Federal Speculative Position Limits for Referenced Energy Contracts and Associated Regulations, 4144-4172 [2010-1209]
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Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 1, 20 and 151
RIN 3038–AC85
Federal Speculative Position Limits for
Referenced Energy Contracts and
Associated Regulations
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
AGENCY: Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
SUMMARY: The Commodity Futures
Trading Commission (‘‘CFTC’’ or
‘‘Commission’’) is proposing to
implement speculative position limits
for futures and option contracts in
certain energy commodities. The
Commodity Exchange Act of 1936
(‘‘CEA’’ or ‘‘Act’’) gives the Commission
the authority to establish limits on
positions to diminish, eliminate or
prevent excessive speculation causing
sudden or unreasonable fluctuations in
the price of a commodity, or
unwarranted changes in the price of a
commodity. In addition to identifying
the affected energy contracts and the
position limits that would apply to
them, the notice of proposed rulemaking
includes provisions relating to
exemptions from the position limits for
bona fide hedging transactions and for
certain swap dealer risk management
transactions. The notice of proposed
rulemaking also sets out an application
process that would apply to swap
dealers seeking a risk management
exemption from the position limits, as
well as related definitions and reporting
requirements. In addition, the notice of
proposed rulemaking includes
provisions regarding the aggregation of
positions under common ownership for
the purpose of applying the limits.
DATES: Comments must be received on
or before April 26, 2010.
ADDRESSES: Comments should be
submitted to David Stawick, Secretary,
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581. Comments also may be sent by
facsimile to (202) 418–5521, or by
electronic mail to secretary@cftc.gov.
Reference should be made to ‘‘Proposed
Federal Speculative Position Limits for
Referenced Energy Contracts and
Associated Regulations.’’ Comments
may also be submitted by connecting to
the Federal eRulemaking Portal at
https://www.regulations.gov and
following comment submission
instructions.
FOR FURTHER INFORMATION CONTACT:
Stephen Sherrod, Acting Director of
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Surveillance, (202) 418–5452,
ssherrod@cftc.gov, David P. Van
Wagner, Chief Counsel, (202) 418–5481,
dvanwagner@cftc.gov, Donald Heitman,
Senior Special Counsel, (202) 418–5041,
dheitman@cftc.gov, or Bruce Fekrat,
Special Counsel, (202) 418–5578,
bfekrat@cftc.gov, Division of Market
Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581, facsimile number (202) 418–
5527.
SUPPLEMENTARY INFORMATION:
I. Overview
The majority of futures and options
trading on energy commodities in the
United States occurs on the New York
Mercantile Exchange (‘‘NYMEX’’), a
designated contract market (‘‘DCM’’) that
operates as part of the CME Group.1
Energy commodity trading also takes
place on the Intercontinental Exchange
(‘‘ICE’’), an Atlanta-based exchange that
operates as an exempt commercial
market (‘‘ECM’’) and is, as of July 2009,
a registered entity with respect to its
Henry Financial LD1 Fixed Price natural
gas contract.2 NYMEX currently lists
physically-delivered and cash-settled
futures contracts (and options on such
futures contracts) in crude oil, natural
gas, gasoline and heating oil. ICE lists a
cash-settled look-alike contract on
natural gas, and options thereon, that
settles directly to the settlement price of
NYMEX’s physically-delivered natural
gas futures contract.3
1 The CME Group is the parent company of four
DCMs: NYMEX, the Chicago Board of Trade
(‘‘CBOT’’), the Chicago Mercantile Exchange
(‘‘CME’’), and the Commodity Exchange (‘‘COMEX’’).
2 Under section 2(h)(7) of the Act, ECM contracts
that have been determined by the Commission to
be significant price discovery contracts (‘‘SPDCs’’)
are subject to Commission regulation. 7 U.S.C.
2(h)(7). ECMs listing SPDCs (‘‘ECM–SPDCs’’) are
also deemed to be registered entities with selfregulatory responsibilities with respect to such
contracts. To date, ICE’s Henry Financial LD1 Fixed
Price natural gas contract is the first and only ECM
contract to have been determined by the
Commission to be a SPDC under section 2(h)(7) of
the Act. 74 FR 37988 (July 30, 2009).
3 US-based traders also enter into various energy
contracts listed by the ICE Futures Europe Exchange
(‘‘ICE Futures Europe’’), a London-based exchange.
These energy contracts include futures on West
Texas Intermediate (WTI) light sweet crude oil, a
New York Harbor heating oil futures contract and
a New York Harbor unleaded gasoline blendstock
futures contract. All of the listed contracts directly
cash-settle to the price of NYMEX futures contracts
that are physically-settled. ICE Futures Europe is a
foreign board of trade (‘‘FBOT’’) and, unlike NYMEX
and ICE, is not registered in any capacity with the
Commission. Instead, ICE Futures Europe and its
predecessor, the International Petroleum Exchange,
have operated in the US since 1999 pursuant to
Commission staff no-action relief. CFTC Staff Letter
No. 99–69 (November 12, 1999). Since 2008, ICE
Futures Europe’s no-action relief has been
conditioned on, among other things, the
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ICE’s Henry Financial LD1 Fixed
Price natural gas contract and virtually
all NYMEX energy contracts are
currently subject to exchange-set spotmonth speculative position limits that
are in effect for the last three days of
trading of the respective contracts.
Under an exchange’s speculative
position limit rules, no trader, whether
commercial or noncommercial, may
exceed a specified limit unless the
trader has requested and received an
exemption from the exchange. Outside
of a contract’s spot month, these energy
contracts are subject to exchange allmonths-combined and single-month
position accountability rules. Under an
exchange’s position accountability
rules, once a trader exceeds an
accountability level in terms of
outstanding contracts held, the
exchange has the right to request
supporting justification from the trader
for the size of its position, and may
order a trader to reduce or not increase
its positions further.
As described in detail in section VI of
this release, the Commission is
proposing to impose all-monthscombined, single-month, and spotmonth speculative position limits for
contracts based on a defined set of
energy commodities. Broadly described,
the Commission’s proposal, for nonspot-month positions, would apply
exchange-specific speculative position
limits to a set of economically similar
contracts that settle in the same manner.
In addition, the Commission is
proposing to implement and enforce
aggregate non-spot-month speculative
position limits that would apply across
registered entities that list substantially
similar energy contracts. As discussed
in the Paperwork Reduction Act section
of this notice of proposed rulemaking,
should the proposed regulations be
adopted, the Commission estimates that
the total number of traders with
significant positions that could be
affected by the proposed regulations
would be approximately ten.
Particular data concerning the
distribution of speculative traders in a
market and an analysis of market
conditions and variables, including
open interest, can support a range of
acceptable speculative position limit
requirements. The Commission, in
structuring the speculative position
requirement that the Exchange implement position
limit requirements for its NYMEX-linked contracts
that are comparable to the position limits that
NYMEX applies to its contracts. CFTC Staff Letter
No. 08–09 (June 17, 2008); CFTC Staff Letter No.
08–10 (July 3, 2008). Generally, comparable
position limits for FBOT contracts that link to
CFTC-regulated contracts serve to ensure the
integrity of prices for CFTC-regulated contracts.
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Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules
limit framework as proposed, has
considered its recent and historical
actions in setting position limits, its
continuous oversight of exchange-set
speculative position limit and
accountability rules, its experience in
administering Commission-set
speculative position limits 4 and its
observations of energy commodity
market conditions and developments,
particularly during the past four years.
The Commission notes that the
proposed Federal speculative position
limits on energy contracts would be in
addition to, and not a substitute for, a
reporting market’s existing speculative
position limit and accountability
requirements. Reporting markets,
defined in Commission regulation 15.00
to include DCMs and ECM–SPDCs, are
self-regulatory organizations with an
independent responsibility for adopting
and implementing appropriate position
limit and accountability rules.
This notice of proposed rulemaking
does not propose regulations that would
classify and treat differently passive
long-only positions. The Commission
does, however, in section VIII of this
notice, solicit comment on specific
issues related to large, passive long-only
positions. In particular, the Commission
solicits comments on how to identify
and define such positions and whether
such positions should, including
collectively, be limited in any way.
II. Statutory Background
Speculative position limits have been
identified as an effective regulatory tool
for mitigating the potential for market
disruptions that could result from
uncontrolled speculative trading.
Section 4a(a) of the Act, 7 U.S.C. 6a(a),
which in significant part retains
language that was initially adopted in
1936, provides that:
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
Excessive speculation in any commodity
under contracts of sale of such commodity
for future delivery made on or subject to the
rules of contract markets or derivatives
transaction execution facilities, or on
electronic trading facilities with respect to a
significant price discovery contract causing
sudden or unreasonable fluctuations or
unwarranted changes in the price of such
commodity, is an undue and unnecessary
burden on interstate commerce in such
commodity.
