further, proposed rule 150.4(b)(2)(i)(C) would

condition relief on a demonstration that such person and the owned

entity have, and enforce, written procedures to preclude the one entity

from having knowledge of, gaining access to, or receiving data about,

trades of the other. Such procedures would have to include document

routing and other procedures or security arrangements, including

separate physical locations, which would maintain the independence of

their activities. As noted in the Part 151 Aggregation Proposal, the

Commission has applied these same conditions in connection with the IAC

exemption to ensure independence of trading between an eligible entity

and an affiliated independent account controller.\123\ Similar to the

IAC exemption, proposed rule 150.4(b)(2) permits disaggregation in

certain circumstances where there is independence of trading between

two entities. Thus, the Commission is proposing the above conditions,

which are already applicable and working well in the IAC context, and

which are expected to strengthen the independence between the two

entities for the owned entity exemption.

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\123\ See regulation 150.3(a)(4) (proposed here to be replaced

by proposed rule 150.4(b)(5)). Such conditions have been useful in

ensuring that trading is not coordinated through the development of

similar trading systems, and that procedures are in place to prevent

the sharing of trading decisions between entities.

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The Commission proposes that the phrase ``separately developed and

independent trading systems'' should be interpreted in accordance with

the Commission's prior practices in this regard.\124\ The Commission

generally

[[Page 68962]]

does not expect that this criterion would prevent an owner and an owned

entity from both using the same ``off-the-shelf'' system that is

developed by a third party. Rather, the Commission's concern is that

trading systems (in particular, the parameters for trading that are

applied by the systems) could be used by multiple parties who each know

that the other parties are using the same trading system as well as the

specific parameters used for trading and, therefore, are indirectly

coordinating their trading.\125\

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\124\ See, e.g., 1979 Aggregation Policy, 44 FR 33839, 33840-1

(futures commission merchant (FCM) ``deemed to control'' trading of

customer accounts in trading program where FCM gives specific advice

or recommendations not made available to other customers, unless

such accounts and programs are traded independently and for

different purposes than proprietary accounts).

\125\ Compare id. at 33841. ``However, the Commission also

recognizes that purportedly different programs which in fact are

similar in design and purpose and are under common control may be

initiated in an attempt to circumvent speculative limit and

reporting requirements.''

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The requirement of ``separate physical locations'' in proposed rule

150.4(b)(2)(i)(C) would not necessarily require that the relevant

personnel be located in separate buildings. The Commission believes

that the important factor is that there be a physical barrier between

the personnel that prevents access between the personnel that would

impinge on their independence. For example, locked doors with

restricted access would generally be sufficient, while merely providing

the purportedly ``independent'' personnel with desks of their own would

not. Similar principles would apply to sharing documents or other

resources.

Proposed rule 150.4(b)(2)(i)(D) would condition aggregation relief

on a demonstration that the person does not share employees that

control the owned entity's trading decisions, and the employees of the

owned entity do not share trading control with such persons. The

Commission continues to be concerned that, as stated in the Part 151

Aggregation Proposal, shared employees with control of trading

decisions may undermine the independence of trading between entities.

Regarding the comments on the sharing of attorneys, accountants, risk

managers, compliance and other mid- and back-office personnel, the

Commission proposes, as noted above, that sharing of such personnel

between entities would generally not compromise independence so long as

the employees do not control, direct or participate in the entities'

trading decisions.\126\ Similarly, sharing of board or advisory

committee members, research personnel or sharing of employees for

training, operational or compliance purposes would not result in a

violation of the criteria if the personnel do not influence (e.g.,

``have a say in'') or direct the entities' trading decisions.\127\

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\126\ As noted in the Part 151 Aggregation Proposal, the

condition barring the sharing of employees that control the owned

entity's trading decisions would include a prohibition on sharing of

the types of employees described in the aggregation petition

(attorneys, accountants, risk managers, compliance and other mid-and

back-office personnel), to the extent such employees participate in

control of the trading decisions of the person or the owned entity.

For further clarification, see previous discussion regarding the

condition under proposed rule 150.4(b)(2)(i)(A) (conditioning

aggregation relief on a demonstration that the person filing for

disaggregation relief and the owned entity do not have knowledge of

the trading decisions of the other, and discussing what constitutes

``knowledge'' for this purpose).

\127\ In this respect, proposed rule 150.4(b)(2)(i)(D) would be

consistent with the Commission's Interpretive Letter No. 92-15 (CCH

] 25,381), where an employee both oversaw the execution of orders

for a commodity pool, as well as maintained delta neutral option

positions in non-agricultural commodities for the proprietary

account of an affiliate of the sponsor of the commodity pool. The

Commission concluded that the use of clerical personnel who are dual

employees of both affiliates would not require aggregation when the

clerical personnel engage in ministerial activities and steps are

taken to maintain independence, such as: (i) Limiting trading

authority so that the personnel do not have responsibility for the

two entities' activities in the same commodity; and (ii) separating

the times at which the personnel conduct activities for the two

entities.

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Proposed rule 150.4(b)(2)(i)(E) would condition aggregation relief

on a demonstration that the person and the owned entity do not have

risk management systems that permit the sharing of trades or trading

strategies with the other. This condition would address concerns that

risk management systems that permit the sharing of trades or trading

strategies with each other present a significant risk of coordinated

trading through the sharing of information.\128\ The Commission

proposes that this criterion generally would not prohibit sharing of

information to be used only for risk management and surveillance

purposes, when such information is not used for trading purposes and

not shared with employees that, as noted above, control, direct or

participate in the entities' trading decisions. Thus, sharing with

employees who use the information solely for risk management or

compliance purposes would generally be permitted, even though those

employees' risk management or compliance activities could be considered

to have an ``influence'' on the entity's trading.

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\128\ The Commission remains concerned, as stated in the Part

151 Aggregation Proposal and as noted above, that a trading system,

as opposed to a risk management system, that is not separately

developed from another system can subvert independence because such

a system could apply the same or similar trading strategies even

without the sharing of trading information.

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d. Proposed Notice Filing Requirement

The Commission is proposing a notice filing requirement in proposed

rule 150.4(c) that is similar to the criteria set forth in proposed

rule 151.7(h)(1), with a modification to add an application procedure

for ownership interests of more than 50 percent under proposed rule

150.4(b)(3). The proposed rule contemplates that the filing under

proposed rule 150.4(c)(1) would be made before the exemption from

aggregation is needed, since the filing is a pre-requisite for

obtaining the exemption. However, where a prior filing is impractical

(such as where a person lacks information regarding a newly-acquired

subsidiary's activities), the Commission proposes that the filing under

proposed rule 150.4(c)(1) should be made as promptly as practicable.

Even though a filing under proposed rule 150.4(c)(1) may be made

after an ownership or equity interest is acquired, the Commission

proposes that the exemption from aggregation would not be effective

retroactively because the filing is a pre-requisite to the exemption.

The Commission believes that retroactive application of such filings

could result in administrative difficulty in monitoring the scope of

exemptions from aggregation and negatively affect the Commission

staff's surveillance efforts.

Generally, the Commission proposes that entities could consolidate

these filings in any efficient manner by, for example, discussing more

than one owned entity in a single filing, so long as the scope of the

filing is made clear.\129\ The Commission also wishes to emphasize that

if an entity determines to no longer apply an exemption (or if an

exemption is no longer available), the entity would be required to

inform the Commission by making a filing under proposed rule 150.4(c)

because this would constitute a material change to the prior filing. Of

course, once an exemption no longer applies to an owned entity, the

person would be required to subsequently aggregate the positions of the

entity in question.

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\129\ In response to commenters on the Part 151 Aggregation

Proposal, the Commission clarifies that section 8 of the CEA would

apply to the information that the Commission may request under

proposed rule 150.4(c), and sets out the extent to which such

information will be treated confidentially.

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In order to implement an application procedure for ownership

interests of more than 50 percent under proposed rule 150.4(b)(3), as

noted above, the Commission is also proposing proposed rule

150.4(c)(2), under which filings would not be effective until the

Commission's finding that the person

[[Page 68963]]

has satisfied the conditions of proposed rule 150.4(b)(3).

The Commission solicits comment as to all aspects of proposed rule

150.4. Commenters are invited to address the potential effects and

implications of the proposed rule as the scope of the position limits

regime may change in the future. For example, what issues or concerns

arising from the scope and the requirements of the disaggregation

relief in the proposed rule would have to be addressed if the

Commission were to adopt its proposal to establish speculative position

limits for 28 exempt and agricultural commodity futures and option

contracts, and physical commodity swaps that are ``economically

equivalent'' to such contracts? \130\

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\130\ See Position Limits for Derivatives (November 5, 2013).

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If the Commission were to adopt its proposal to establish position

limits on physical commodity swaps, are there any implications with

respect to the interplay between the disaggregation relief in the

proposed rule and the Commission's other rules relating to swaps? For

instance, the Commission understands that various corporate groups

organize the swap activities of the affiliated entities within

corporate groups in different ways. Some corporate groups centralize

some or all swap activities in a particular affiliate, while in other

groups the affiliates engage in swaps independently. Also, corporate

groups may apply centralized risk management policies to varying

degrees, which may affect how the affiliated entities in the group

engage in swaps. What are the implications of the disaggregation relief

in the proposed rule for the various ways that affiliated entities in

corporate groups organize their swap activities? In considering the

proposed rule, what other Commission rules should the Commission take

into account and what are the implications of how other Commission

rules may affect affiliated entities? Have corporate groups begun to

organize their swap activities to comply with other Commission rules in

ways that could be affected by the proposed rule? If so, what

considerations should the Commission take into account in this regard?

The Commission also solicits comment as to the appropriateness of

the conditions for disaggregation relief in proposed rule 150.4(b), and

whether relief should be available for persons that have a greater than

50 percent ownership or equity interest in an owned entity. If such

relief should be available, is it appropriate to condition such relief

on the owned entity not being, and not being required to be,

consolidated on the financial statements of the owner? Is financial

consolidation a relevant consideration in this regard? Why or why not?

For example, is financial consolidation a useful proxy for other

characteristics that are relevant to the position limits regime, such

as ownership and control?

Regarding the condition in proposed rule 150.4(b)(3)(iii), is it

clear when an individual board member is considered the

``representative'' of a person on the board of directors? Are there

modifications to this condition that would help to identify which board

members should be required to make the certification?

e. Proposed Revisions To Clarify Regulations

In connection with the proposed modifications to rule 150.4, the

Commission has reviewed whether the text of existing regulation 150.4

is easy to understand and apply. In this regard, the Commission notes

that the existing regulation may be unclear, especially in terms of the

relationship between the provisions of paragraphs (a) through (d) of

the existing regulation and whether a particular paragraph is an

exception to another. Also, as more different types of market

participants have studied existing regulation 150.4 (and regulation

151.7, which has similar provisions), both in connection with the Dodd-

Frank Act and otherwise, questions have arisen about the application of

the aggregation requirements to a wide variety of circumstances. The

Commission believes it is important that the rules setting forth the

aggregation requirements be clear in their application to both the

circumstances in which they currently apply, and the various

circumstances in which they may apply in the future. These textual

modifications are not intended to effect any substantive change to the

meaning of rule 150.4, and the Commission invites commenters to address

whether any of these modifications change the meaning of the

aggregation requirements in their particular circumstances.\131\

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\131\ The textual modifications proposed here relate to the

Commission regulations currently in effect. The Commission notes

that its proposal regarding position limits includes amendments to

the text of certain Commission regulations. See Position Limits for

Derivatives (November 5, 2013). If both of the proposals are

adopted, conforming technical changes to reflect the interplay

between the two amendments may be necessary.

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Therefore, the Commission is proposing to modify the text to

clarify that paragraph (a) of rule 150.4 states the general requirement

to aggregate positions a person may hold in various accounts, and

paragraph (b) of the rule sets out the exemptions to the aggregation

requirement that may apply. The Commission believes that this format

clarifies that the exemptions in rule 150.4(b) are alternatives; that

is, aggregation is not required to the extent that any of the

exemptions in rule 150.4(b) may apply.

In rule 150.4(b), the Commission is proposing text for rule

150.4(b)(1) that is substantially similar to existing regulation

150.4(c). The Commission believes that stating this provision as the

first exemption will clarify that any person that is a limited partner,

limited member, shareholder or other similar type of pool participant

holding positions in which the person by power of attorney or otherwise

directly or indirectly has a 10 percent or greater ownership or equity

interest in a pooled account or positions may apply this exemption.

That is, if the requirements of this exemption are satisfied with

respect to a person, then the person need not determine if the

requirements of the exemption in paragraph (b)(2) or (b)(3) are

satisfied. The text of paragraphs (b)(2) and (b)(3), in turn, state

that they apply to persons with an ownership or equity interest in an

owned entity, other than an interest in a pooled account which is

subject to paragraph (b)(1).