Accordingly, section 4a(a) of the Act
provides the Commission with the
following authority:
For the purpose of diminishing,
eliminating, or preventing such burden, the
Commission shall, from time to time * * *
4 The Commission sets Federal speculative
position limits for certain agricultural commodities
enumerated in section 1a(4) of the Act. See 17 CFR
150.2.
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proclaim and fix such limits on the amounts
of trading which may be done or positions
which may be held by any person under
contracts of sale of such commodity for
future delivery on or subject to the rules of
any contract market or derivatives
transaction execution facility, or on an
electronic trading facility with respect to a
significant price discovery contract, as the
Commission finds are necessary to diminish,
eliminate, or prevent such burden.
Amendments introduced to the Act by
the Futures Trading Act of 1982
supplemented this longstanding
statutory framework for Commission-set
Federal speculative position limits by
explicitly acknowledging the role of the
exchanges in setting their own
speculative position limits.5 The 1982
legislation also gave the Commission,
under section 4a(5) of the Act, the
authority to directly enforce violations
of exchange-set, Commission-approved
speculative position limits in addition
to position limits established directly by
the Commission through orders or
regulations.6 Thus, since 1982, the Act’s
framework explicitly anticipates the
concurrent application of Commission
and exchange-set speculative position
limits. The concurrent application of
limits is particularly consistent with an
exchange’s close knowledge of trading
activity on that facility and the
Commission’s greater capacity for
monitoring trading and implementing
remedial measures across
interconnected commodity futures and
option markets.
The Commodity Futures
Modernization Act of 2000 (‘‘CFMA’’) 7
introduced substantial changes to the
CEA. Broadly described, the CFMA
established a principles-based approach
to regulating the futures markets,
allowed for the implementation of
exchange rules through a certification
process without requiring the exchanges
to obtain prior Commission approval,
and delineated specific designation
criteria and core principles with which
a DCM must comply to receive and
maintain designation. Among these,
Core Principle 5 in section 5(d) of the
Act provides:
Position Limitations or Accountability—To
reduce the potential threat of market
manipulation or congestion, especially
during trading in the delivery month, the
board of trade shall adopt position
limitations or position accountability for
speculators, where necessary and
appropriate.
5 Futures Trading Act of 1982, Pub. L. No. 97–
444, 96 Stat. 2299–30 (1983).
6 Section 4a(5) has since been redesignated as
section 4a(e) of the Act. 7 U.S.C. 4a(e).
7 Commodity Futures Modernization Act of 2000,
Appendix E of Public Law No. 106–554, 114 Stat.
2763 (2000).
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Most recently the CEA was amended
by the CFTC Reauthorization Act of
2008.8 The 2008 legislation amended
the CEA by, among other things, adding
core principles in new section 2(h)(7)
governing SPDCs traded on electronic
trading facilities operating in reliance
on the exemption in section 2(h)(3) of
the Act.9 The 2008 legislation amended
the Act to impose certain self-regulatory
responsibilities on ECM–SPDCs through
core principles, as did the CFMA with
respect to DCMs, including a core
principle that requires such facilities to
‘‘adopt, where necessary and
appropriate, position limitations or
position accountability for speculators
in significant price discovery contracts
* * *’’ 10 The 2008 legislation also
amended section 4a(e) of the Act to
incorporate references to ECM–SPDCs,
thereby assuring that violation of an
ECM–SPDC’s position limits, regardless
of whether such position limits have
been approved by or certified to the
Commission, would constitute a
violation of the Act that the Commission
could independently enforce.
As mentioned above, the CFMA
generally replaced the Act’s exchange
rule approval process with a
certification process. On a practical
level, this shift has tended to reduce the
Commission’s ability to more directly
shape the specific requirements of
exchange-set speculative position limit
and accountability rules through
approving such rules prior to
implementation. In light of this, the
Commission’s broad authority to
independently set position limits under
CEA section 4a(a) could be viewed as an
increasingly important enabling
provision that allows the Commission to
take the initiative in acting, when
appropriate, to bolster market
confidence and curb or prevent
excessive speculation that may cause
sudden, unwarranted, or unreasonable
fluctuations in commodity prices.
III. Federal Speculative Position Limits
A. Historical Background
From the earliest days of federal
regulation of the futures markets,
Congress made it clear that unchecked
speculative positions, even without
intent to manipulate the market, can
cause price disturbances.11 To protect
8 Food, Conservation and Energy Act of 2008,
Public Law No. 110–246, 122 Stat. 1624 (June 18,
2008).
9 7 U.S.C. 2(h)(3)–(7).
10 7 U.S.C. 2(h)(7)(C)(ii)(IV).
11 The Congressional finding that excessive
speculation can have detrimental consequences
even without manipulative intent is consistent with
the series of studies and reports made to Congress
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Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
markets from the adverse consequences
associated with large speculative
positions, Congress expressly
authorized the Commodity Exchange
Commission (‘‘CEC’’) 12 to impose
speculative position limits
prophylactically.13 The Congressional
endorsement of the Commission’s
prophylactic use of position limits
rendered unnecessary a specific finding
that an undue burden on interstate
commerce had actually occurred.
Additionally, Congress closely restricted
exemptions from position limits to bona
fide hedging transactions, initially
defined as sales or purchases of futures
contracts offset by sales or purchases of
the same cash commodity.
In December of 1938, the CEC
promulgated the first Federal
speculative position limits for futures
contracts in grains (then defined as
wheat, corn, oats, barley, flaxseed, grain
sorghums and rye) after finding that
large speculative positions tended to
cause sudden and unreasonable
fluctuations and changes in the price of
grain.14 At that time, the CEC did not
impose limits in the other commodities
enumerated in the 1936 Act.
Over the following years, Federal
position limits were extended to various
other commodities enumerated in the
Act. However, no uniform approach
regarding speculative position limits
was applied to those enumerated
commodities. In some cases (e.g.,
soybeans), a commodity added to the
Act’s list of enumerated commodities
was also added to the roster of
commodities subject to Federal
speculative position limits. In other
cases (e.g., livestock products, butter,
and wool), commodities added to the
list of enumerated commodities in the
Act never became subject to Federal
position limits.
In 1974, Congress overhauled the CEA
to create the CFTC and simultaneously
expanded the new agency’s
jurisdictional scope beyond the
enumerated agricultural commodities to
include futures contracts in any
commodity. In expanding the CFTC’s
urging the adoption of measures to restrict
speculative trading notwithstanding the absence of
‘‘the deliberate purpose of manipulating the
market.’’ See e.g., Fluctuations in Wheat Futures,
69th Cong., 1st Sess., Senate Document No. 135
(June 28, 1926).
12 The CEC is the predecessor of the Commodity
Exchange Authority, which is, in turn, the
predecessor of the Commission.
13 Requiring a specific demonstration of the need
for position limits is contrary to section 4a(a) of the
Act, which provides that the Commission shall set
position limits from time to time, among other
things, to prevent excessive speculation. 7 U.S.C.
4a(a).
14 3 FR 3145 (December 24, 1938).
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jurisdiction, Congress reiterated a
fundamental precept underlying the
Act, namely, to minimize or prevent the
harmful effect of uncontrolled
speculation.15 When the Commission
came into existence in April 1975,
‘‘various contract markets [had]
voluntarily placed speculative position
limits on 23 contracts involving 17
commodities.’’ 16 At that time, ‘‘position
limits were in effect for almost all
actively traded commodities then under
regulation and the limits for positions in
about one half of these actively traded
commodities had been specified by the
contract markets.’’ 17 Initially, the
Commission retained the position limits
enacted by the CEC, as then in effect,
but did not establish position limits for
any additional commodities.18 In the
years immediately following, the
Commission implemented a few
relatively minor changes to position
limit regulations, but undertook no
significant expansion of Federal
speculative position limits.
After the silver futures market crisis
during late 1979 to early 1980,
commonly referred to as ‘‘the Hunt
Brothers silver manipulation,’’ 19 the
Commission concluded that ‘‘[t]he
recent events in silver * * * suggest
that the capacity of any futures market
to absorb large positions in an orderly
manner is not unlimited.’’ 20
Accordingly, in 1981 the Commission
adopted regulation 1.61, which required
all exchanges to adopt and submit for
Commission approval speculative
position limits in active futures markets
for which no exchange or Commission
limits were then in effect.21 Although
regulation 1.61 directed the exchanges
to implement position limit rules, the
pre-CFMA exchange rule approval
15 ‘‘The fundamental purpose of the measure is to
insure fair practice and honest dealing on the
commodity exchanges and to provide a measure of
control over those forms of speculative activity
which too often demoralize the markets to the
injury of producers and consumers and the
exchanges themselves.’’ S. Rep. No. 93–1131, 93rd
Cong., 2d. Sess. (1974).
16 45 FR 79831 (December 2, 1980).
17 Id. at 79832. ‘‘Commodity Exchange Authority
regulations included limits for wheat, corn, oats,
soybeans, cotton, eggs and potatoes. Exchange rules
included limits for live cattle, feeder cattle, live
hogs, frozen pork bellies, soybean oil, soybean
meal, and grain sorghums.’’ (Id. n.1)
18 Pursuant to section 4l of the Commodity
Futures Trading Commission Act of 1974, all
regulations previously adopted by the Commodity
Exchange Authority continued in full force and
effect, to the extent they were not inconsistent with
the Act, as amended, unless or until terminated,
modified or suspended by the Commission. Sec.
205, 88 Stat. 1397 (effective July 18, 1975).
19 See, In re Nelson Bunker Hunt et al., CFTC
Docket No. 85–12.
20 45 FR 79831, at 79833 (December 2, 1980).
21 46 FR 50938 (October 16, 1981).
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process, on a practical level, gave the
Commission the ability to shape the
requirements of exchange-set position
limit rules as measures that guarded
against excessive speculation in
accordance with the purposes and
findings of section 4a(a) of the Act.
The next significant development
occurred in 1986, when the Commission
undertook a comprehensive review of
speculative position limit policies,
including position limit levels. During
the Commission’s 1986 reauthorization,
the CFTC’s Congressional authorizing
committees suggested that this subject
should be addressed. The Report of the
House Agriculture Committee stated:
[T]he Committee believes that, given the
changes in the nature of these markets and
the influx of new market participants over
the last decade, the Commission should
reexamine the current levels of speculative
position limits with a view toward
elimination of unnecessary impediments to
expanded market use.22
Subsequently, the Commission
reviewed its Federal speculative
position limit framework and, in
October 1987, adopted final
amendments that raised some of the
Federal speculative position limits and
revised the general structure of the
Federal speculative position limit
regulations.23 The amendments
introduced in 1987 retained the then
current spot-month and individual
month position limits but increased the
all-months-combined position limits.
The revised limits, which had
historically been set on a generic
commodity basis, established position
limits for each contract ‘‘according to the
individual characteristics of that
contract market,’’ particularly ‘‘the
distribution of speculative position sizes
in recent years and recent levels of open
interest.’’ 24 In response to a petition by
the CBOT, the Commission also
established position limits for CBOT
soybean oil and soybean meal contracts,
which had been subject solely to
exchange-set position limits, to provide
‘‘consistency with all other agricultural
commodities traded at the CBOT.’’ 25
In 1992, the Commission issued
proposed regulations adhering to the
principle that speculative position
limits should be formulaically adjusted
based upon increases in the size of a
contract’s open interest (in addition to
the traditional standard of distribution
of speculative traders in a market).26
22 H.R. Rep. No. 624, 99th Cong., 2d Sess., at 4
(1986).
23 52 FR 38914 (October 20, 1987).
24 Id. at 38917, 38919.
25 Petition for rulemaking of the CBOT, dated July
24, 1986, cited in 52 FR 6814 (March 5, 1987).
26 57 FR 12766 (April 13, 1992).
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The formula was thereafter ‘‘routinely
applied … as a matter of administrative
practice when reviewing proposed
exchange speculative position limits
under Commission [regulation] 1.61.’’ 27
During this same time frame, the
Commission began a process that led to
the adoption of position accountability
rules for contracts that were subject to
exchange-set speculative position limits.
Beginning in 1991, the Commission
approved several exchange rules
establishing position accountability
provisions in lieu of position limits for
certain contracts exhibiting significant
trading volume and open interest, a
highly liquid underlying cash market
and ready opportunities for arbitrage
between the cash and futures markets.28
An exchange’s position accountability
rules, as opposed to position limits that
bar traders from acquiring contracts that
quantitatively exceed a specific number
of outstanding contracts, require
persons holding a certain number of
open contracts to report the nature of
their positions, trading strategy, and
hedging needs to the exchange, upon
the exchange’s request.
In 1999, the Commission simplified
and reorganized its speculative position
limit regulations to consolidate
requirements for both Commission-set
limits and exchange-set limits under
regulation 1.61 in part 150 of the
Commission’s regulations. Regulation
150.5(e), currently, and as initially
adopted in 1999, establishes a ‘‘trader
accountability exemption’’ 29 and
generally codifies the position
accountability conditions that initially
were imposed as a matter of
administrative practice beginning in
1991.30
27 63
FR 38525 (July 17, 1998).
e.g., 56 FR 51687 (October 15, 1991) and
57 FR 29064 (June 30, 1992).
29 64 FR 24038, at 24048 (May 5, 1999).
30 Regulation 150.5(e) provides that, for futures
and option contracts that have been listed for
trading for at least 12 months, an exchange may
submit a position accountability rule, in lieu of a
numerical limit, as follows:
‘‘(1) For futures and option contracts on a
financial instrument or product having an average
open interest of 50,000 contracts and an average
daily trading volume of 100,000 contracts and a
very highly liquid cash market, an exchange bylaw,
regulation or resolution requiring traders to provide
information about their position upon request by
the exchange;
(2) For futures and option contracts on a financial
instrument or product or on an intangible
commodity having an average month-end open
interest of 50,000 and an average daily volume of
25,000 contracts and a highly liquid cash market,
an exchange bylaw, regulation or resolution
requiring traders to provide information about their
position upon request by the exchange and to
consent to halt increasing further a trader’s
positions if so ordered by the exchange;
(3) For futures and option contracts on a tangible
commodity, including but not limited to metals,
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The reorganized rules also included
new regulation 150.5(c), which codified
the Commission’s 1992 formula for
calculating Federal speculative position
limits based upon open interest, and
applied it to exchanges for their use in
calculating the levels of exchangeimposed numerical speculative position
limits.31 The formula provided for
‘‘combined futures and option
speculative position limits for both a
single month and for all-monthscombined at the level of 10 percent of
open interest up to an open interest of
25,000 contracts, with a marginal
increase of 2.5% thereafter.’’ 32 In
initially proposing to use this formula,
the Commission noted that:
[I]ts large trader data indicates that limits
based on open interest as described above
should accommodate the normal course of
speculative positions in agricultural markets.
The levels derived using this method of
analysis generally are consistent with the
largest exchange-set speculative limits
approved by the Commission under Rule
1.61 for contract markets in agricultural
commodities at corresponding levels of open
interest. However, the Commission, based on
its surveillance experience and monitoring of
exchange and Federal speculative position
limits, is satisfied that the levels indicated by
this methodology, although near the outer
bounds of the levels which have been
approved previously, nevertheless will
achieve the prophylactic intent of Section
[4a] of the Act and Commission Rule 1.61,
thereunder [emphasis supplied].33
The Commission also emphasized
that particular data can result in a range
of acceptable speculative position
energy products, or international soft agricultural
products having an average month-end open
interest of 50,000 contracts and an average daily
volume of 5,000 contracts and a liquid cash market,
an exchange bylaw, regulation or resolution
requiring traders to provide information about their
position upon request by the exchange and to
consent to halt increasing further a trader’s
positions if so ordered by the exchange, provided,
however, such contract markets are not exempt from
the requirement of paragraphs (b) or (c) that they
adopt an exchange bylaw, regulation or resolution
setting a spot month speculative position limit with
a level no greater than one quarter of the estimated
spot-month deliverable supply * * *’’ 17 CFR
150.5(e).
Notably, the Commission’s concerns regarding
spot-month limits were eventually mirrored by the
CFMA, which provides in DCM Core Principle 5
(section 5(d)(5) of the Act), that ‘‘[t]o reduce the
potential threat of market manipulation or
congestion, especially during trading in the delivery
month, the board of trade shall adopt position
limitations or position accountability for
speculators, where necessary and appropriate.’’
31 The formulaic approach, initially developed by
Blake Imel, former Acting Director of the Division
of Economic Analysis (the Division has since been
merged into the Division of Market Oversight), was
premised on limiting the concentration of positions
in the hands of one or a few traders by requiring
a minimum number of distinct market participants.
32 64 FR 24038, at 24039 (May 5, 1999).
33 57 FR 12766, at 12771 (April 13, 1992).
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limits, and that based on its experience
overseeing exchange-set speculative
limits and its direct administration of
the Federal limits establishing ‘‘a singlemonth and all-month limits on futures
positions combined with option
positions on a delta-equivalent basis of
no more than ten percent of the
combined markets’ open interest for
contracts with combined open interest
below 25,000’’ was within the range of
acceptable speculative position limits.34
For those markets with combined
average open interest greater than
25,000 contracts, the Commission
proposed a marginal increase of 2.5%
after noting that ‘‘the size of the largest
individual positions in a market do not
continue to grow in proportion with
increases in the overall open interest of
the market.’’35
As noted above, Core Principle 5,
introduced to the Act in 2000 by the
CFMA, requires DCMs to implement
position limits or position
accountability rules for speculators
‘‘where necessary and appropriate.’’ In
2001, the Commission established
Acceptable Practices for complying with
Core Principle 5, set out in Appendix B
to part 38 of the Commission’s
regulations.36 The Acceptable Practices
specifically reference part 150 of the
Commission’s regulations as providing
guidance on how to comply with the
requirements of the Core Principle.37
The CFMA, however, did not change the
treatment of the enumerated agricultural
commodities, which remained subject to
Federal speculative position limits.