Proposed rule 150.4(b)(1) states that for any person that is a

limited partner, limited member, shareholder or other similar type of

pool participant holding positions in which the person by power of

attorney or otherwise directly or indirectly has a 10 percent or

greater ownership or equity interest in a pooled account or positions,

aggregation of the accounts or positions of the pool is not required,

except as provided in paragraphs (b)(1)(i), (b)(1)(ii) or (b)(1)(iii).

Although existing regulation 150.4(c) does not contain any explicit

statement of this rule, the lack of an aggregation requirement in these

circumstances is implicit in the existing regulation's statement that

aggregation is required only in certain specified circumstances. Thus,

proposed rule 150.4(b)(1)(i) states explicitly a principle that is

implicit in the existing regulation.\132\ Paragraphs (b)(1)(i),

(b)(1)(ii) and (b)(1)(iii) of proposed rule 150.4 set out the

circumstances in which aggregation requirements apply; these

circumstances are substantially similar to those covered by paragraphs

[[Page 68964]]

(c)(1), (c)(2) and (c)(3) of existing regulation 150.4, but the text of

the rule has been modified to simplify the wording of the

provisions.\133\

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\132\ This modification to the rule is not intended to effect a

substantive change. Rather, it is intended to state explicitly a

rule that the Commission has applied since at least 1979. See note

100, above.

\133\ The revised text also includes references to a ``limited

member'' in addition to the references in the existing regulation to

a limited partner in a pool.

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

Paragraphs (b)(4) to (b)(8) of rule 150.4 set forth other

exemptions that may apply in various circumstances. The exemption for

certain accounts held by FCMs in paragraph (b)(4) is substantially the

same as existing regulation 150.4(d), except that it has been rephrased

in a form of a statement of when an exemption is available, instead of

the statement in the existing regulation that the aggregation

requirement applies unless certain conditions are met. Paragraph (b)(5)

sets forth the exemption for accounts carried by an IAC that is

substantially similar to existing regulation 150.3(a)(4). Paragraphs

(b)(6), (b)(7) and (b)(8) set forth the exemptions for underwriting,

broker-dealer activity and circumstances where laws restrict

information sharing that are discussed in more detail above. Paragraph

(b)(9) describes how higher-tier entities may apply an exemption

pursuant to a notice filed by an owned entity.

The Commission solicits comment as to whether the revised text of

rule 150.4 is easy to understand and apply.

D. Underwriting

1. Part 151 Proposed Approach

As noted above, regulation 151.7(g) includes an exemption from

aggregation where an ownership interest is in an unsold allotment of

securities. In the Part 151 Aggregation Proposal, the Commission noted

that the ownership interest of a broker-dealer \134\ in an entity based

on the ownership of securities acquired as part of reasonable activity

in the normal course of business as a dealer is largely consistent with

the ownership of an unsold allotment of securities covered by the

underwriting exemption in regulation 151.7(g). In both circumstances,

the ownership interest is likely transitory and not to hold for

investment purposes. Accordingly, the Commission proposed to include an

aggregation exemption in regulation 151.7(g) for such activity.\135\

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\134\ Broker-dealers are those persons registered as such with

the SEC, see 15 U.S.C. 78o, or similarly registered with a foreign

regulatory authority.

\135\ The Commission specifically noted that this proposed

exemption would not apply to registered broker-dealers that acquire

an ownership interest in securities with the intent to hold for

investment purposes.

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However, the Commission noted in the Part 151 Aggregation Proposal

that this exemption would not have applied where a broker-dealer

acquires more than a 50 percent ownership interest in another entity

because such acquisition would not be consistent with holding a

transitory interest for the purpose of market making and runs a higher

risk of coordinated trading.\136\ Therefore, a broker-dealer that

acquires a greater than 50 percent ownership interest in another entity

would be required to aggregate the positions of that entity, in the

absence of another aggregation exemption.

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\136\ The proposed rules would encompass within the proposed

exemption a broker-dealer's ownership of securities in anticipation

of demand or as part of routine life cycle events, if the activity

was in the normal course of the person's business as a broker-

dealer.

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The Commission requested comment on whether ownership of stock, by

a broker-dealer registered with the SEC or similarly registered with a

foreign regulatory authority, that is acquired as part of reasonable

activity in the normal course of business as a dealer, without other

ownership interests or indicia of control or concerted action, warrants

aggregation.

2. Commenters' Views

FIA commented on the Part 151 Aggregation Proposal, saying that the

underwriting exemption should not require that ownership be acquired

``as part of [the] reasonable activity'' of a broker-dealer, because

the normal course requirement is sufficient and the additional

requirement that the acquisition be part of reasonable activity creates

uncertainty.\137\ FIA also said that broker-dealers should be able to

use the underwriting exemption for any level of ownership, i.e., even a

more than 50 percent ownership interest, or, alternatively, the

ownership interests that a broker-dealer holds in its capacity as a

broker-dealer should not be aggregated with ownership interests held by

the broker-dealer or its affiliates in any other capacity.\138\

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\137\ CL-FIA.

\138\ CL-FIA.

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3. Proposed Rule

The Commission continues to believe that any acquisition by a

broker-dealer of a greater than 50 percent ownership interest in an

owned entity (other than in a distribution of securities directly by an

issuer or through an underwriter) requires aggregation, and further

relief from this requirement is not appropriate. For example, if a

broker-dealer has a 49 percent ownership interest in an entity and then

acquires a 2 percent ownership interest in the same entity in the

normal course of the broker-dealer's activity, aggregation of the owned

entity's positions should be required.

On the other hand, the Commission is proposing an exemption from

aggregation where an ownership interest is in an unsold allotment of

securities in proposed rule 150.4(b)(7) that is essentially the same as

the exemption in regulation 151.7(g). However, proposed rule

150.4(b)(7) does not include the phrase ``as part of reasonable

activity,'' as was suggested by a commenter on the Part 151 Aggregation

Proposal, because the Commission proposes to interpret the phrase

``reasonable activity'' to be effectively synonymous with the phrase

``normal course of business'' in this context.

The Commission solicits comment as to all aspects of proposed rule

150.4(b)(7). In particular, the Commission solicits comment as to the

appropriateness of the proposed treatment of ownership interests

acquired in the normal course of the broker-dealer's activity.

E. Independent Account Controller for Eligible Entities

1. Part 151 Proposed Approach

As noted above, regulation 150.3(a)(4) provides an eligible entity

with an exemption from aggregation of the eligible entity's customer

accounts that are managed and controlled by independent account

controllers. The definition of eligible entity in regulation 150.1(d)

includes ``the limited partner or shareholder in a commodity pool the

operator of which is exempt from registration under Sec. 4.13 of this

chapter. . . .'' However, with regard to a CPO that is exempt under

regulation 4.13, the definition of an independent account controller in

regulation 150.1(e)(5) only extends to ``a general partner of a

commodity pool the operator of which is exempt from registration under

Sec. 4.13 of this chapter.'' At the time the Commission expanded the

IAC exemption to include regulation 4.13 commodity pools, market

participants generally structured such pools as limited

partnerships.\139\

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\139\ See 63 FR 38532.

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The Commission understands that today, not all regulation 4.13

commodity pools are formed as partnerships. For example, regulation

4.13 pools may be formed as limited liability companies and have

managing members, not general partners. Accordingly, in the Part 151

Aggregation Proposal, the Commission proposed to expand the definition

of independent account controller to

[[Page 68965]]

include the managing member of a limited liability company, and to

amend the definitions of eligible entity and independent account

controller to specifically provide for regulation 4.13 commodity pools

established as limited liability companies.

2. Commenters' Views

One commenter said that the independent account controller rule

should be expanded to apply to any person with a role equivalent to a

general partner in a limited partnership or managing member of a

limited liability company, to accommodate various structures that are

used for commodity pools in jurisdictions outside the U.S.\140\

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\140\ CL-AIMA.

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Another commenter addressed 4.13 pools more broadly, and said that

the Commission's rules should treat ownership of 4.13 pools in the same

way that the rules treat ownership of operating companies.\141\ In

particular, this commenter said that the Commission should eliminate

the requirement that the positions of a 4.13 pool be aggregated with

the positions of any person that owns more than 25% of the 4.13

pool.\142\

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\141\ CL-ABC.

\142\ CL-ABC.

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3. Proposed Rule

The Commission proposes to adopt rule 150.4(b)(5) to take the place

of the existing IAC rule in regulation 150.3(a)(4), so that the IAC

exemption is in the regulatory section providing for aggregation of

positions. Proposed rule 150.4(b)(5) is substantially similar to

existing regulation 150.3(a)(4) except that, in response to the

commenters, the Commission proposes to modify it (and the related

definitions in regulation 150.1) so that it could be applied with

respect to any person with a role equivalent to a general partner in a

limited liability partnership or a managing member of a limited

liability company.

Regarding the treatment of regulation 4.13 pools in a manner that

is equivalent to the treatment of operating companies, the Commission

believes that this is a matter that could be the subject of relief

granted under CEA section 4a(a)(7).\143\ Persons wishing to seek such

relief should apply to the Commission stating the particular facts and

circumstances that justify the relief.

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\143\ Section 4a(a)(7) of the CEA provides authority to the

Commission to grant relief from the position limits regime.

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The Commission solicits comment as to all aspects of the proposed

rule 150.4(b)(5) and the related amendments to regulation 150.1. In

particular, the Commission solicits comment as to the appropriateness

of treating limited liability companies that are commodity pools in the

same way as limited liability partnerships that are commodity pools.

Commenters are invited to provide information regarding the

considerations that determine whether commodity pools are, in practice,

structured as limited liability companies or limited liability

partnerships and whether there are any relevant differences in the two

types of entities. Also, what are the facts and circumstances that

commenters believe would justify relief under CEA section 4a(a)(7)?

III. Related Matters

A. Considerations of Costs and Benefits

Section 15(a) of the CEA requires the Commission to consider the

costs and benefits of its actions before promulgating a regulation

under the CEA or issuing certain orders. Section 15(a) further

specifies that the costs and benefits shall be evaluated in light of

the following five broad areas of market and public concern: (1)

Protection of market participants and the public; (2) efficiency,

competitiveness, and financial integrity of futures markets; (3) price

discovery; (4) sound risk management practices; and (5) other public

interest considerations. The Commission considers the costs and

benefits resulting from its discretionary determinations with respect

to the section 15(a) factors.

On May 30, 2012, the Commission proposed, partially in response to

a petition for interim relief from part 151's provision for the

aggregation of positions across accounts,\144\ certain modifications to

its policy for aggregation under the part 151 position limits regime

(the ``Part 151 Aggregation Proposal''). In an order dated September

28, 2012, the District Court for the District of Columbia vacated part

151 of the Commission's regulations. The Commission is now proposing

modifications to part 150 of the Commission's regulations that are

substantially similar to the modifications proposed to part 151.

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\144\ A copy of the petition (the ``aggregation petition'') can

be found on the Commission's Web site at www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgap011912.pdf. The

aggregation petition was originally filed by the Working Group of

Commercial Energy Firms; certain members of the group later

reconstituted as the Commercial Energy Working Group. Both groups

(hereinafter, collectively, the ``Working Groups'') presented one

voice with respect to the aggregation petition.

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The Part 151 Aggregation Proposal provided the public with an

opportunity to comment on the Commission's considerations of costs and

benefits of the proposed rules. In the Part 151 Aggregation Proposal,

the Commission explained its position that the proposed changes to the

aggregation policy would, on net, lower costs for market participants

without lessening the effectiveness of the Commission's position limits

regime. The Commission requested comment on all aspects of its

consideration of costs and benefits, including identification and

assessment of any costs and benefits not discussed therein. In

addition, the Commission requested that commenters provide data and any

other information or statistics that they believe supports their

positions with respect to the Commission's consideration of costs and

benefits.

The modifications to part 150 proposed herein reflect the

Commission's consideration of the comments that were received on the

proposed amendments to part 151. The Commission summarizes the proposed

modifications to part 150 below, including those provisions proposed to

be modified or amended in response to public comment on the Part 151

Aggregation Proposal, describes expected costs and benefits of the

proposed regulations, requests public comment on its considerations of

costs and benefits, and considers the proposed regulations in light of

the five factors outlined in Section 15(a).\145\

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\145\ The Commission notes that the opinions and beliefs

expressed herein are preliminary assertions based on comments from

previous releases, and are subject to change after consideration of

any further comments. The Commission welcomes public comment on all

aspects of this release in order to better inform its policy

determinations.

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1. Background

As discussed above, the Commission's historical approach to

position limits generally includes three components: (1) The level of

the limits, which set a threshold that restricts the number of

speculative positions that a person may hold in the spot-month, in any

individual month, and in all months combined, (2) an exemption for

positions that constitute bona fide hedging transactions, and (3) rules

to determine which accounts and positions a person must aggregate for

the purpose of determining compliance with the position limit levels.