In 2005, the Commission increased
the all-months-combined Federal
speculative position limits and reset the
single-month levels to roughly
approximate the existing numerical
relationship between all-monthscombined and single-month levels (i.e.,
arriving at the single-month limits by
setting them at about two-thirds of the
relevant all-months-combined limits),
based generally on the 1992 open
interest formula (as incorporated into
regulation 150.5(e)).38
In 2008, Congress, in response to high
prices and volatility in the energy
markets and concerns regarding
excessive speculation on unregulated
energy exchanges, including ECMs,
adopted the CFTC Reauthorization Act
of 2008 and amended two CEA
provisions aimed at curbing possible
manipulation and excessive speculation
34 Id.
at 12770.
35 Id.
36 17 CFR part 38, Appendix B, Core Principle
5(d)(5).
37 66 FR 42256 (August 10, 2001).
38 70 FR 24705 (May 11, 2005).
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in the energy markets. Specifically, the
2008 legislation amended CEA section
4a(e) to give the CFTC enforcement
authority over position limits certified
by the exchanges and adopted new
section 2(h)(7) to apply a position limit
and position accountability core
principle to ECM–SPDCs.39 Notably, the
legislation also extended the
Commission’s authority to set Federal
speculative position limits, under CEA
section 4a(a), to ECM–SPDCs.
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B. Statutory Basis and Need for Energy
Speculative Position Limits
Energy futures and option contracts
have never been subject to CFTC-set
speculative position limits. These
contracts began to attract significant
trading volumes in the early 1980s
beginning with NYMEX’s New York
Harbor No. 2 heating oil futures
contract,40 followed by NYMEX’s
gasoline futures contract in 1981 and
crude oil futures contract in 1983.
NYMEX did not initially adopt position
limits for heating oil futures contracts.
However, with the adoption of
Commission regulation 1.61, effective
November 16, 1981, each exchange was
required to submit for Commission
approval speculative position limits for
each actively traded futures contract.
Thereafter, newly designated contracts
(e.g., NYMEX’s crude oil futures
contract in 1983) were required to be
accompanied by exchange speculative
position limit rules as a condition of
designation.
As noted above, in 1999 the
Commission reorganized its speculative
position limit regulations to codify its
earlier administrative practice of
allowing exchanges to adopt position
accountability rules in lieu of numerical
position limits for positions outside of
the spot month. Currently, virtually all
of NYMEX’s energy futures and option
contracts and ICE’s single SPDC contract
are subject to exchange-set position
accountability rules during non-spot
months and to hard speculative position
limits during spot months.
From 2007 to mid 2008, commodity
prices generally, and energy prices in
particular, increased significantly and
experienced unusual volatility. As a
result of this, Commission-regulated
energy markets, as well as the over-thecounter (‘‘OTC’’) energy swap markets
over which the Commission has no
direct regulatory authority, were the
subject of numerous Congressional
39 See
7 U.S.C. 2(h)(7)(C)(IV).
contract was designated in October 1974,
but significant volume first developed in 1980.
40 The
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hearings 41 and formal and informal
studies, including a preliminary review
by an Interagency Task Force chaired by
CFTC staff. 42 In the summer of 2009,
the Commission held three days of
hearings ‘‘to discuss energy position
limits and hedge exemptions’’ (‘‘Energy
Hearings’’).43 The Commission heard
from 26 witnesses, including members
of the U.S. House and Senate, swap
dealers, money managers, futures
market participants (including
commercial hedgers), trade associations,
exchanges, and consumer advocates.44
In addition, a total of 5,281 email
comments were received (including
some 1,200 identical emails from a
single commenter).45
As with the Congressional hearings
and market studies, there were mixed
opinions among the Energy Hearing
participants as to the causes of the price
rises and market volatility. With respect
to position limits for energy
commodities, a number of witnesses
expressed concern over the impact on
energy prices of excessive speculation
and supported position limits.46 Others
41 At the hearings, numerous witnesses expressed
concern regarding the impact on energy prices of
speculation on commodity futures markets,
including particularly the price impact of trading by
swap dealers and index funds. Alternatively, many
other witnesses expressed the view that
fundamental market conditions were the primary
driver of prices.
42 The Task Force included staff representatives
from the Departments of Agriculture, Energy and
the Treasury, the Board of Governors of the Federal
Reserve, the Federal Trade Commission, and the
Securities and Exchange Commission. The Task
Force looked at the crude oil market between
January 2003 and June 2008. The staff members of
the various agencies did not find direct causal
evidence for the general increase in oil prices
between January 2003 and June 2008. Interagency
Task Force on Commodity Markets, Interim Report
on Crude Oil (July 22, 2008).
43 Commodity Futures Trading Commission,
‘‘CFTC to Hold Three Open Hearings to Discuss
Energy Position Limits and Hedge Exemptions,’’
CFTC Release 5681–09 (July 21, 2009).
44 See the following Commission Releases for a
listing of agendas and witnesses and related links:
5681–09 (July 21, 2009) https://www.cftc.gov/
newsroom/generalpressreleases/2009/pr568109.html;
5682–09 (July 27, 2009) https://www.cftc.gov/
newsroom/generalpressreleases/2009/pr568209.html;
and 5685–09 (July 31, 2009) https://www.cftc.gov/
newsroom/generalpressreleases/2009/pr568509.html.
45 Persons wishing to review these comments may
contact the Commission’s Secretariat at
secretary@cftc.gov.
46 ‘‘This increase in volatility has been associated
with a massive increase in speculative investment
in oil futures.’’ Ben Hirst, Senior Vice President and
General Counsel for Delta Airlines;
‘‘* * *[S]peculative trading strategies may not
always have a benign effect on the markets.’’ Laura
Campbell, Assistant Manager of Energy Resources,
Memphis Light, Gas & Water, on behalf of The
American Public Gas Association; ‘‘That ability [to
hedge heating fuel costs], however, is now being
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cautioned that such limits could be
ineffective, hurt market liquidity or
distort the price discovery process if not
properly constructed.47
As discussed above, section 4a(a)
represents an explicit Congressional
finding that extreme or abrupt price
fluctuations attributable to unchecked
speculative positions are harmful to the
futures markets and that position limits
can be an effective prophylactic
regulatory tool to diminish, eliminate or
prevent such activity. Accordingly,
Congress charged the Commission with
responsibility for setting contract
position limits in any commodity to
prevent or minimize extreme or abrupt
price movements resulting from large or
concentrated positions. Under the
authority granted to it, the Commission
may impose speculative position limits
without finding an extant undue burden
on interstate commerce resulting from
excessive speculation.48 Section 8a(5) of
the Act also provides that the
Commission may make and promulgate
such rules and regulations that in its
judgment are reasonably necessary to
accomplish any of the purposes of the
Act.
Large concentrated positions in the
energy futures and option markets can
potentially facilitate abrupt price
movements and price distortions. The
prevention of unreasonable and abrupt
price movements that are attributable to
large or concentrated speculative
positions is a congressionally endorsed
regulatory objective. This objective is
furthered by position limits, particularly
given that the capacity of any reporting
market to absorb the establishment and
liquidation of large speculative
undermined by an erratic market, questionable
investment tactics and purely speculative market
forces.’’ Sean Cota, President, Cota & Cota, Inc.
Hearings on Energy Position Limits and Hedge
Exemptions, July 28, July 29 and August 5, 2009,
at the Commodity Futures Trading Commission.
47 ‘‘If [limits] are set too tight, traders who possess
important market information and provide crucial
liquidity are kept away.’’ Todd E. Petzel. Chief
Investment Officer, Offit Capital Advisors; ‘‘Simply
eliminating or limiting swap dealer hedge
exemptions will impair liquidity, have other
unintended consequences and would very likely
not achieve the stated objective.’’ Donald Casturo,
Managing Director, Goldman Sachs & Co.; ‘‘Position
limits no matter how well meaning create real
market migration risk and pushing price discovery
of agricultural, energy or metals markets to overseas
or other trading venues would be contrary to the
purposes of the Act.’’ Mark D. Young, Kirkland &
Ellis LLP. Hearings on Energy Position Limits and
Hedge Exemptions, July 28, July 29 and August 5,
2009, at the Commodity Futures Trading
Commission.