The proposed rules address the third component of the Commission's

position limits regime--aggregation--which is set out in regulation

150.4. This regulation generally requires that

[[Page 68966]]

unless a particular exemption applies, a person must aggregate all

positions for which that person: (1) Controls the trading decisions, or

(2) has a 10 percent or greater ownership interest in an account or

position; and in doing so the person must treat positions that are held

by two or more persons pursuant to an express or implied agreement or

understanding as if they were held by a single person.

2. Part 151 Aggregation Proposal

As noted above, the Commission received the aggregation petition on

January 19, 2012.\146\ The aggregation petition requested interim

relief under CEA section 4a(a)(7) from, among other things, part 151's

provision for aggregation of positions across accounts. The Commission

also received letters that were generally supportive of the aggregation

petition. In addition, several commenters opined on the aggregation

rules in connection with the Commission's request for comment on the

spot-month position limits on cash-settled contracts established on an

interim final basis in November 2011.\147\ As further discussed in the

Part 151 Aggregation Proposal, the aggregation petition and the interim

final regulation commenters asserted that the Commission should clarify

regulation 151.7(i), which provides an exemption where the sharing of

information would cause a violation of federal law, and expand the

exemption to include circumstances in which the sharing of information

would cause a violation of state or foreign law. In addition, the

aggregation petition and commenters to the interim final regulation

requested that the Commission create an aggregation exemption for owned

non-financial entities. In this connection, some interim final

regulation commenters argued that the Commission should only aggregate

on the basis of control and not ownership. Finally, one interim final

regulation commenter requested that the Commission expand the exemption

provided in Sec. 151.7(g) for the ownership interests of broker-

dealers connected with specific market-making activity.

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\146\ See note 18, supra.

\147\ See Proposed Rules, 77 FR at 31769, fn. 24.

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As regards the violation-of-laws exemption in Sec. 151.7(i), the

Part 151 Aggregation Proposal clarified that the exemption would apply

where the sharing of information presents a ``reasonable risk'' of

violating the applicable law(s), retained the requirement to submit an

opinion of counsel, and expanded the violation-of-laws exemption to

include state law and the law of foreign jurisdictions.

Proposed rule 151.7(b)(1) in the Part 151 Aggregation Proposal

provided that any person with an ownership or equity interest in an

entity (financial or non-financial) of between 10 percent and 50

percent (inclusive) may disaggregate the owned entity's positions upon

demonstrating compliance with each of several specified indicia of

independence. The proposed indicia were that such person and the owned

entity: (1) Do not have knowledge of the trading decisions of the

other; (2) trade pursuant to separately developed and independent

trading systems; (3) have in place policies and procedures to preclude

sharing knowledge of, gaining access to, or receiving data about,

trades of the other; (4) do not share employees that control the

trading decisions of the other; and (5) maintain a risk management

system that does not allow the sharing of trade information or trading

strategies between entities.

The Commission also proposed to expand the exemption for the

underwriting of securities in regulation 151.7(g) to include ownership

interests acquired through the market-making activities of an

affiliated broker dealer. The Part 151 Aggregation Proposal proposed to

exempt from aggregation ownership interests acquired as part of a

person's reasonable market-making activity in the normal course of

business as a broker-dealer registered with the SEC or comparable

registration in a foreign jurisdiction, so long as there is no other

ownership interests or indicia of control or concerted action. The

Commission said in the Part 151 Aggregation Proposal that this

exemption would apply to ownership interests that are likely transitory

and not for investment purposes.

Proposed rule 151.7(j) in the Part 151 Aggregation Proposal

extended filing relief to ``higher-tier'' entities--i.e., entities with

an ownership interest in the entity that is itself the owner of an

entity and the subject of a filing for relief from aggregation. As

such, the proposed rule allowed higher-tier entities to rely on

exemption notices filed by owned entities. The Part 151 Aggregation

Proposal explained that such an exemption would reduce the burden of

filing exemption notices by eliminating redundancies.

The Commission also proposed in the Part 151 Aggregation Proposal

to amend the IAC exemption in regulation 151.7(f), which includes

commodity pools exempt from registration under Sec. 4.13 that are

structured as limited partnerships, to also encompass commodity pools

structured as limited liability companies.

As discussed below, the Commission received comments on the Part

151 Aggregation Proposal.\148\ The amendments now being proposed to

regulation 150.4 reflect the Commission's consideration of the comments

that were received on the Part 151 Aggregation Proposal. Thus, the

discussion below covers the amendments in the Part 151 Aggregation

Proposal and the comments on those proposed amendments.\149\ The

Commission considers these comments, discusses the current proposed

amendments to the aggregation provisions in Sec. 150.4, considers the

costs and benefits of the current proposal, and evaluates the current

proposal in light of the five enumerated factors of Section 15(a)(2) of

the CEA.

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\148\ The written comments are available on the Commission's Web

site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1208.

\149\ For additional background on part 150 and part 151 and the

existing provisions for aggregation, see the Part 151 Aggregation

Proposal.

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3. Comments on the Part 151 Aggregation Proposal

The Commission received numerous comments regarding the proposed

changes to the aggregation policy in Sec. 151.7. This section

summarizes the issues raised in those comments relevant to the

Commission's considerations of costs and benefits; a more thorough

discussion of comments relating to each provision of the Part 151

Aggregation Proposal can be found in section II of this release.

The proposed owned-entity exemption and its attendant indicia of

independence was a topic in the majority of comments. Several

commenters requested the Commission extend the owned entity exemption

to a person with a greater than 50 percent ownership in the owned

entity, so long as the person and the owned entity can both demonstrate

independence.\150\ These commenters generally objected to the 50

percent ceiling on the grounds that ownership above 50 percent is

potentially indicative of control but does not equate to control, and

that ownership of an entity regardless of control over that entity is

not an appropriate measure to determine aggregation.\151\ Some

commenters asserted that the ``bright-line test'' of 50

[[Page 68967]]

percent ownership is arbitrary.\152\ Another claimed that passive

ownership poses little risk of coordinated trading and that requiring

aggregation even when management and trading are independent inhibits

legitimate commercial activity.\153\ Some commenters expressed concern

that the aggregation standards may require information sharing and

coordination between entities that had previously constructed barriers

to preclude such activity, and that relaxing those barriers to comply

with aggregation standards may create antitrust concerns.\154\

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\150\ CL-ABC, CL-AGA, CL-AIMA, CL-API, CL-Barclays, CL-CMC, CL-

COPE, CL-EEI, CL-FIA, CL-Iberdrola, CL-ISDA/SIFMA, CL-MFA, CL-WGCEF.

\151\ CL-AGA, CL-MFA, CL-PEGCC, CL-WGCEF, CL-API, CL-Atmos, CL-

CMC, CL-Chamber, CL-EEI.

\152\ CL-AGA, CL-API, CL-COPE.

\153\ CL-FIA.

\154\ CL-WGCEF, CL-CMC, CL-COPE.

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Conversely, other commenters expressed support for the Commission's

proposed 50 percent ceiling as reasonable and appropriate.\155\ Two

commenters suggested that the Commission should not expand the

exemption for owned entities.\156\

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\155\ CL-Better Markets, Chris Barnard on June 21, 2012 (``CL-

Barnard'').

\156\ CL-IAMAW, CL-IATP.

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Commenters presented several alternatives to the 50 percent

threshold. Some commenters suggested that ownership over 50 percent

should create a ``rebuttable presumption,'' requiring entities to

demonstrate why ownership above that threshold does not result in

trading control or information sharing.\157\ Others supported

disaggregation relief for an entity with greater than 50 percent

ownership only in circumstances in which the Commission had

specifically approved a request for relief.\158\ One commenter

requested an exemption specifically for private equity investment funds

that meet certain criteria.\159\ Another requested an exemption for

pension plans to free them from aggregating a plan sponsor's corporate

positions with the plan's positions given that pension plan managers

are subject to fiduciary responsibilities to the plans they

manage.\160\ In lieu of a new rule on owned entities, one commenter

urged the Commission to rely on Form 40 reports and raise the

presumptive control standard to 50 percent instead of 10 percent, thus

never requiring aggregation below 50 percent ownership.\161\

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\157\ CL-ISDA/SIFMA, CL-WGCEF, CL-PEGCC.

\158\ CL-AIMA, CL-API, CL-Atmos, CL-MFA.

\159\ CL-PEGCC.

\160\ CL-ABC.

\161\ CL-Barclays.

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Commenters also expressed concerns about the costs associated with

the owned-entity exemption--in particular, the direct and indirect

costs of the 50 percent ``ceiling'' for disaggregation imposed by Sec.

151.7(b)(1)(ii). Several noted that developing a system to coordinate

trading among aggregated entities will be costly for market

participants.\162\ One commenter said it would be costly to implement a

system to monitor when ownership of an entity exceeds 10 percent.\163\

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\162\ CL-API, CL-Chamber, CL-CMC.

\163\ CL-Barclays.

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More specifically, two commenters said that the rules would require

entities that are currently operated and managed separately, but who

have common upstream ownership greater than 50 percent, to implement

information sharing systems solely to comply with the Commission's

position limits regime. These commenters noted that these systems would

be costly to implement without providing a corresponding benefit

because these entities are not currently operating in concert.\164\

Similarly, another commenter said that aggregation is impractical for

commercial entities engaged in independent operations under common

ownership and may put such entities at a competitive disadvantage.\165\

Another commenter noted that automatic aggregation at 50 percent would

require sophisticated information controls and expensive trade

monitoring systems.\166\

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\164\ CL-COPE, CL-Iberdrola.

\165\ CL-Chamber.

\166\ CL-WGCEF.

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Commenters also stated concerns about costs of complying with the

50 percent ``ceiling'' for private funds and pension plans. One

commenter noted that private funds would need entirely new (and costly)

programs to monitor, allocate, and coordinate trading across portfolio

companies though the fund company was not previously involved in

trading.\167\ Another commenter had the same concern regarding the

costs incurred by pension plans, which do not currently collect

position or trading information from owned collective investment

vehicles, to monitor positions in real-time across potentially hundreds

of these vehicles.\168\

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\167\ CL-PEGCC.

\168\ CL-ABC.

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Commenters were also concerned that the automatic aggregation at 50

percent would lead to indirect costs by unnecessarily limiting hedging,

because commonly owned companies will have to remain below position

limits unless a bona fide hedging exemption is available.\169\

Commenters were also concerned about potential impacts on investment in

other entities; one opined that the rules would discourage investment

because owners would have to be more deeply involved in the operations

of owned companies, including by overseeing trading.\170\ One commenter

said that automatic aggregation at 50 percent would hinder management

and could limit joint-venture formation.\171\

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\169\ CL-API, CL-Chamber, CL-PEGCC.

\170\ CL-CMC, CL-Chamber.

\171\ CL-WGCEF.

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Commenters also weighed in on the other aspects of the Commission's

proposed rules. Regarding the filing of exemptions, one commenter noted

that the Commission's estimated costs of aggregation filings appeared

to be correct. This commenter also disputed the validity of the Working

Group's ``fear of vast new information infrastructure'' and said that

entities affected by the provisions will have the resources to apply

for and receive the proposed exemptions from aggregation.\172\

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\172\ CL-IATP.

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Regarding the violation-of-laws exemption, several commenters

generally expressed support for the ``reasonable risk'' of violation

standard,\173\ and the proposed exemption for federal, state, or

foreign laws.\174\ One commenter expressed that the exemption should be

limited to violations of federal law, and that exemption from

aggregation for potential violations is impractical and should not be

allowed.\175\ Further, some commenters opined that a memorandum of law,

prepared by internal, as opposed to outside, counsel, should suffice,

thereby mitigating outside legal fees.\176\ Another commenter noted it

had no objection to the proposed opinion of counsel requirement,\177\

while others expressed support for the requirement as proposed, on

grounds that aggregation relief should be available in only the most

clear-cut cases.\178\

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\173\ CL-EEI, CL-FIA.

\174\ CL-ISDA/SIFMA.

\175\ CL-IATP.

\176\ CL-API, CL-EEI, CL-FIA, CL-ISDA/SIFMA, CL-PEGCC, CL-WGCEF.

\177\ CL-Atmos.

\178\ CL-Better Markets, CL-IATP.

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Some commenters asserted that aggregation should be applied on a

pro-rata basis to avoid the double-counting of positions and a

potential limit on trading that may affect liquidity.\179\ One

commenter said that the aggregation requirements would cause pension

plans to reconsider investing in collective investment vehicles. This

commenter also maintained that the current federal position limits

regime has had little effect on commodity pools

[[Page 68968]]

because position limits were imposed on only nine agricultural

products.\180\

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\179\ CL-ABC, CL-Barclays, CL-FIA.

\180\ CL-ABC.