48 Moreover, the exchanges’ independent
responsibility to monitor trading and implement
position limits and position accountability rules
does not detract from or otherwise impair the
Commission’s broad authority to impose
speculative limits.
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positions in an orderly manner is
related to the relative size of such
positions and is not unlimited.
Specifically, when large speculative
positions are amassed in a contract, or
contract month, the potential exists for
unreasonable and abrupt price
movements should the positions be
traded out of or liquidated in a
disorderly manner. Concentration of
large positions in one or a few traders’
accounts can also create the
unwarranted appearance of appreciable
liquidity and market depth. Trading
under such conditions can result in
greater volatility than would otherwise
prevail if traders’ positions were more
evenly distributed among market
participants.
Furthermore, concurrent trading in
economically similar and equivalent
energy futures and option contracts on
multiple exchanges effectively creates a
single but fragmented market for such
contracts. Because individual exchanges
have knowledge of positions only on
their own trading facilities, it is difficult
for them to assess the full impact of a
trader’s positions on the greater market.
As such, monitoring and limiting
positions through exchange-specific
position limits and through the
enforcement of exchange position
accountability rules, though necessary
and beneficial, may not sufficiently
guard against potential market
disruptions.
For these reasons, the Commission is
proposing to establish reporting marketspecific Federal speculative position
limits for futures and option contracts in
certain energy commodities and
aggregate position limits that would
apply across economically similar
contracts, regardless of whether such
contracts are listed on a single or on
multiple reporting markets, to curb the
impact of disruptive excessive
speculation.
IV. Exemptions and Account
Aggregation
The Commission’s current regulatory
framework for Federal speculative
position limits consists of three
elements, (i) the levels of the
Commission-set speculative position
limits (discussed above), (ii) certain
exemptions from the limits (e.g., for
hedging, spreading or arbitraged
positions), and (iii) the policy on
aggregating related accounts for
purposes of applying the limits.
Commission regulation 150.3, headed
‘‘Exemptions,’’ lists certain types of
positions that may be exempted from
(and thus may exceed) the Federal
speculative position limits delineated in
regulation 150.2. In particular, under
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regulation 150.3(a)(1), bona fide hedging
transactions, as defined in Commission
regulation 1.3(z), may exceed
Commission-set position limits.49 The
49 Commission
regulation 1.3(z) provides:
‘‘Bona fide hedging transactions and positions—
(1) General definition. Bona fide hedging
transactions and positions shall mean transactions
or positions in a contract for future delivery on any
contract market, or in a commodity option, where
such transactions or positions normally represent a
substitute for transactions to be made or positions
to be taken at a later time in a physical marketing
channel, and where they are economically
appropriate to the reduction of risks in the conduct
and management of a commercial enterprise, and
where they arise from:
(i) The potential change in the value of assets
which a person owns, produces, manufactures,
processes, or merchandises or anticipates owning,
producing, manufacturing, processing, or
merchandising,
(ii) The potential change in the value of liabilities
which a person owns or anticipates incurring, or
(iii) The potential change in the value of services
which a person provides, purchases, or anticipates
providing or purchasing.
Notwithstanding the foregoing, no transactions or
positions shall be classified as bona fide hedging
unless their purpose is to offset price risks
incidental to commercial cash or spot operations
and such positions are established and liquidated
in an orderly manner in accordance with sound
commercial practices and, for transactions or
positions on contract markets subject to trading and
position limits in effect pursuant to section 4a of
the Act, unless the provisions of paragraphs (z)(2)
and (3) of this section and §§ 1.47 and 1.48 of the
regulations have been satisfied.
(2) Enumerated hedging transactions. The
definitions of bona fide hedging transactions and
positions in paragraph (z)(1) of this section
includes, but is not limited to, the following
specific transactions and positions:
(i) Sales of any commodity for future delivery on
a contract market which do not exceed in quantity:
(A) Ownership or fixed-price purchase of the
same cash commodity by the same person; and
(B) Twelve months’ unsold anticipated
production of the same commodity by the same
person provided that no such position is
maintained in any future during the five last trading
days of that future.
(ii) Purchases of any commodity for future
delivery on a contract market which do not exceed
in quantity:
(A) The fixed-price sale of the same cash
commodity by the same person;
(B) The quantity equivalent of fixed-price sales of
the cash products and by-products of such
commodity by the same person; and
(C) Twelve months’ unfilled anticipated
requirements of the same cash commodity for
processing, manufacturing, or feeding by the same
person, provided that such transactions and
positions in the five last trading days of any one
future do not exceed the person’s unfilled
anticipated requirements of the same cash
commodity for that month and for the next
succeeding month.
(iii) Offsetting sales and purchases for future
delivery on a contract market which do not exceed
in quantity that amount of the same cash
commodity which has been bought and sold by the
same person at unfixed prices basis different
delivery months of the contract market, provided
that no such position is maintained in any future
during the five last trading days of that future.
(iv) Sales and purchases for future delivery
described in paragraphs (z)(2)(i), (ii), and (iii) of this
section may also be offset other than by the same
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4149
first two parts of the bona fide hedging
definition include a general definition
of bona fide hedging (see paragraph
(z)(1)) and a listing of certain
enumerated hedging transactions in the
agricultural commodities that are
currently subject to Federal position
limits (see paragraph (z)(2)). Paragraph
(z)(3) of the definition provides
flexibility to the Commission in granting
exemptions by permitting additional
transactions to be recognized as bona
fide hedging upon a trader’s request,
made in accordance with the
application provisions of Commission
regulation 1.47. Regulation 1.47 requires
a person seeking a bona fide hedge
exemption under regulation 1.3(z)(3) to
provide the Commission with various
information that will, among other
things, ‘‘demonstrate that the purchases
and sales are economically appropriate
to the reduction of risk exposure
attendant to the conduct and
management of a commercial
enterprise.’’ 50
In addition to regulation 150.3(a)(1)’s
bona fide hedging exemption, regulation
150.3(a) includes two other exemptions
from the Federal speculative position
limits. Regulation 150.3(a)(3) exempts
‘‘spread or arbitrage positions between
single months of a futures contract
* * * outside of the spot-month, in the
same crop year * * * .’’ Subject to
various conditions, regulation
150.3(a)(4) exempts positions ‘‘[c]arried
for an eligible entity as defined in
regulation 150.1(d), in the separate
account or accounts of an independent
account controller, as defined in
regulation 150.1(e) * * * .’’ Eligible
entities include mutual funds,
commodity pool operators and
commodity trading advisors. Entities
claiming this exemption are required,
upon call by the Commission, to
provide information supporting their
claim that the account controllers for
quantity of the same cash commodity, provided that
the fluctuations in value of the position for future
delivery are substantially related to the fluctuations
in value of the actual or anticipated cash position,
and provided that the positions in any one future
shall not be maintained during the five last trading
days of that future.
(3) Non-enumerated cases. Upon specific request
made in accordance with § 1.47 of the regulations,
the Commission may recognize transactions and
positions other than those enumerated in paragraph
(z)(2) of this section as bona fide hedging in such
amount and under such terms and conditions as it
may specify in accordance with the provisions of
§ 1.47. Such transactions and positions may
include, but are not limited to, purchases or sales
for future delivery on any contract market by an
agent who does not own or who has not contracted
to sell or purchase the offsetting cash commodity
at a fixed price, provided that the person is
responsible for the merchandising of the cash
position which is being offset.’’ 17 CFR 1.3(z).
50 17 CFR 1.47(b)(2).
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these positions are acting
independently.
Also, in order to achieve the intended
effect of the Federal speculative position
limits, Commission regulation 150.4,
headed ‘‘Aggregation of positions,’’
requires the Commission and the
exchanges to treat multiple accounts
subject to common ownership or control
as if they are held by a single trader.
Such accounts are typically considered
to be under a common ownership if one
or more traders have a 10% or greater
financial interest in the accounts and do
not otherwise qualify for an exemption
from aggregation, such as the
independent account controller
exemption discussed above. The
aggregation standards are applied in a
manner calculated to aggregate related
positions. For example, each participant
with a 10% or greater financial interest
in an account must aggregate the entire
position of that account—not just the
participant’s fractional share—together
with other positions that the participant
may independently hold. Likewise, a
commodity futures or option contract
pool comprised of many traders is
allowed only to hold positions as if it
were a single trader. The Commission
also treats positions that are not
commonly owned, but are traded
pursuant to an express or implied
agreement, as a single aggregated
position for purposes of applying the
Federal speculative position limits.
Exceptions to the aggregation standards
exist for certain pool participants, such
as limited partners and shareholders
that cannot exercise control over the
positions of the pool.