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One commenter noted that the Part 151 Aggregation Proposal to allow

higher-tier entities to rely on filings by subsidiaries strikes an

appropriate cost balance.\181\ Another commenter expressed support for

the alternative of a single aggregate notice filing, that filing should

be effective retroactively, and that sister affiliates of the filing

entity should be able to rely on the filing.\182\

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\181\ CL-IATP.

\182\ CL-FIA.

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4. The Proposed Amendments to Part 150

a. Aggregation of Positions in Owned Entities

The Commission is proposing two exemptions concerning the

aggregation of positions in owned entities. First, as proposed in the

Part 151 Aggregation Proposal, the Commission is proposing to allow a

person to disaggregate the positions of an owned entity provided such

person demonstrates compliance with the conditions of the exemption.

Such conditions include ownership of less that 50 percent of the owned

entity, independent trading systems, prohibition of the sharing of

trading knowledge between the entities, and the other criteria found in

proposed regulations 150.4(b)(2)(i)(A-E). Second, the Commission is

proposing to allow persons with a greater than 50 percent ownership

interest to apply for relief in accordance with proposed regulation

150.4(b)(3), subject to the conditions of that section and the approval

of the Commission or its delegate.

As noted above and in the Part 151 Aggregation Proposal, the

Commission's general policy on aggregation is derived from CEA Section

4a(a)(1), which directs the Commission to aggregate positions based on

separate considerations of ownership, control, or persons acting

pursuant to an express or implied agreement. The Commission's

historical approach to its statutory aggregation obligation has thus

included both ownership and control factors in a manner designed to

prevent evasion of prescribed position limits. The Commission continues

to believe that ownership of an entity is an appropriate criterion for

aggregation of that entity's positions.

Some commenters on the Part 151 Aggregation Proposal opposed the

requirement that a person own 50 percent or less of another entity in

order to obtain relief from the aggregation requirement, asserting that

an ownership stake of greater than 50 percent does not necessarily

indicate control. However, as explained in part II.B.3. above, this

requirement of 50 percent or less ownership is in line with the

language in CEA section 4a, the legislative history of that section,

subsequent regulatory developments, and the Commission's historical

practices in this regard. Moreover, the ability for persons owning 50

percent or less of another entity (subject to establishing the indicia

of independence) to disaggregate the positions of the owned entity

would substantially liberalize the Commission's approach to aggregation

for position limits. The Commission does not consider this ceiling on

disaggregation to be arbitrary; rather, ownership above 50 percent of

an entity is a level at which there is a strong likelihood that a

person would be able to use its ownership interest to directly or

indirectly influence the owned entity's accounts or positions. As noted

above, 50 percent ownership is a standard used by other government

agencies and reflects a general understanding that greater than 50

percent ownership level poses substantial potential for direct or

indirect control over an owned entity. Accordingly, the Commission

views the 50 percent ceiling to be a reasonable outer limit in most

cases on the general availability of aggregation exemptions, even for

passively-owned entities.

However, the Commission recognizes that in certain specific

circumstances it may be appropriate to allow exemptions from

aggregation of an owned entity's positions, even at greater than 50

percent ownership. In particular, the Commission notes that while, in

many instances, ownership of more than 50 percent of an entity requires

the owner to consolidate the financial statements of the owned entity,

consolidation is not always required. Thus, as discussed in more detail

in section II.B3.b of this release, the proposed amendments to part 150

include a provision for a person with more than 50 percent ownership of

an owned entity, but that does not consolidate that entity in its

financial statements, to apply to the Commission for aggregation relief

on a case-by-case basis, provided the applicant can demonstrate

adherence to stringent indicia of independence. Notwithstanding that it

represents a relaxation from historical practice, the Commission

believes that allowing case-by-case applications for disaggregation

addresses commenters' concerns without jeopardizing the effectiveness

of the Commission's position limits regime.

The Commission expects no material negative effects on market

quality as a result of the proposed relief from aggregation that would

be available to persons that hold ownership interests in other

entities. The Commission does not believe that a material reduction in

hedging will result from the proposed requirement that, to obtain

relief from aggregation based on notice only, a person must own 50

percent or less of an entity, because hedge exemptions would be

available to any entity regardless of position aggregation. In

addition, the proposed aggregation exemptions are more permissive than

the 10 percent threshold currently applied. Impacts from the proposed

regulations on investment activity where the investor desires a passive

interest should also be minor, as these proposed regulations permit a

passive investor to have a larger ownership interest and still claim an

exemption from aggregation. As noted above, prior rules required

aggregation at a 10 percent ownership level, so these proposed

regulations allowing for relief from aggregation at higher ownership

levels should lower the overall impact of aggregation on market quality

factors.

The Commission requests comment on its proposed amendments to

regulation 150.4. Are there other potential impacts on market quality

factors that the Commission should consider? What costs and benefits

may attend the proposed owned entity exemptions in proposed regulations

150.4(b)(2) and 150.4(b)(3) that the Commission should consider?

b. Consideration of Alternative Approaches to Aggregation of Positions

in Owned Entities

The Commission believes that the approach reflected in these

proposed regulations--a bright-line ceiling on the availability of

notice relief from aggregation at 50 percent ownership, with the

potential for case-by-case relief in appropriate circumstances--is

preferable to the various alternatives suggested by commenters for a

variety of reasons.

Several commenters to the Part 151 Aggregation Proposal suggested

that the aggregation requirements should be loosened further than was

proposed by allowing persons with a more than 50 percent ownership

interest in another entity to obtain relief from aggregation by

demonstrating independent trading by the two entities. While this

approach would make relief from the aggregation requirements available

to more entities in more different situations, the

[[Page 68969]]

Commission believes, as noted above, that CEA Section 4a(a)(1) requires

the aggregation of positions of an owned entity and that a 50 percent

ownership interest is a reasonable indicator that a person is the owner

of an entity and therefore aggregation should be required. The

Commission notes that the proposed amendments to regulation 150.4 would

allow an entity with a more than 50 percent ownership interest in

another entity to apply for relief from the aggregation requirement on

a case-by-case basis if it meets the other conditions in regulation

150.4(b)(3). Through an exemption application, such entities may be

able to rebut the presumption that greater than 50 percent ownership

results in trading control or information sharing; however, the

Commission does not believe it is appropriate to grant such entities a

broader exemption based only on a notice filing, because of the

importance of the ownership standard in the statute as described above.

The Commission has not proposed the commenters' alternative because,

while to loosen the standards as requested might lower immediate

compliance burdens, the Commission believes it would also lessen the

effectiveness of the position limits regime.

Another commenter on the Part 151 Aggregation Proposal urged that

the Commission not require aggregation of positions and instead rely on

information reported on Form 40. However, the Commission notes that not

necessarily all subsidiaries file those reports, and in any case the

Commission believes that effective and efficient compliance with

position limit regulations, including compliance with aggregation

requirements, is better served when it is primarily the responsibility

of each market participant. The Commission believes that each entity

can track its own compliance more efficiently compared to the

Commission tracking the compliance of all the market participants

involved; thus, the Commission does not endorse the shifting of the

compliance burden from large traders to the Commission. For these

reasons, the Commission believes that this proposed alternative does

not have advantages that would justify its acceptance, and instead it

could potentially impede compliance with the position limits regime.

The Commission believes that aggregation on a pro-rata basis, as

suggested by some commenters, would be administratively burdensome for

both owners of financial interests and the Commission. For example,

since the level of financial interest in a particular company may

change over time, it would be burdensome to determine and monitor the

appropriate pro rata allocation on a daily basis. Moreover, a pro rata

approach would be inconsistent with the Commission's historical

requirement of aggregation of all the relevant positions of owned

entities, absent an exemption. This is consistent with the view that a

holder of a significant ownership interest in another entity may have

the ability to influence all the trading decisions of that entity in

which such ownership interest is held. For these reasons, the

Commission declines to propose amending the policy in Sec. 150.4 to

require a pro-rata aggregation of positions.

c. Other Sec. 150.4 Exemptive Relief

The Commission is proposing the violation-of-laws exemption largely

as previously adopted in part 151 with the proposed changes in the Part

151 Aggregation Proposal, with one amendment. The Commission has

proposed the alternative posed by commenters to allow a memorandum of

law, which can be prepared by internal counsel, to satisfy the

requirement that the applicant explain the potential for a violation of

law. This requirement is intended to provide the Commission with the

ability to review the legal basis for the asserted regulatory

impediment to the sharing of information, particularly where the

asserted impediment arises from laws and/or regulations that the

Commission does not directly administer; to consult with other federal

regulators as to the accuracy of the opinion; and to coordinate the

development of rules surrounding information sharing and aggregation

across accounts in the future. The Commission believes that a

memorandum of law prepared by internal counsel could provide the

information and legal analysis to accomplish these goals, and a formal

opinion of counsel is not required. Thus, the proposed amendments to

part 150 include the requirement suggested by commenters on the Part

151 Aggregation Proposal.

The Commission requests comment as to the costs and benefits of

proposed rule 150.4(b)(8). In particular, the Commission requests

comment as to the relative costs and benefits of requiring a written

memorandum of law, rather than an opinion of counsel, regarding the

reasonable risk of a violation of law.

Regarding higher-tier entities, the Commission is proposing

regulation 150.4(b)(9), which is identical to previously proposed

regulation 151.7(j). The exemption in proposed regulation 150.4(b)(9)

would allow higher-tier entities to rely on exemption notices filed by

the owned entity, with respect to the accounts or positions

specifically identified in the notice. In response to the suggestion of

one Part 151 Aggregation Proposal commenter that aggregate notice

filings should be permitted, the Commission notes, as discussed above,

that entities would be able to utilize the exemption in the manner most

efficient for their enterprise. However, the Commission is not

persuaded by the commenter's assertion that the filing should be

permitted to be effective retroactively, because retroactive

application would result in administrative difficulty in monitoring the

scope of exemptions from aggregation and negatively affect the

Commission staff's surveillance efforts.

The Commission is also proposing exemptions for underwriting

activity in proposed regulation 150.4(b)(6) and for broker dealer

activity in proposed regulation 150.4(b)(7). The Commission believes

that such activity may present less of a risk of coordinated trading

because in both circumstances, the ownership interest is likely

transitory and not held for investment purposes.

Finally, consistent with the approach taken in 151.7(d), proposed

rule 150.4(d) will require aggregation of investments in accounts with

substantially identical trading strategies.

5. Costs and Benefits

In the Part 151 Aggregation Proposal, the Commission stated its

goal in proposing to amend the aggregation provisions of part 151:

It is the Commission's goal that this proposal uphold part 151's

regulatory aims without diminishing its effectiveness. In so doing,

the Commission adheres to its belief that aggregation represents a

key element to prevent evasion of prescribed position limits and

that its historical approach towards aggregation--one that

appropriately blends consideration of ownership and control

indicia--remains sound.'' \183\

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\183\ 77 FR 31767 at 31779.

Similarly, in proposing these amendments to part 150, the Commission

aims to achieve an appropriate balance between reducing costs for

market participants and maintaining the effectiveness of part 150's

regulatory objectives. The Commission believes that the regulations

proposed herein would contribute to that goal by maintaining the

Commission's historical approach to aggregation while simultaneously

updating that approach with thoughtful exemptions that relieve the

burdens of

[[Page 68970]]

aggregation for those market participants who can demonstrate

compliance with certain criteria and who choose to avail themselves of

the exemptions--without undermining the effectiveness of the

Commission's position limits regime.

In adopting the now-vacated part 151, the Commission noted that the

amendments to regulation 151.7 largely tracked regulation 150.4 and

therefore reflected continuity in the position limits regime. In this

release, the Commission is proposing to provide the same exemptions

that it had provided in regulation 151.7, along with the additional

exemptions proposed in the Part 151 Aggregation Proposal, with some

changes to reflect the views of commenters on that release.\184\

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\184\ In regulation 151.7, the Commission added a requirement

that accounts trading pursuant to identical trading strategies be

aggregated. The Commission also provided exemptions for the

underwriters of securities and for instances in which the sharing of

information between persons would cause either person to violate

federal law or regulations adopted thereunder. The Commission

proposed in the Part 151 Aggregation Proposal to extend the

violation-of-laws exemption to include state law and the laws of a

foreign jurisdiction; to include an exemption for broker-dealers

engaged in market-making activity; to allow higher-tier entities to

file notices on behalf of lower-tier entities; to expand the

applicability of the IAC exemption to include limited liability

companies; and to provide a limited exemption for entities owning

greater than 10 but less than 50 percent of another entity.

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Using existing part 150 as the standard for comparison, the

Commission will consider the incremental costs and benefits that arise

from these proposed amendments. That is, if these proposed regulations

are not adopted, the aggregation standards that would apply would be

those described in regulation 150.4 as it currently exists.

Although the Commission anticipates certain costs as a result of

the proposed regulations--including a greater number of entities

preparing and filing notices and memoranda of law, among other costs,

since the availability of relief from aggregation has been expanded--

the Commission believes that the regulations proposed herein, on a net

basis, would cause market participants that use the exemptions in the

regulations to incur a smaller burden as compared to the burden they

would have incurred under regulation 150.4.

a. Costs

There are a myriad of ways a market participant could conceivably

ensure proper compliance with the proposed amendments to regulation

150.4, depending on the particular circumstances of each market

participant. In general, however, the Commission anticipates that

entities who wish to take advantage of the exemptions in proposed

regulation 150.4 will incur direct costs associated with the following:

(1) Developing a system for aggregating positions across owned

entities; (2) initially determining which owned entities, other

persons, or transactions qualify for any of the exemptions in

regulation 150.4; (3) developing and maintaining some system of

determining the scope of such exemptions over time; (4) potentially

amending current operational structures to achieve eligibility for such

exemptions; and (5) preparing and filing notices of exemption with the

Commission, including memoranda of law if claiming the violation-of-

laws exemption.\185\

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\185\ The Commission notes that direct costs associated with how

a particular entity aggregates its positions would be dependent upon

that entity's individual ownership structure, how and why the entity

chooses to avail themselves of any particular exemption, and the

methods employed by the entity to ensure compliance. Thus, as noted

in the Part 151 Aggregation Proposal, costs relating to this rule

are highly entity-specific; actual costs may be higher or lower than

the Commission can anticipate accurately.

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To a large extent, market participants have incurred many of these

costs to comply with existing regulation 150.4. For example, market

participants that are affected by the existing aggregation requirement

should already have a system in place for aggregating positions across

owned entities. This rulemaking does not increase the costs of

complying with the basic aggregation requirements of part 150, and in

fact may decrease those costs by providing for relief from the

aggregation requirements in certain situations. Because the Commission

and DCMs generally have required aggregation of positions starting at a

10 percent ownership threshold under the current regulatory

requirements of part 150 and the acceptable practice found in the prior

version of part 38, the Commission expects that market participants

active on DCMs have developed systems of aggregating positions across

owned entities.\186\

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\186\ The 10 percent threshold has been in place for the nine

agricultural contracts with federal limits for decades, and for

other contracts where limits were imposed by DCMs and enforced by

the Commission. See supra, note 39 (citing to the statement of

policy on aggregation issued in 1979, where the Commission codified

its view, that, except in certain limited circumstances, a financial

interest in an account at or above 10 percent ``will constitute the

trader as an account owner for aggregation purposes.'' 44 FR 33839,

33843, June 13, 1979).

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Thus, the main direct costs associated with the proposed amendments

to regulation 150.4, relative to the standard of existing

regulation150.4, would be those incurred by entities as they determine

whether they may be eligible for the proposed exemptions, and as they

make subsequent filings required by the exemptions. For example, the

Commission recognizes that there may be costs to market participants to

adapt their systems in order to allow such systems to be used to

determine whether persons qualify for the exemptions from the

aggregation requirement proposed herein. Some entities may also incur

direct costs to modify existing operational procedures--such as

firewalls and reporting schemes--in order to be eligible to claim an

exemption.

The Commission does not believe that these proposed regulations

would result in material indirect costs to market participants or the

public. For market participants, these proposed regulations provide for

relief in certain circumstances from the requirement to aggregate

positions. For the public, the Commission believes that these proposed

regulations appropriately balance the need for exemptions from

aggregation in certain circumstances with the public interest in

maintaining the effectiveness of the Commission's position limits

regime.

The direct costs of the proposed regulations are impracticable to

quantify in the aggregate because such costs are heavily dependent on

the characteristics of each entity's current systems, its corporate

structure, its use of derivatives, the specific modifications it would

implement in order to qualify for an exemption, and other

circumstances. However, the Commission believes that market

participants would choose to incur the costs of qualifying for and

using the exemptions in the proposed regulations only if doing so is

less costly than complying with the position limits. Thus, by providing

these market participants with a lower cost alternative (i.e.,

qualifying for and using the exemptions) the proposed regulations may

ease the overall compliance burden resulting from position limits, for

it is reasonable to assume that no entity will elect the exemption if

the benefits of doing so do not justify the costs. Accordingly, the

Commission anticipates that notwithstanding the additional costs of

determining eligibility and filing exemptions, the net result of the

proposed rules for impacted market participants would be a reduction in

costs as compared to the current standard in regulation 150.4.

In the Part 151 Aggregation Proposal, the Commission requested

``that commenters submit data from which the Commission can consider

and quantify the costs of the proposed rules'' because it recognized

that ``costs associated with

[[Page 68971]]

the aggregation of positions are highly variable and entity-specific.''

No commenter on that rule provided data, leaving the Commission without

additional data or another basis to quantify the incremental direct

costs to determine eligibility and file for exemptions beyond those

previously estimated by the Commission.

One commenter asserted that the compliance with the rules would

cost in excess of the $5.9 million estimate stated in the Part 151

Aggregation Proposal; however, the Commission notes that this comment

relates to an estimate of costs relating to now-vacated regulation

151.7 and not the costs relating to the proposed rules in this release.

Another commenter, without providing estimates, described a list of

costs that could be incurred by each affected entity, including: (1)

Evaluating its business structure and determine whether or not it

qualifies for disaggregation relief; (2) planning for being compelled

to aggregate should corporate structure change; (3) designing, testing,

and implementing systems to aggregate positions across multiple

entities across jurisdictions to ensure intraday compliance with

position limits; and (4) incurring the ``as yet unknown and ongoing

cost of complying'' with the proposed rules. The Commission again notes

that entities who have been transacting in futures markets have been

subject to these aggregation requirements for decades, and should have

means of aggregating positions across multiple owned entities.

Some of the costs mentioned above likely relate to the imposition

of the Commission's aggregation provision on swaps contracts as well as

on the additional contract markets that would have been subject to

federal position limits under the now-vacated part 151. Although part

151 is no longer in effect, the Commission has proposed, in accordance

with the Dodd-Frank Act revisions to CEA section 4a, amendments to part

150 that would, among other things: expand the number of contract

markets subject to federal position limits; impose speculative limits

on swaps contracts; and require exchanges to conform their aggregation

policies to the Commission's aggregation policy in Sec. 150.4.\187\

That proposed rulemaking thus may have significant implications for the

Commission's considerations of costs and benefits of the instant

proposal.

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\187\ See Position Limits for Derivatives (November 5, 2013).

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Should that rule be adopted as proposed, the aggregation policies

proposed herein would apply on a federal level to commodity derivative

contracts, including swaps, based on an additional 19 commodities. This

expansion may create additional compliance costs for futures market

participants, who would have to expand current procedures for

aggregating futures positions in order to include swaps positions, as

well as for swaps market participants, who would be required to develop

a system to comply with aggregation policies or expand already existing

policies and procedures to incorporate the aggregation rules. Further,

should the other proposed rulemaking be adopted as proposed, exchanges

would be required to conform their aggregation policies to the

Commission's aggregation policy. As such, all contracts with

speculative position limits, including exempt commodity contracts,

would utilize the Commission's aggregation policy, including the

amendments to that policy proposed in this rulemaking.

Until and unless that proposal is finalized by the Commission, part

150 applies to only the nine contracts enumerated in current Sec.

150.2; in that case, the Commission believes that many of the costs

described by commenters would be substantially less than previously

estimated. The Commission requests that commenters submit data from

which the Commission can quantify the costs of the proposed rules

amending Sec. 150.4. The Commission also requests that commenters

provide data that would help the Commission to compare the potential

cost implications of the instant proposal in the event that the other

amendments to part 150 are adopted to the potential cost implications

in the event that they are not.

The Commission understands that the additional exemptions proposed

herein may create additional costs to file the proper exemptive notices

in accordance with regulations 150.4(c) and 150.4(d). However, the

exemptions are elective, so no entity is required to make this filing

if that entity determines the costs of doing so do not justify the

potential benefit resulting from the exemption. Thus, the Commission

does not anticipate the costs of obtaining any of the exemptions to be

overly burdensome. Nor does the Commission anticipate the costs would

be so great as to discourage entities from utilizing available

exemptions, as applicable.

In accordance with the Paperwork Reduction Act (PRA) the Commission

has estimated the costs of the paperwork required to claim the proposed

exemptions. As stated in the PRA section of this release, the

Commission estimates that 240 entities will submit a total of 340

responses per year and incur a total burden of 7,100 labor hours at a

cost of approximately $852,000 annually in order to claim exemptive

relief under regulation 150.4.\188\ This burden includes a recounting

of the estimates included in the final regulations promulgating now

vacated part 151, as those exemptions are being re-proposed in part

150; however, the estimates have been reduced from that rulemaking

because of the relatively smaller sphere of impact for part 150 as

compared to part 151. That is, as part 151 extended federal position

limits to swap contracts, the impact of that rule was broader than the

impact anticipated for the proposed regulations herein. Should the

proposed amendments to other sections of part 150 be adopted, the

Commission anticipates the PRA burden would increase accordingly.

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\188\ See Section III.B of this release for a more detailed

summary of the Commission's PRA burden estimates.

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The Commission requests comment on its consideration of the costs

imposed by the proposed regulations. Are there other direct or indirect

costs that the Commissions should consider? Has the Commission

accurately characterized the nature of the costs to be incurred?

Commenters are specifically encouraged to submit both qualitative and

quantitative estimates of the potential costs associated with the

proposed changes to Sec. 150.4, as well as data or other information

to support such estimates.

b. Benefits

As discussed above, the Commission's goal in proposing amendments

to its aggregation policy in regulation 151.7 was to reduce costs for

market participants without jeopardizing the effectiveness of its

aggregation policy and by extension its position limits regime.

Similarly, the Commission believes that the proposed amendments to

regulation 150.4 would help to realize that goal, essentially

benefiting both market participants (through lower costs) and the

market at large (through an effective position limits regime).

The Commission continues to view aggregation as an essential part

of its position limits regime. The proposed regulations include

exemptions from the aggregation policy, the purpose of which is to

prevent evasion of position limits through coordinated trading. The

Commission believes that because the proposed exemptions would require

demonstration of eligibility and qualification for an entity to take

advantage of them, only those entities

[[Page 68972]]

whose activities impose a lesser risk of coordinated trading would be

exempted from the aggregation requirements. In this way, the Commission

believes that the exemptions that would be available through these

proposed regulations would not inhibit the effectiveness of the

Commission's aggregation policy in particular or position limits regime

in general.

However, for those entities who represent a lesser risk of

coordinated trading--as demonstrated by their eligibility to obtain an

applicable exemption--the proposed rule represents a benefit in the

form of lower costs of complying with the Commission's position limits

regime while preserving the important protections of the existing

aggregation policy. Based on the comments received on the part 151

Aggregation Proposal, the Commission has attempted where possible to

minimize the regulatory burden of applying for the exemption--for

example, allowing a memorandum of law prepared by internal counsel

instead of a formal opinion--to increase the net benefits available to

market participants. The Commission also proposed an avenue for certain

entities to apply for relief on a case-by-case basis, providing

additional flexibility for market participants.

The Commission requests comment on its considerations of the

benefits of the proposed rules. Are there other benefits to markets,

market participants, and/or the public that the Commission should

consider? Commenters are specifically encouraged to include both

quantitative and qualitative assessments of the potential benefits of

the proposed regulations in Sec. 150.4, as well as data or other

information to support such assessments.

6. Section 15(a) Considerations

As the Commission has long held, position limits are an important

regulatory tool that is designed to prevent concentrated positions of

sufficient size to manipulate or disrupt markets. The aggregation of

accounts for purposes of applying position limits represents an

integral component that impacts the effectiveness of those limits. The

rules proposed herein would amend the Commission's longstanding

aggregation policy to introduce certain exemptions. The Commission

believes these proposed regulations would preserve the important

protections of the existing aggregation policy, but at a lower cost for

market participants.

a. Protection of Market Participants and the Public

The Commission believes these proposed rules would not materially

affect the level of protection of market participants and the public

provided by the aggregation policy reflected currently in regulation

150.4. Given that the account aggregation standards are necessary to

implement an effective position limit regime, it is important that the

exemptions proposed herein be sufficiently tailored to exempt from

aggregation only those accounts that pose a low risk of coordinated

trading. The owned-entity exemption would maintain the Commission's

historical presumption threshold of 10 percent ownership or equity

interest and make that presumption rebuttable only where several

conditions indicative of independence are met. This proposed exemption

focuses on the conditions that impact trading independence. In

addition, by providing an avenue to apply for relief when ownership is

greater than 50 percent of the owned entity, the proposed rules would

allow market participants greater flexibility in meeting the

requirements of the position limits regulations, provided they are

eligible to apply. The Commission believes that these proposed

exemptions would allow the Commission to direct its resources to

monitoring those entities that pose a higher risk of coordinated

trading and thus a higher risk of circumventing position limits,

without reducing the protection of market participants and the public

that the Commission's aggregation policy affords.