V. Bona Fide Hedge Exemptions
Prior to 1974, the CEA included a
limited statutory hedging definition that
applied only to agricultural
commodities. When the Commission
was created in 1974, the Act’s definition
of commodity was expanded. At that
time, Congress was concerned that the
limited hedging definition, even if
applied to newly regulated commodity
futures, would fail to accommodate the
commercial risk management needs of
market participants that could emerge
over time. Accordingly, Congress, in
section 404 of the Commodity Futures
Trading Commission Act of 1974,
repealed the statutory definition and
gave the Commission the authority to
define bona fide hedging.
The Commission exercised this
authority in 1977 by adopting
regulations 1.3(z) and 1.47.51 Those
regulations have remained unchanged
since 1977. By the mid 1980s, new
51 42
FR 42748 (August 24, 1977).
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concerns had emerged. Under the
Commission’s definition, bona fide
hedge transactions ‘‘normally represent
a substitute for transactions to be made
or positions to be taken at a later time
in a physical marketing channel,’’ and
are ‘‘economically appropriate to the
reduction of risks in the conduct of a
commercial enterprise.’’ 52 This aspect of
the hedging definition proved to be ill
fitted to the economic realities of
financial futures. Portfolio managers
utilize the financial futures markets to
add incremental income to managed
assets, to manage overall risk, or to
rebalance a portfolio. Indeed, futures
market positions are often acquired
entirely as an alternative to cash market
transactions (in view of the lower
transaction costs, speed, and minimal
price impact), rather than as a
temporary substitute for positions that
will later be taken in the underlying
cash market.
In 1986, in response to concerns
raised in testimony regarding the
constraints on investment decisions
imposed by position limits, the House
Committee on Agriculture, in its report
accompanying the Commission’s 1986
reauthorization legislation, instructed
the Commission to reexamine its
approach to speculative position limits
and its definition of hedging.53
Specifically, the Committee Report
‘‘strongly urge[d] the Commission to
undertake a review of its hedging
definition * * * and to consider giving
certain concepts, uses, and strategies
‘non-speculative’ treatment * * *
whether under the hedging definition
or, if appropriate, as a separate category
similar to the treatment given certain
spread, straddle or arbitrage positions
* * *’’ 54 The Committee Report singled
out four categories of trading and
positions that the Commission should
recognize as non-speculative: (i) ‘‘Risk
management’’ trading by portfolio
managers as an alternative to the
concept of ‘‘risk reduction;’’ (ii) futures
positions taken as alternatives to, rather
than as temporary substitutes for, cash
market positions; (iii) other positions
acquired to implement strategies
involving the use of financial futures
including, but not limited to, asset
allocation (altering portfolio exposure in
certain areas such as equity and debt),
portfolio immunization (curing
mismatches between the duration and
sensitivity assets and liabilities to
ensure that portfolio assets will be
52 17
CFR 1.3(z)(1).
Committee on Agriculture, Futures
Trading Act of 1986, H.R. Rep. No. 624, 99th Cong.,
2d Sess. 44–46 (1986).
54 Id. at 46.
53 House
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sufficient to fund the payment of
liabilities), and portfolio duration
(altering the average maturity of a
portfolio’s assets); and (iv) certain
options trading, in particular the writing
of covered puts and calls.55
The Senate Committee on Agriculture,
Nutrition and Forestry, in its report on
the 1986 CFTC reauthorization
legislation, also directed the
Commission to reassess its
interpretation of bona fide hedging.56
The Commission heeded Congress’s
recommendation, and its staff issued
interpretive statements directing that
risk management exemptions be
included as speculative position limit
exemptions in addition to the existing
exemptions for hedging, arbitrage and
spreading.57 The interpretive statements
recognized new types of ‘‘risk reducing’’
and ‘‘risk shifting’’ strategies in financial
futures (including ‘‘dynamic asset
allocation strategies’’) as falling within
the bona fide hedging category.
The next significant change in trading
patterns and practices in derivatives
markets involved an influx of new
traders into the market seeking exposure
to commodities as an asset class through
passive, long-term investment in
commodity indexes as a way of
diversifying portfolios that might
otherwise be limited to equities and
debt instruments.58 New market
participants included commodity index
traders (including pension and
endowment funds, as well as individual
investors participating in commodity
index-based funds or trading programs)
and swap dealers seeking to hedge price
risk from OTC trading activity
(frequently opposite those same
commodity index traders).
The development of the OTC swaps
industry, over which the Commission
generally has no regulatory authority, is
related to the exchange-traded futures
and options industry in that a swap
agreement 59 can either compete with or
55 Id.
56 Senate Committee on Agriculture, Nutrition
and Forestry, Futures Trading Act of 1986, S. Rep.
No. 291, 99th Cong., 2d Sess. at 21–22 (1986).
Specifically, the Senate Committee directed the
Commission to consider ‘‘whether the concept of
prudent risk management [should] be incorporated
in the general definition of hedging as an alternative
to this risk reduction standard.’’ Id., at 22.
57 See, Clarification of Certain Aspect of the
Hedging Definition, 52 FR 27195 (July 20, 1987);
Risk Management Exemptions from Speculative
Position Limits Approved under Commission
Regulation 1.61, 52 FR 34633 (September 14, 1987).
58 The argument has also been made that
commodities act as a general hedge of liability
obligations that are linked to inflation.
59 A swap agreement is typically a privately
negotiated exchange of one asset or cash flow for
another asset or cash flow. In a commodity swap,
at least one of the assets or cash flows is related to
the price of one or more commodities.
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complement regulated commodity
futures and options trading.60 Market
participants often enter into OTC swap
agreements because, unlike more
standardized futures contracts, they can
be customized to match particular
hedging or price exposure needs. Swap
dealers, often affiliated with a bank or
other large financial institution, act as
swap counterparties to both commercial
firms seeking to hedge price risks and
speculators seeking to gain price
exposure. Swap dealers, in turn, utilize
the more standardized futures markets
to manage the residual risk of their
swaps book.61 In addition, some swap
dealers also deal directly in the
merchandising of physical commodities.
In accordance with the abovediscussed Congressional
recommendations, market
developments, and the Commission’s
recognition of a risk management
exemption for financial futures,
beginning in 1991, the Commission staff
extended the concept of risk
management exemptions from
speculative position limits by granting
bona fide hedge exemptions, in various
agricultural futures markets subject to
Federal speculative position limits, to a
number of swap dealers who were
seeking to manage price risks on their
books arising from swap dealing
activities. The first such hedge
exemption involved J. Aron, a large
commodity merchandising firm that
engaged in commodity related swaps as
a part of a commercial line of business.
The firm, through an affiliate, wished to
enter into an OTC swap transaction with
a qualified counterparty (a large pension
fund) involving an index based on the
returns afforded by investments in
exchange-traded futures contracts on
certain non-financial commodities
meeting specified criteria.62 The
commodities making up the index
included contracts in certain
agricultural commodities subject to
Federal speculative position limits. As a
result of the swap, J. Aron would have,
in effect, been going short the index. In
order to protect itself against this risk,
the firm planned to establish a portfolio
60 The bilateral contracts that swap dealers create
can vary widely, from terms tailored to meet the
needs of a specific customer, to relatively
standardized contracts.
61 Because swap agreements can be highly
customized, and the liquidity for a particular swap
contract can be low, swap dealers may also use
other swap agreements and physical market
positions, in addition to futures, to offset the
residual risks of their swap book.
62 The commodities comprising such indexes may
include the agricultural commodities subject to
Federal speculative position limits, as well as
energy commodities, metals and world agricultural
commodities (e.g., coffee, sugar, and cocoa).
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of long futures positions in the
commodities making up the index, in
such amounts as would replicate its
exposure under the swap transaction.
By design, the index did not include
contract months that had entered the
delivery period and J. Aron, in
replicating the index, stated that it
would not maintain futures positions
based on index-related swap activity
into the spot month (when physical
commodity markets are most vulnerable
to manipulation and attendant price
fluctuations). With this risk mitigation
strategy, the firm’s composite return on
its futures portfolio would have offset
the net payments that the dealer would
have been required to make to the
pension fund counterparty.
The futures positions J. Aron required
to cover its exposure on the swap
agreement’s agricultural component
would have been in excess of certain
Federal speculative position limits.
Accordingly, the firm requested, and the
staff granted, a hedge exemption for
those futures positions, that offset risks
directly related to the OTC swap
transaction.
Subsequently, the Commission staff
granted a number of similar hedge
exemptions, pursuant to delegated
authority, in other cases where the
futures positions clearly offset risks
related to swap agreements or similar
OTC positions involving both
individual commodities and commodity
indexes. These non-traditional ‘‘hedges’’
were all subject to specific limitations to
protect the marketplace from potential
ill effects. The limitations required: (i)
The futures positions to offset specific
price risk; (ii) the dollar value of the
futures positions to be no greater than
the dollar value of the underlying risk;
and (iii) the futures positions to not be
carried into the spot-month.63
In 2006, Commission staff issued two
no-action letters involving another type
of index-based trading.64 Both cases
involved trading that offered investors
the opportunity to participate in a
broadly-diversified commodity indexbased fund or program (‘‘index fund’’).
The futures positions of these index
funds differed from the futures positions
taken by the swap dealers who had
earlier received exemptions. The swap
dealer positions were taken to offset
OTC swaps exposure that was directly
linked to the price of an index. For that
reason, Commission staff granted hedge
exemptions to those swap dealer
positions. On the other hand, in the
index fund positions described in the
63 72
FR 66097, at 66099 (November 27, 2007).
Letter 06–09 (April 19, 2006); CFTC
Letter 06–19 (September 6, 2006).
64 CFTC
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4151
no-action letters, the price exposure
resulted from a promise or obligation to
track an index, rather than from holding
an OTC swap position whose value was
directly linked to the price of an index.
Commission staff believed that this
difference was significant enough that
the index fund positions would not
qualify for a hedge exemption.
Nevertheless, because the index fund
positions represented a legitimate and
potentially useful investment strategy,
Commission staff granted the index
funds no-action relief, subject to certain
conditions intended to protect the
futures markets from potential ill
effects. These conditions required: (i)
The positions to be passively managed;
(ii) the positions to be unleveraged (so
that financial conditions should not
trigger rapid liquidations); and (iii) the
positions to not be carried into the
delivery month.
Prompted by concerns regarding the
growing market presence of swap
dealers and commodity index traders
who use futures markets to manage risks
related to OTC trading activity, in June
and July of 2008, CFTC staff issued a
special call for information from swap
dealers and index traders. Based upon
information collected from its special
call, the Commission published on
September 11, 2008, a ‘‘Staff Report on
Commodity Swap Dealers and Index
Traders with Commission
Recommendations’’ (the ‘‘September
2008 Report’’). Most relevant to the
Commission’s proposed rulemaking is
the Report’s recommendation that the
Commission consider the elimination of
bona fide hedge exemptions for swap
dealers and the creation of a new,
limited risk management exemption for
the activities of swap dealers and
commodity index traders.65
65 The Report also made a number of other
recommendations for Commission action,
including: (1) Removing swap dealers from the
commercial category in the Commitments of
Traders Reports (‘‘COT Reports’’) and creating a new
swap dealer classification for reporting purposes;
(2) Developing and publishing a new periodic
supplemental report based on OTC swap dealer
activity; (3) Creating a new CFTC Office of Data
Collection dedicated to the collection and
publication of COT Report data; (4) Establishing
more detailed reporting standards for large traders;
and (5) Conducting a review of swap dealers’
futures trading activity to ensure that it is
sufficiently independent of any affiliated
commodity research. The Commission has largely
addressed the Report’s recommendations regarding
COT Reports. The Commission has been publishing
a new Disaggregated COT Report (‘‘DCOT Report’’)
for twenty-two different physical commodity
markets since September 4, 2009 and expanded the
DCOT Report to the remaining physical markets on
December 4, 2009. The Commission also began
publishing on September 4, 2009 a new quarterly
report of Index Investment Data which shows for
swap dealers and index funds their index
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WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
In March of 2009, the Commission
published a ‘‘Concept Release on
Whether to Eliminate the Bona Fide
Hedge Exemption for Certain Swap
Dealers and Create a New Limited Risk
Management Exemption from
Speculative Position Limits.’’66 The
concept release reviewed the underlying
statutory and regulatory background, as
well as relevant regulatory history and
marketplace developments, and posed a
number of questions designed to help
inform the Commission’s decision as to:
(i) Whether to proceed with the
recommendation to eliminate the bona
fide hedge exemption for swap dealers
and replace it with a conditional limited
risk management exemption; and (ii) if
so, what form the new limited risk
management exemptive regulations
should take and how they might be
implemented most effectively.
In response, the Commission received
letters from 30 commenters, including
futures exchanges, agricultural trade
associations, financial industry trade
associations, money management firms
(including swap dealers), other market
participants and various other interested
parties. The comments were about
equally divided between those who
favored eliminating the bona fide hedge
exemption for swap dealers (or
restricting the exemption to positions
offsetting swap dealers’ exposure to
traditional commercial market users)
and those who favored retaining the
swap dealer hedge exemption in its
current form, or some variation
thereof.67 Similar views on hedge
exemptions were also expressed at the
Commission’s Energy Hearings in July
and August 2009.68 As discussed below,
the proposed regulations would not
recognize futures and option
transactions offsetting exposure
acquired pursuant to swap dealing
activity as bona fide hedges.
Accordingly, swap dealers would not be
allowed to seek bona fide hedge
investments in commodity markets in terms of
notional values and equivalent futures positions.
The Commission continues to study the viability of
the September 2008 Report’s other
recommendations regarding the creation of an
Office of Data Collection, the establishment of more
detailed reporting standards for large traders and a
review of the relation of swap dealers’ futures
trading and commodity research activities.
September 2008 Report, at 6.
66 74 FR 12282 (March 24, 2009).
67 The comments are available for review on the
Commission’s Web site at https://www.cftc.gov/
lawandregulation/federalregister/federal
registercomments/2009/09–004.html.
68 Also in August 2009, Commission staff
withdrew CFTC Letters 06–09 and 06–19, which
had granted staff no-action relief to two index funds
(with passively managed positions) from complying
with the Federal speculative position limits
otherwise applicable to futures and option contracts
in wheat, corn and soybeans.
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14:28 Jan 25, 2010
Jkt 220001
exemptions for such positions. Instead,
however, upon compliance with several
conditions including reporting and
disclosure obligations, the proposed
regulations would allow swap dealers to
seek a limited exemption from the
proposed speculative position limits for
the major energy contracts.
VI. The Proposed Regulations
A. Overview
The proposed regulations seek to
implement an integrated speculative
position limit framework for exchange
listed natural gas, crude oil, heating oil,
and gasoline futures and option
contracts. In addition to identifying the
affected energy contracts with
particularity, the proposed regulations
would establish aggregate and exchangespecific speculative position limits,
including provisions relating to
exemptions from the proposed limits
and related application and reporting
requirements. The proposed regulations
provide position limit exemptions for
bona fide hedging transactions, certain
swap dealer risk management
transactions, and positions that remain,
in their totality, in compliance with the
applicable limits once option contracts
that comprise a portion of a trader’s
overall position are delta-adjusted by a
demonstrably appropriate risk factor.
The proposed regulations key the setting
of position limits to deliverable supplies
and open interest. In addition, they seek
to apply position limits to a set of
readily identifiable contracts. By doing
so, the proposed regulations intend to
establish an objective and administerial
process for fixing specific position
limits and identifying the contracts to
which they apply without relying on the
Commission’s exercise of discretion.
As discussed in detail below, the
proposed spot-month limits generally
are a function of the estimated
deliverable supply for physically-settled
contracts. The logic behind limiting
positions based on deliverable supply is
readily apparent since, for example,
traders with sufficiently large positions
can squeeze shorts and thereby distort
the price of the deliverable commodity.
In contrast, the proposed (non-spot)
single-month and all-months-combined
position limits would limit positions to
a specific percentage of overall trading
activity as represented by open interest.
As such, the link between open interest
and the proposed non-spot-month
position limits may not be as readily
apparent as the link between spotmonth limits and estimated deliverable
supply.
To illustrate how a formula based on
open interest would restrict the ability
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of any single trader to disrupt market
operations through the acquisition and
liquidation of large speculative
positions, it may be helpful to consider
a framework in which there are no
exemptions from position limits and
there exists a single contract with an
open interest level of 1,000 contracts.
With these simplifications in place, a
position limit that is set at 10% of open
interest, given an assumed open interest
level of 1,000 contracts, would be 100
contracts (i.e., 10% of 1,000 contracts).
Thus, the position limit, at the assumed
open interest level of 1,000 contracts,
would mean that there must, at a
minimum, be 10 independent long and
10 independent short traders.69 If there
were 9 traders on either side of the
market, then at least one trader would
necessarily hold more than 100
contracts. That trader would hold such
positions in violation of the contract’s
position limit.
Alternatively, if the position limit is
set at a lower percentage of the
contract’s assumed open interest level of
1,000 contracts, then the minimum
number of independent traders needed
as market participants would be higher.
For example, a position limit that is set
at 2.5% of the assumed open interest
level of 1,000 contracts would be 25
contracts (i.e., 2.5% of 1,000 contracts).
Accordingly, the minimum ‘‘size of the
trading crowd’’ under this scenario
would be 40 long and 40 short traders
(40 traders each with 25 contract
positions would equal the given open
interest level of 1,000 contracts).
Therefore, position limits that are
formulaically set as a percentage of open
interest can prevent any single trader
from acquiring excessive market power
if structured properly as one part of a
comprehensive speculative position
limit framework.