The Commission believes the proposed exemptions would reduce costs

for market participants without compromising the integrity or

effectiveness of the Commission's aggregation policy.

b. Efficiency, Competition, and Financial Integrity of Markets

As discussed above, the Commission does not believe that the

proposed regulations would negatively impact market quality indicators,

such as liquidity or incentive for investment, to the detriment of the

efficiency, competitiveness, or integrity of derivatives markets.

Rather, the Commission believes that these proposed regulations would

balance appropriately the need to preserve account aggregation as a

tool to uphold the integrity of the part 151 position limit regime,

while also providing for relief from the aggregation requirements where

they are not necessary to prevent coordinated speculative trading. The

Commission expects the proposed rules to further the Commission's

mission to deter and prevent manipulative behavior while maintaining

sufficient liquidity for hedging activity and protecting the price

discovery process. Prior rules required aggregation at a 10 percent

ownership level, so these regulations, which propose relief from

aggregation at higher ownership levels, should lower the overall impact

of aggregation on market quality factors without imposing unnecessary

or inappropriate restrictions on trading.

c. Price Discovery

Similarly, because the Commission has structured the exemptions in

these proposed regulations to maintain the effectiveness of the

position limits regime in part 150, the Commission believes that these

rules would not impact the price discovery process, which the position

limit regime (including the account aggregation provisions in

regulation 150.4) is designed to protect. Because the exemptions in and

of themselves do not directly impact the formation of prices--only the

aggregation of positions--the rules would not impact the price

discovery process.

d. Risk Management

The Commission has stated previously that the imposition of

position limits requires market participants to ensure they do not

amass positions of sufficient size to disrupt the orderly flow of the

market or to influence unduly the formation of prices. In so doing,

market participants protect themselves--and the market as a whole--from

the disruption that such large positions could cause, when traded

improperly.\189\ The proposed rules would allow entities to not

aggregate positions in circumstances where the Commission has

determined that the positions are at a lesser risk of disrupting the

market through the coordinated trading of affiliated entities. Thus,

the Commission believes these rules, if adopted, would not lessen the

effectiveness of the sound risk management practices that the position

limits regime promotes. The Commission does not expect the proposed

regulations to materially inhibit the use of derivatives for hedging,

because hedge exemptions are available to any entity regardless of

position aggregation and the proposed regulations would be more

permissive than the 10 percent threshold for

[[Page 68973]]

aggregation that applied in existing regulation 150.4.

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\189\ 76 FR 71626 at 71675.

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e. Other Public Interest Considerations

The Commission has not identified any other public interest

considerations related to the costs and benefits of the rules.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') requires that agencies

consider whether the rules they propose will have a significant

economic impact on a substantial number of small entities and, if so,

provide a regulatory flexibility analysis respecting the impact.\190\ A

regulatory flexibility analysis or certification typically is required

for ``any rule for which the agency publishes a general notice of

proposed rulemaking pursuant to'' the notice-and-comment provisions of

the Administrative Procedure Act, 5 U.S.C. 553(b).\191\ The

requirements related to the proposed amendments fall mainly on

registered entities, exchanges, FCMs, swap dealers, clearing members,

foreign brokers, and large traders. The Commission has previously

determined that registered DCMs, FCMs, swap dealers, major swap

participants, eligible contract participants, SEFs, clearing members,

foreign brokers and large traders are not small entities for purposes

of the RFA.\192\ While the requirements under the proposed rulemaking

may impact non-financial end users, the Commission notes that position

limits levels apply only to large traders. Accordingly, the Chairman,

on behalf of the Commission, hereby certifies, on behalf of the

Commission, pursuant to 5 U.S.C. 605(b), that the actions proposed to

be taken herein would not have a significant economic impact on a

substantial number of small entities. The Chairman made the same

certification in the Proposal,\193\ and the Commission did not receive

any comments on the RFA in relation to the proposed rulemaking.

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\190\ 44 U.S.C. 601 et seq.

\191\ 5 U.S.C. 601(2), 603-05.

\192\ See Policy Statement and Establishment of Definitions of

``Small Entities'' for Purposes of the Regulatory Flexibility Act,

47 FR 18618, 18619, Apr. 30, 1982 (DCMs, FCMs, and large traders)

(``RFA Small Entities Definitions''); Opting Out of Segregation, 66

FR 20740, 20743, Apr. 25, 2001 (eligible contract participants);

Position Limits for Futures and Swaps; Final Rule and Interim Final

Rule, 76 FR 71626, 71680, Nov. 18, 2011 (clearing members); Core

Principles and Other Requirements for Swap Execution Facilities, 78

FR 33476, 33548, June 4, 2013 (SEFs); A New Regulatory Framework for

Clearing Organizations, 66 FR 45604, 45609, Aug. 29, 2001 (DCOs);

Registration of Swap Dealers and Major Swap Participants, 77 FR

2613, Jan. 19, 2012, (swap dealers and major swap participants); and

Special Calls, 72 FR 50209, Aug. 31, 2007 (foreign brokers).

\193\ See 77 FR 31780.

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C. Paperwork Reduction Act

1. Overview

The Paperwork Reduction Act (``PRA'') imposes certain requirements

on Federal agencies in connection with their conducting or sponsoring

any collection of information as defined by the PRA. An agency may not

conduct or sponsor, and a person is not required to respond to, a

collection of information unless it displays a currently valid control

number issued by the Office of Management and Budget (``OMB''). Certain

provisions of the proposed regulations would result in amendments to a

previously-approved collection of information requirements within the

meaning of the PRA. Therefore, the Commission is submitting to OMB for

review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11 the

information collection requirements proposed in this rulemaking

proposal as an amendment to the previously-approved collection

associated with OMB control number 3038-0013.

If adopted, responses to this collection of information would be

mandatory. The Commission will protect proprietary information

according to the Freedom of Information Act and 17 CFR part 145, headed

``Commission Records and Information.'' In addition, the Commission

emphasizes that section 8(a)(1) of the Act strictly prohibits the

Commission, unless specifically authorized by the Act, from making

public ``data and information that would separately disclose the

business transactions or market positions of any person and trade

secrets or names of customers.'' The Commission also is required to

protect certain information contained in a government system of records

pursuant to the Privacy Act of 1974. In January of 2012, the Commission

received a petition requesting relief under section 4a(a)(7) of the CEA

and clarification of certain aggregation requirements in regulation

151.7.

On May 30, 2012, the Commission published in the Federal Register a

notice of proposed modifications to part 151 of the Commission's

regulations. The modifications addressed the policy for aggregation

under the Commission's position limits regime for 28 exempt and

agricultural commodity futures and options contracts and the physical

commodity swaps that are economically equivalent to such contracts. In

an Order dated September 28, 2012, the District Court for the District

of Columbia vacated part 151 of the Commission's regulations. The

Commission is now proposing modifications to the aggregation provisions

of part 150 of the Commission's regulations that are substantially

similar to the aggregation modifications proposed to part 151, except

that the modifications address the policy for aggregation under the

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

nine agricultural commodities set forth in part 150.

The Commission is also proposing to amend other sections of part

150 in a separate rulemaking that would, among other things: Expand the

number of contract markets subject to federal position limits; impose

speculative limits on swaps contracts; and require exchanges to conform

their aggregation policies to the Commission's aggregation policy in

part 150.4.\194\ Given the increase in scope proposed in the other

rulemaking, the Commission anticipates a corresponding increase in the

PRA burdens arising from this proposal should the amendments to other

sections of part 150 be adopted. Unless and until that rulemaking is

finalized, however, the instant proposal applies only to the nine

commodities enumerated in current Sec. 150.2. The Commission requests

comment regarding the impact on its PRA analysis should the amendments

to part 150 proposed in the separate rulemaking be adopted.

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\194\ See Position Limits for Derivatives (November 5, 2013).

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Specifically, regulation 150.4(b)(2) proposes an exemption for a

person to disaggregate the positions of a separately organized entity

(``owned entity''). To claim the exemption, a person would need to meet

certain criteria and file a notice with the Commission in accordance

with regulation 150.4(c). The notice filing would need to demonstrate

compliance with certain conditions set forth in regulations

150.4(b)(2)(i)(A)-(E). Similar to other exemptions from aggregation,

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

but the Commission may call for additional information as well as

reject, modify or otherwise condition such relief. Further, such person

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

change to the filing.

The proposed rules also contain proposed regulation 150.4(b)(3)

which establishes a similar but separate owned-entity exemption with

more intensive qualifications for exemption. To claim the exemption, a

person would

[[Page 68974]]

need to meet certain criteria above and beyond that imposed by

regulation 150.4(b)(2) and file an application for exemption with the

Commission in accordance with regulation 150.4(c). The notice filing

would need to demonstrate compliance with certain conditions as well as

additional information that could inform the Commission's decision to

grant or not to grant the person's application. Similar to other

exemptions from aggregation, the notice filing would be effective upon

submission to the Commission, but the Commission may call for

additional information as well as reject, modify or otherwise condition

such relief. Further, such person is obligated to amend the notice

filing in the event of a material change to the filing.

The Commission is also proposing to amend the definitions of

eligible entity and independent account controller in part 150.1 and

150.4(5) to specifically provide for regulation 4.13 commodity pools

established as limited liability companies. In addition, the Commission

is proposing to amend the definition of independent account controller

to specifically provide for commodity pool operators that operate

excluded pools as defined under regulation 4.5(a)(4) of the

Commission's regulations. These amendments would likely expand the

number of entities that can file for the independent account controller

aggregation exemption.

The proposal includes two provisions in proposed regulations

150.4(b)(6) and 150.4(b)(7) providing exemptions from aggregation for

underwriting agents and broker-dealers engaging in market making

activity, respectively. Both exemptions are self-executing and do not

require a notice filing.

The proposal also includes proposed regulation 150.4(b)(8) which

provides an exemption from aggregation where the sharing of information

between persons would cause either person to violate federal law. The

exemption would apply to a situation where the sharing of information

creates a reasonable risk of a violation of federal, state, or foreign

law or regulations adopted thereunder. The rules also propose a

requirement that market participants file a notice demonstrating

compliance with the condition, including an internal memorandum of

counsel. The memorandum allows Commission staff to review the legal

basis for the asserted regulatory impediment to the sharing of

information, and is particularly helpful where the asserted impediment

arises from laws and/or regulations that the Commission does not

directly administer. Further, Commission staff will have the ability to

consult with other federal regulators as to the accuracy of the

opinion, and to coordinate the development of rules surrounding

information sharing and aggregation across accounts in the future.

Finally, the proposed rules propose relief from notice filings for

``higher-tier'' entities, which, under proposed regulation 150.4(b)(9),

may rely on the filings submitted by owned entities. A ``higher-tier''

entity need not submit a separate notice pursuant to the notice filing

requirements to rely upon the notice filed by an owned entity as long

as it complies with conditions of the applicable aggregation exemption.

2. Methodology and Assumptions

It is not possible at this time to precisely determine the number

of respondents affected by the proposed rules. Many of the regulations

that impose PRA burdens are exemptions that a market participant may

elect to take advantage of, meaning that without intimate knowledge of

the day-to-day business decisions of all its market participants, the

Commission could not know which participants, or how many, may elect to

obtain such an exemption. Further, the Commission is unsure of how many

participants not currently in the market may be required to or may

elect to incur the estimated burdens in the future.

These limitations notwithstanding, the Commission has made best-

effort estimations regarding the likely number of affected entities for

the purposes of calculating burdens under the PRA. The Commission used

its proprietary data, collected from market participants, to estimate

the number of respondents for each of the proposed obligations subject

to the PRA by estimating the number of respondents who may be close to

a position limit and thus may file for relief from aggregation

requirements.

The Commission's estimates concerning wage rates are based on 2011

salary information for the securities industry compiled by the

Securities Industry and Financial Markets Association (``SIFMA''). The

Commission is using a figure of $120 per hour, which is derived from a

weighted average of salaries across different professions from the

SIFMA Report on Management & Professional Earnings in the Securities

Industry 2011, modified to account for an 1800-hour work-year, adjusted

to account for the average rate of inflation in 2012. This figure was

then multiplied by 1.33 to account for benefits \195\ and further by

1.5 to account for overhead and administrative expenses.\196\ The

Commission anticipates that compliance with the provisions would

require the work of an information technology professional; a

compliance manager; an accounting professional; and an associate

general counsel. Thus, the wage rate is a weighted national average of

salary for professionals with the following titles (and their relative

weight); ``programmer (average of senior and non-senior)'' (15%

weight), ``senior accountant'' (15%) ``compliance manager'' (30%), and

``assistant/associate general counsel'' (40%). All monetary estimates

have been rounded to the nearest hundred dollars.

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\195\ The Bureau of Labor Statistics reports that an average of

32.8% of all compensation in the financial services industry is

related to benefits. This figure may be obtained on the Bureau of

Labor Statistics Web site, at http://www.bls.gov/news.release/ecec.t06.htm. The Commission rounded this number to 33% to use in

its calculations.

\196\ Other estimates of this figure have varied dramatically

depending on the categorization of the expense and the type of

industry classification used (see, e.g., BizStats at http://www.bizstats.com/corporation-industry-financials/finance-insurance-52/securities-commodity-contracts-other-financial-investments-523/commodity-contracts-dealing-and-brokerage-523135/show and Damodaran

Online at http://pages.stern.nyu.edu/~adamodar/pc/datasets/

uValuedata.xls. The Commission has chosen to use a figure of 50% for

overhead and administrative expenses to attempt to conservatively

estimate the average for the industry.

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The Commission welcomes comment on its assumptions and estimates.

3. Reporting Burdens

Proposed regulation 150.4(b)(2) would require qualified persons to

file a notice in order to claim exemptive relief from aggregation.

Further, proposed regulation 150.4(b)(2)(ii) states that the notice is

to be filed in accordance with proposed regulation 150.4(c), which

requires a description of the relevant circumstances that warrant

disaggregation and a statement that certifies that the conditions set

forth in the exemptive provision have been met. Regulation 150.4(b)(3)

specifies that qualified persons may request an exemption from

aggregation in accordance with proposed regulation 150.4(c). Such a

request would be required to include a description of the relevant

circumstances that warrant disaggregation and a statement certifying

the conditions have been met. Persons claiming these exemptions would

be required to submit to the Commission, as requested, such information

as relates to the claim for exemption. An updated or amended notice

must be filed with the Commission upon any material change.

[[Page 68975]]

The release also proposes to extend relief available under

150.4(b)(5) to additional entities; the Commission expects that, as a

result of the expanded exemptive relief available to these entities, a

greater number of persons will file exemptive notices under

150.4(b)(5). The Commission also expects entities to file for relief

under proposed regulation 150.4(b)(8), which allows for entities to

file a notice, including a memorandum of law, in order to claim the

exemption.

Given the expansion of the exemptions that market participants may

claim, the Commission anticipates an increase in the number of notice

filings. However, because of the relief for ``higher-tier'' entities

under regulation 150.4(b)(9) the Commission expects that increase to be

offset partially by a reduction in the number of filings by ``higher-

tier'' entities. Thus, the Commission anticipates a net increase in the

number of filings under regulation 150.4 as a result of the adoption of

these proposed rules. The Commission believes that this increase will

create an increase in the annual labor burden. However, because

entities have already incurred the capital, start-up, operating, and

maintenance costs to file other exemptive notices--such as those

currently allowed for independent account controllers and futures

commission merchants under regulation 150.4--the Commission does not

anticipate an increase in those costs.

The Commission estimates that 100 entities will each file two

notices annually under proposed regulation 150.4(b)(2), at an average

of 20 hours per filing. Thus, the Commission approximates a total per

entity burden of 40 labor hours annually. At an estimated labor cost of

$120, the Commission estimates a cost of approximately $4,800 per

entity for filings under proposed regulation 150.4(b)(2).

The Commission estimates that 25 entities will each file one notice

annually under proposed regulation 150.4(b)(3), at an average of 30

hours per filing. Thus, the Commission approximates a total per entity

burden of 30 labor hours annually. At an estimated labor cost of $120,

the Commission estimates a cost of approximately $3,600 per entity for

filings under proposed regulation 150.4(b)(3).

The Commission estimates that 75 entities will each file one notice

annually under proposed regulation 150.4(b)(5), at an average of 10

hours per filing. Thus, the Commission approximates a total per entity

burden of 10 labor hours annually. At an estimated labor cost of $120,

the Commission estimates a cost of approximately $1,200 per entity for

filings under proposed regulation 150.4(b)(5).

The Commission estimates that 40 entities will each file one notice

annually under proposed regulation 150.4(b)(8), including the requisite

memorandum of law, at an average of 40 hours per filing. Thus, the

Commission approximates a total per entity burden of 40 labor hours

annually. At an estimated labor cost of $120,\197\ the Commission

estimates a cost of approximately $4,800 per entity for filings under

proposed regulation 150.4(b)(8).

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\197\ See above, text accompanying note 196.

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In sum, the Commission estimates that 240 entities will submit a

total of 340 responses per year and incur a total burden of 7,100 labor

hours at a cost of approximately $852,000 annually in order to claim

exemptive relief under regulation 150.4.

4. Comments on Information Collection

The Commission invites the public and other federal agencies to

comment on any aspect of the reporting and recordkeeping burdens

discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission

solicits comments in order to: (1) Evaluate whether the proposed

collections of information are necessary for the proper performance of

the functions of the Commission, including whether the information will

have practical utility; (2) evaluate the accuracy of the Commission's

estimate of the burden of the proposed collections of information; (3)

determine whether there are ways to enhance the quality, utility, and

clarity of the information to be collected; and (4) minimize the burden

of the collections of information on those who are to respond,

including through the use of automated collection techniques or other

forms of information technology.

Comments may be submitted directly to the Office of Information and

Regulatory Affairs, by fax at (202) 395-6566 or by email at [email protected] Please provide the Commission with a copy of

comments submitted so that all comments can be summarized and addressed

in the final regulation preamble. Refer to the Addresses section of

this notice for comment submission instructions to the Commission. A

copy of the supporting statements for the collection of information

discussed above may be obtained by visiting RegInfo.gov. OMB is

required to make a decision concerning the collection of information

between 30 and 60 days after publication of this release. Consequently,

a comment to OMB is most assured of being fully considered if received

by OMB (and the Commission) within 30 days after the publication of

this notice of proposed rulemaking.

As noted above, the following proposed amendments to part 150 may

require conforming technical changes if the Commission also adopts any

proposed amendments to its regulations regarding position limits.\198\

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\198\ See Position Limits for Derivatives (November 5, 2013).

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List of Subjects in 17 CFR Part 150

Position limits, Bona fide hedging, Referenced contracts.

For the reasons discussed in the preamble, the Commission proposes

to amend 17 CFR part 150 as follows:

PART 150--LIMITS ON POSITIONS

0

1. The authority citation for part 150 is revised to read as follows:

Authority: 7 U.S.C. 6a, 6c, and 12a(5), as amended by Title VII

of the Dodd-Frank Wall Street Reform and Consumer Protection Act,

Pub. L. 111-203, 124 Stat. 1376 (2010).

0

2. Amend Sec. 150.1 to revise paragraphs (d), (e)(2), and (e)(5) to

read as follows:

Sec. 150.1 Definitions.

* * * * *

(d) Eligible entity means a commodity pool operator; the operator

of a trading vehicle which is excluded, or which itself has qualified

for exclusion from the definition of the term ``pool'' or ``commodity

pool operator,'' respectively, under Sec. 4.5 of this chapter; the

limited partner, limited member or shareholder in a commodity pool the

operator of which is exempt from registration under Sec. 4.13 of this

chapter; a commodity trading advisor; a bank or trust company; a

savings association; an insurance company; or the separately organized

affiliates of any of the above entities:

(1) Which authorizes an independent account controller

independently to control all trading decisions with respect to the

eligible entity's client positions and accounts that the independent

account controller holds directly or indirectly, or on the eligible

entity's behalf, but without the eligible entity's day-to-day

direction; and

(2) Which maintains:

(i) Only such minimum control over the independent account

controller as is consistent with its fiduciary responsibilities to the

managed positions and accounts, and necessary

[[Page 68976]]

to fulfill its duty to supervise diligently the trading done on its

behalf; or

(ii) If a limited partner, limited member or shareholder of a

commodity pool the operator of which is exempt from registration under

Sec. 4.13 of this chapter, only such limited control as is consistent

with its status.

(e) * * *

(2) Over whose trading the eligible entity maintains only such

minimum control as is consistent with its fiduciary responsibilities to

the managed positions and accounts to fulfill its duty to supervise

diligently the trading done on its behalf or as consistent with such

other legal rights or obligations which may be incumbent upon the

eligible entity to fulfill;

* * * * *

(5) Who is:

(i) Registered as a futures commission merchant, an introducing

broker, a commodity trading advisor, or an associated person of any

such registrant, or

(ii) A general partner, managing member or manager of a commodity

pool the operator of which is excluded from registration under Sec.

4.5(a)(4) of this chapter or Sec. 4.13 of this chapter, provided that

such general partner, managing member or manager complies with the

requirements of Sec. 150.4(c).

* * * * *

Sec. 150.3 [Amended]

0

3. Amend Sec. 150.3 as follows:

0

a. Remove the semicolon and the word ``or'' at the end of paragraph

(a)(3);

0

b. Add a period at the end of paragraph (a)(3); and

0

c. Remove paragraph (a)(4).

0

4. Revise Sec. 150.4 to read as follows:

Sec. 150.4 Aggregation of positions.

(a) Positions to be aggregated--(1) Trading control or 10 percent

or greater ownership or equity interest. For the purpose of applying

the position limits set forth in Sec. 150.2, unless an exemption set

forth in paragraph (b) of this section applies, all positions in

accounts for which any person, by power of attorney or otherwise,

directly or indirectly controls trading or holds a 10 percent or

greater ownership or equity interest must be aggregated with the

positions held and trading done by such person. For the purpose of

determining the positions in accounts for which any person controls

trading or holds a 10 percent or greater ownership or equity interest,

positions or ownership or equity interests held by, and trading done or

controlled by, two or more persons acting pursuant to an expressed or

implied agreement or understanding shall be treated the same as if the

positions or ownership or equity interests were held by, or the trading

were done or controlled by, a single person.

(2) Substantially identical trading. Notwithstanding the provisions

of paragraph (b) of this section, for the purpose of applying the

position limits set forth in Sec. 150.2, any person that, by power of

attorney or otherwise, holds or controls the trading of positions in

more than one account or pool with substantially identical trading

strategies, must aggregate all such positions.

(b) Exemptions from aggregation. For the purpose of applying the

position limits set forth in Sec. 150.2, and notwithstanding the

provisions of paragraph (a)(1) of this section, but subject to the

provisions of paragraph (a)(2) of this section, the aggregation

requirements of this section shall not apply in the circumstances set

forth in this paragraph (b).

(1) Exemption for ownership by limited partners, shareholders or

other pool participants. Any person that is a limited partner, limited

member, shareholder or other similar type of pool participant holding

positions in which the person by power of attorney or otherwise

directly or indirectly has a 10 percent or greater ownership or equity

interest in a pooled account or positions need not aggregate the

accounts or positions of the pool with any other accounts or positions

such person is required to aggregate, except that such person must

aggregate the pooled account or positions with all other accounts or

positions owned or controlled by such person if such person:

(i) Is the commodity pool operator of the pooled account;

(ii) Is a principal or affiliate of the operator of the pooled

account, unless:

(A) The pool operator has, and enforces, written procedures to

preclude the person from having knowledge of, gaining access to, or

receiving data about the trading or positions of the pool;

(B) The person does not have direct, day-to-day supervisory

authority or control over the pool's trading decisions;

(C) The person, if a principal of the operator of the pooled

account, maintains only such minimum control over the commodity pool

operator as is consistent with its responsibilities as a principal and

necessary to fulfill its duty to supervise the trading activities of

the commodity pool; and

(D) The pool operator has complied with the requirements of

paragraph (c) of this section on behalf of the person or class of

persons; or

(iii) Has, by power of attorney or otherwise directly or

indirectly, a 25 percent or greater ownership or equity interest in a

commodity pool, the operator of which is exempt from registration under

Sec. 4.13 of this chapter.

(2) Exemption for certain ownership of greater than 10 percent in

an owned entity. Any person with an ownership or equity interest in an

owned entity of 10 percent or greater but not more than 50 percent

(other than an interest in a pooled account subject to paragraph (b)(1)

of this section), need not aggregate the accounts or positions of the

owned entity with any other accounts or positions such person is

required to aggregate, provided that:

(i) Such person, including any entity that such person must

aggregate, and the owned entity:

(A) Do not have knowledge of the trading decisions of the other;

(B) Trade pursuant to separately developed and independent trading

systems;

(C) Have and enforce written procedures to preclude each from

having knowledge of, gaining access to, or receiving data about, trades

of the other. Such procedures must include document routing and other

procedures or security arrangements, including separate physical

locations, which would maintain the independence of their activities;

(D) Do not share employees that control the trading decisions of

either; and

(E) Do not have risk management systems that permit the sharing of

trades or trading strategy; and

(ii) Such person complies with the requirements of paragraph (c) of

this section.

(3) Exemption for certain ownership of greater than 50 percent in

an owned entity. Any person with a greater than 50 percent ownership or

equity interest in an owned entity (other than an interest in a pooled

account subject to paragraph (b)(1) of this section), need not

aggregate the accounts or positions of the owned entity with any other

accounts or positions such person is required to aggregate, provided

that:

(i) Such person certifies to the Commission that the owned entity

is not required under U.S. generally accepted accounting principles to

be, and is not, consolidated on the financial statement of such person;

(ii) Such person, including any entity that such person must

aggregate, and the owned entity meet the requirements of paragraphs

(b)(2)(i)(A) through (E) of this section and such person demonstrates

to the Commission that procedures are in place that are

[[Page 68977]]

reasonably effective to prevent coordinated trading decisions by such

person, any entity that such person must aggregate, and the owned

entity;

(iii) Each representative (if any) of the person on the owned

entity's board of directors (or equivalent governance body) certifies

that he or she does not control the trading decisions of the owned

entity;

(iv) Such person certifies to the Commission that either all of the

owned entity's positions qualify as bona fide hedging transactions or

the owned entity's positions that do not so qualify do not exceed 20

percent of any position limit currently in effect, and agrees with the

Commission that:

(A) If such certification becomes untrue for any owned entity of

the person, such person will aggregate the accounts or positions of the

owned entity with any other accounts or positions such person is

required to aggregate; however, after a period of three complete

calendar months in which such person aggregates such accounts or

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

hedging transactions, such person may make such certification again and

be permitted to cease such aggregation;

(B) Any owned entity of the person shall, upon call by the

Commission at any time, make a filing responsive to the call,

reflecting only such owned entity's positions and transactions, and not

reflecting the inventory of the person or any other accounts or

positions such person is required to aggregate (this requirement shall

apply regardless of whether the owned entity or the person is subject

to Sec. 18.05 of this chapter); and

(C) Such person shall inform the Commission, and provide to the

Commission any information that the Commission may request, if any

owned entity engages in coordinated activity regarding the trading of

such owned entity, such person, or any other accounts or positions such

person is required to aggregate, even if such coordinated activity does

not conflict with any of the requirements of paragraphs (b)(2)(i)(A) to

(b)(2)(i)(E) of this section;

(v) The Commission finds, in its discretion, that such person has

satisfied the conditions of this paragraph (b)(3);

(vi) Such person, when first requesting disaggregation relief under

this paragraph, complies with the requirements of paragraph (c)(2) of

this section; and

(vii) Such person complies with the requirements of paragraph

(c)(1) of this section if, subsequent to a Commission finding that the

person has satisfied the conditions of this paragraph (b)(3), there is

a material change to the information provided to the Commission in the

person's original filing under paragraph (c)(2) of this section.

(4) Exemption for accounts held by futures commission merchants. A

futures commission merchant or any affiliate of a futures commission

merchant need not aggregate positions it holds in a discretionary

account, or in an account which is part of, or participates in, or

receives trading advice from a customer trading program of a futures

commission merchant or any of the officers, partners, or employees of

such futures commission merchant or of its affiliates, if:

(i) A person other than the futures commission merchant or the

affiliate directs trading in such an account;

(ii) The futures commission merchant or the affiliate maintains

only such minimum control over the trading in such an account as is

necessary to fulfill its duty to supervise diligently trading in the

account;

(iii) Each trading decision of the discretionary account or the

customer trading program is determined independently of all trading

decisions in other accounts which the futures commission merchant or

the affiliate holds, has a financial interest of 10 percent or more in,

or controls; and

(iv) The futures commission merchant or the affiliate has complied

with the requirements of paragraph (c) of this section.

(5) Exemption for accounts carried by an independent account

controller. An eligible entity need not aggregate its positions with

the eligible entity's client positions or accounts carried by an

authorized independent account controller, as defined in Sec.

150.1(e), except for the spot month in physical-delivery commodity

contracts, provided that the eligible entity has complied with the

requirements of paragraph (c) of this section, and that the overall

positions held or controlled by such independent account controller may

not exceed the limits specified in Sec. 150.2.

(i) Additional requirements for exemption of affiliated entities.

If the independent account controller is affiliated with the eligible

entity or another independent account controller, each of the

affiliated entities must:

(A) Have, and enforce, written procedures to preclude the

affiliated entities from having knowledge of, gaining access to, or

receiving data about, trades of the other. Such procedures must include

document routing and other procedures or security arrangements,

including separate physical locations, which would maintain the

independence of their activities; provided, however, that such

procedures may provide for the disclosure of information which is

reasonably necessary for an eligible entity to maintain the level of

control consistent with its fiduciary responsibilities to the managed

positions and accounts and necessary to fulfill its duty to supervise

diligently the trading done on its behalf;

(B) Trade such accounts pursuant to separately developed and

independent trading systems;

(C) Market such trading systems separately; and

(D) Solicit funds for such trading by separate disclosure documents

that meet the standards of Sec. 4.24 or Sec. 4.34 of this chapter, as

applicable, where such disclosure documents are required under part 4

of this chapter.

(6) Exemption for underwriting. A person need not aggregate the

positions or accounts of an owned entity if the ownership or equity

interest is based on the ownership of securities constituting the whole

or a part of an unsold allotment to or subscription by such person as a

participant in the distribution of such securities by the issuer or by

or through an underwriter.

(7) Exemption for broker-dealer activity. A broker-dealer

registered with the Securities and Exchange Commission, or similarly

registered with a foreign regulatory authority, need not aggregate the

positions or accounts of an owned entity if such broker-dealer does not

have greater than a 50 percent ownership or equity interest in the

owned entity and the ownership or equity interest is based on the

ownership of securities acquired in the normal course of business as a

dealer, provided that such person does not have actual knowledge of the

trading decisions of the owned entity.

(8) Exemption for information sharing restriction. A person need

not aggregate the positions or accounts of an owned entity if the

sharing of information associated with such aggregation (such as, only

by way of example, information reflecting the transactions and

positions of a such person and the owned entity) creates a reasonable

risk that either person could violate state or federal law or the law

of a foreign jurisdiction, or regulations adopted thereunder, provided

that such person does not have actual knowledge of information

associated with such aggregation, and provided further that such person

has filed a prior notice pursuant to paragraph (c) of this section and

included with such notice a written memorandum of law explaining in

detail the basis for the conclusion that

[[Page 68978]]

the sharing of information creates a reasonable risk that either person

could violate state or federal law or the law of a foreign

jurisdiction, or regulations adopted thereunder. However, the exemption

in this paragraph shall not apply where the law or regulation serves as

a means to evade the aggregation of accounts or positions. All

documents submitted pursuant to this paragraph shall be in English, or

if not, accompanied by an official English translation.

(9) Exemption for higher-tier entities. If an owned entity has

filed a notice under paragraph (c) of this section, any person with an

ownership or equity interest of 10 percent or greater in the owned

entity need not file a separate notice identifying the same positions

and accounts previously identified in the notice filing of the owned

entity, provided that:

(i) Such person complies with the conditions applicable to the

exemption specified in the owned entity's notice filing, other than the

filing requirements; and

(ii) Such person does not otherwise control trading of the accounts

or positions identified in the owned entity's notice.

(iii) Upon call by the Commission, any person relying on the

exemption in this paragraph (b)(9) shall provide to the Commission such

information concerning the person's claim for exemption. Upon notice

and opportunity for the affected person to respond, the Commission may

amend, suspend, terminate, or otherwise modify a person's aggregation

exemption for failure to comply with the provisions of this section.

(c) Notice filing for exemption. (1) Persons seeking an aggregation

exemption under paragraph (b)(1)(ii), (b)(2), (b)(3)(vii), (b)(4),

(b)(5), or (b)(8) of this section shall file a notice with the

Commission, which shall be effective upon submission of the notice, and

shall include:

(i) A description of the relevant circumstances that warrant

disaggregation; and

(ii) A statement of a senior officer of the entity certifying that

the conditions set forth in the applicable aggregation exemption

provision have been met.

(2) Persons with a greater than 50 percent ownership or equity

interest in an owned entity seeking an aggregation exemption under

paragraph (b)(3)(vi) of this section shall file a request with the

Commission, which shall not become effective unless and until the

Commission finds, in its discretion, that such person has satisfied the

conditions of paragraph (b)(3) of this section, and shall include:

(i) A description of the relevant circumstances that warrant

disaggregation;

(ii) A statement of a senior officer of the entity certifying that

the conditions set forth in paragraph (b)(3) of this section have been

met;

(iii) A demonstration that procedures are in place that are

reasonably effective to prevent coordinated trading decisions by such

person, any entity that such person must aggregate, and the owned

entity; and

(iv) All certifications required under paragraph (b)(3) of this

section.

(3) Upon call by the Commission, any person claiming an aggregation

exemption under this section shall provide such information

demonstrating that the person meets the requirements of the exemption,

as is requested by the Commission. Upon notice and opportunity for the

affected person to respond, the Commission may amend, suspend,

terminate, or otherwise modify a person's aggregation exemption for

failure to comply with the provisions of this section.

(4) In the event of a material change to the information provided

in any notice filed under this paragraph (c), an updated or amended

notice shall promptly be filed detailing the material change.

(5) Any notice filed under this paragraph (c) shall be submitted in

the form and manner provided for in paragraph (d) of this section.

(d) Form and manner of reporting and submitting information or

filings. Unless otherwise instructed by the Commission or its

designees, any person submitting reports under this section shall

submit the corresponding required filings and any other information

required under this part to the Commission using the format, coding

structure, and electronic data transmission procedures approved in

writing by the Commission. Unless otherwise provided in this section,

the notice shall be effective upon filing. When the reporting entity

discovers errors or omissions to past reports, the entity shall so

notify the Commission and file corrected information in a form and

manner and at a time as may be instructed by the Commission or its

designee.

(e) Delegation of authority to the Director of the Division of

Market Oversight. (1) The Commission hereby delegates, until it orders

otherwise, to the Director of the Division of Market Oversight or such

other employee or employees as the Director may designate from time to

time, the authority:

(i) In paragraph (b)(3) of this section:

(A) To determine, after consultation with the General Counsel or

such other employee or employees as the General Counsel may designate

from time to time, if a person has satisfied the conditions of

paragraph (b)(3) of this section; and

(B) To call for additional information from a person claiming the

exemption in paragraph (b)(3) of this section, reflecting such owned

entity's positions and transactions (regardless of whether the owned

entity or the person is subject to Sec. 18.05 of this chapter).

(ii) In paragraph (b)(9)(iii) of this section to call for

additional information from a person claiming the exemption in

paragraph (b)(9)(i) of this section.

(iii) In paragraph (d) of this section for providing instructions

or determining the format, coding structure, and electronic data

transmission procedures for submitting data records and any other

information required under this part.

(2) The Director of the Division of Market Oversight may submit to

the Commission for its consideration any matter which has been

delegated in this section.

(3) Nothing in this section prohibits the Commission, at its

election, from exercising the authority delegated in this section.

Issued in Washington, DC, on November 8, 2013, by the

Commission.

Christopher J. Kirkpatrick,

Deputy Secretary of the Commission.

Appendices to Aggregation of Positions--Commission Voting Summary and

Statement of Chairman

Note: The following appendices will not appear in the Code of

Federal Regulations.

Appendix 1--Commission Voting Summary

On this matter, Chairman Gensler and Commissioners Chilton,

O'Malia, and Wetjen voted in the affirmative; no Commissioner voted

in the negative.

Appendix 2--Statement of Chairman Gary Gensler

I support the proposed rule that would modify the CFTC's

aggregation provisions for limits on speculative positions.

As we move forward on position limits for futures and swaps, it

is important to concurrently implement reforms to the Commission's

current regulations regarding which positions are totaled up as

being owned or controlled by a particular entity. These total,

aggregated positions under common control are then subject to the

speculative position limits, taking into consideration any relevant

exemptions.

We live in a time when companies often have numerous affiliated

entities, sometimes

[[Page 68979]]

measured in the hundreds or thousands. Thus, it is appropriate to

look at how speculative position limits apply across the enterprise.

When Lehman Brothers failed, it had 3,300 legal entities within its

corporate family. The question is--do you count all those 3,300

legal entities that Lehman Brothers once controlled, or do you apply

a limit for each and every one of the 3,300? If we chose the second,

that would be, in practice, a loophole around congressional intent.

That's why this issue of aggregation comes into play.

The proposal generally provides for aggregation when various

entities are under common control. For instance, if the ownership

interest is greater than 50 percent, it will be presumed to be

aggregated and part of the group.

The proposal provides for certain exemptions from aggregation

for the following reasons:

Where sharing of information would violate or create

reasonable risk of violating a federal, state or foreign

jurisdiction law or regulation;

Where an ownership interest is less than 50 percent and

trading is independently controlled;

Where an ownership interest is greater than 50 percent

in a non-consolidated entity whose trading is independently

controlled, and an applicant certifies that such entity's positions

either qualify as bona fide hedging positions or do not exceed 20

percent of any position limit; or

Where ownership of less than 50 percent results from

broker-dealer activities in the normal course of business.

[FR Doc. 2013-27339 Filed 11-14-13; 8:45 am]

BILLING CODE 6351-01-P

 

Last Updated: November 15, 2013