B. Identifying Referenced Energy
Contracts
As proposed, the speculative position
limits would apply only to referenced
energy contracts. Proposed regulation
151.1 defines referenced energy
contracts to mean one of four
enumerated contracts—the NYMEX
Henry Hub natural gas contract, the
NYMEX Light Sweet crude oil contract,
the NYMEX New York Harbor No. 2
heating oil contract, and the NYMEX
New York Harbor gasoline blendstock
(RBOB) contract—and in addition, any
other contract that is exclusively or
partially based on the referenced
69 The concept of independence is important
because the positions of a group of traders acting
pursuant to a common plan would be aggregated as
if the positions were traded by a single person.
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contracts’ commodities and deliverable
at locations specified in the proposed
regulations. Basis contracts and
diversified commodity index futures
that are based on such contracts’
commodities, however, would not be
considered to be referenced energy
contracts and, therefore, would not be
subject to the proposed speculative
position limits.
Basis contracts, as defined in
proposed regulation 151.1, are futures or
option contracts that are cash settled
based on the difference in price of the
same commodity (or substantially the
same commodity)70 at different delivery
points. These basis contracts have been
excluded by the Commission from the
speculative position limits because they
price the difference between the same
commodity in two different locations
and not the underlying commodity
itself.71 Similarly, contracts based on
diversified commodity indexes, defined
in proposed regulation 151.1 as
commodity indexes that are comprised
of contracts in energy as well as nonenergy commodities, are excluded
because they may not involve a separate
and distinct exposure to the price of a
referenced energy contract’s
commodity.72
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
C. Determining Aggregate All-MonthsCombined and Single-Month Position
Limits
The current Federal speculative
position limits of regulation 150.2 apply
only to specific futures contracts (and
on a futures-equivalent basis) specific
option contracts. Historically, all trading
volume in a specific contract tended to
migrate to a single contract on a single
exchange. Consequently, speculative
position limits that applied to a single
contract and options thereon effectively
applied to a single market. The current
speculative position limits of regulation
150.2 for certain agricultural contracts
follow this approach.
In 2005, when the Commission last
amended the agricultural speculative
position limits of regulation 150.2, it
70 A commodity may be considered ‘‘substantially
the same,’’ for instance, if it is of the same grade
and quality. If a commodity meets an underlying
referenced energy contract’s deliverable grade and
quality specifications, then such commodity
presumptively is substantially similar.
71 It should also be noted that, although a grade
may be substantially similar to a referenced energy
contract’s commodity, this is not sufficient to
render a futures or option contract a referenced
energy contract. In order to be included as a
referenced energy contract, a substantially similar
commodity must also be deliverable at a referenced
energy contract’s delivery point(s).
72 Examples of diversified commodity indexes
include the S&P/Goldman Sachs Commodity Index,
the Thomson Reuters/Jefferies CRB Index and the
Dow Jones-UBS Commodity Index.
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14:28 Jan 25, 2010
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codified the Commission’s practice of
grouping positions in a limited set of
contracts on the same exchange with
substantially identical terms for the
purpose of applying the Federal
agricultural speculative position
limits.73 This limited grouping of
positions extended only to regular and
mini-sized contracts on the same
exchange, such as the CBOT Corn and
Mini-Corn futures contracts, and did not
extend to contracts that were cash
settled to physically delivered contracts.
At that time and subsequently in 2007
(in a notice of proposed rulemaking that
was subsequently withdrawn), the
Commission considered but refrained
from adopting additional position
grouping requirements for the
agricultural contracts enumerated in
regulation 150.2.74
With the advent of look-alike energy
contracts that are listed on different
registered entities and contracts that are
based on other contracts in an attempt
to isolate different energy price risks,
most prominently contracts traded at
NYMEX and ICE, applying a speculative
position to a specific energy contract,
and its smaller sized counterpart, if any,
without consideration of other directly
or highly related contracts could result
in applying a position limit only to a
very limited segment of a broader
regulated market. Accordingly, the
proposed regulations would, for
positions outside the spot month, apply
the proposed Federal speculative
position limits aggregately on and across
reporting markets to capture a broader
segment of the open interest that
comprises the market for the referenced
energy contracts.
Proposed regulation 151.2(b)(1) would
establish aggregate all-months-combined
and single-month speculative limits for
positions held outside the spot month.
The proposed framework premises its
limits on open interest levels, and
would establish speculative position
limits aggregately, that is, across
contracts of different classes on a single
exchange and across all reporting
markets listing the same referenced
energy contracts. As defined in
proposed regulation 151.1, contracts of
the same class outside of the spot month
include all referenced energy contracts
(including option contracts on a futuresequivalent basis) on a single reporting
market that are based on the same
commodity and settled in the same
manner. As proposed, NYMEX’s crude
oil financial calendar spread option, last
day financial futures and options
73 70
FR 24705 (May 11, 2005).
70 FR 12621 (March 15, 2005); 72 FR
65483 (November 21, 2007).
74 See,
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4153
thereon, and light sweet crude oil emini contracts, as cash-settled NYMEX
contracts, would all be grouped together
as contracts of the same class. NYMEX’s
physically-settled light sweet crude oil
contract, however, would be in a
different class because the contract is
physically-settled as opposed to being a
financial futures contract like the
contracts listed above. Similarly, ICE’s
natural gas SPDC, although financiallysettled and related to NYMEX’s natural
gas contracts, would be in a different
class because it is on a different
exchange. As discussed more fully
below, categorizing the referenced
energy contracts in this manner allows
for the application of aggregate and
class-specific speculative position limits
and permits for the netting of positions
as appropriate.
In fixing aggregate all-monthscombined and single-month position
limits across contract classes, that is, for
related contracts of different classes on
and across the exchanges, the
Commission would initially identify the
referenced energy contracts that are
based on the same commodity but that
constitute a distinct class of contracts
because, for example, they are cashsettled as opposed to physically-settled,
or because they are listed on different
reporting markets. The Commission
next would calculate each class’s
average combined futures and deltaadjusted option month-end open
interest for all months listed on a
reporting market during the most recent
calendar year as the first reference point
(‘‘class single-exchange gross open
interest value’’).
The proposed regulations would
subtract the open interest generated
from spread contracts, as defined in
regulation 151.1, from the class singleexchange gross open interest value to
arrive at a ‘‘class single-exchange final
open interest value.’’ Proposed
regulation 151.1 would define spread
contracts as either a calendar spread
contract or an inter-commodity spread
contract.75 Open interest generated from
75 More specifically, proposed regulation 151.1
defines ‘‘calendar spread contracts’’ as contracts that
are settled based on the difference between the
settlement prices in one expiring month of a
referenced energy contract and another month’s
settlement price for the same referenced energy
contract. The proposed regulations would define
‘‘inter-commodity spread’’ contracts as contracts
that are based on the price difference between the
settlement price of a referenced energy contract and
another commodity contract. An example of a
calendar spread contract is the NYMEX Crude Oil
Calendar Spread Financially Settled Option
Contract (WA). This contract represents an option
to assume positions in two different NYMEX Light
Sweet crude oil futures contracts distinguished by
opposite positions in different delivery months. An
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spread contracts, as defined in proposed
regulation 151.1, is not included in the
class single-exchange final open interest
value because spread contracts may be
indicative of nominal commodity price
exposures. Traders on both sides of
spread contracts, as defined by the
proposed regulations, hold a single
position composed of two highly
correlated legs. Therefore, open interest
from such contracts may be excluded
from the base open interest value that is
used to calculate speculative position
limits. Although excluded from the
class single-exchange final open interest
value that, as discussed below, is used
to set the aggregate all-monthscombined and single-month position
limits, such contracts, unlike basis
contracts and contracts based on
diversified commodity indexes, are
nonetheless referenced energy contracts
and therefore are attributable to traders
for the purposes of determining a
trader’s compliance with, for example,
the proposed single-month speculative
position limits.
The following table lists the contracts,
grouped by class, which would be used
to determine a class’s single-exchange
final open interest value as described
above:
CONTRACT LIST WITHOUT SPREAD CONTRACTS
Individual
month
conversion
factor relative
to referenced
energy contract
All months
combined conversion factor
relative to referenced energy contract
Class of contract
Contract name
Contract
code
Spot-month
conversion
factor relative
to referenced
energy
contract
Crude Oil/Physical Delivery/NYMEX ....
Light Sweet Crude Oil Futures .............
Light Sweet Crude Oil Option ..............
Crude Oil Financial Futures .................
Crude Oil Last Day Financial Futures ..
Crude Oil Option on Calendar Strip .....
Crude Oil Option on Quarterly Futures
Strip.
Daily Crude Oil Option .........................
E-mini Crude Oil Futures .....................
NYMEX Crude Oil Backwardation/
Contango (B/C) Index.
NYMEX Crude Oil MACI Index ............
NYMEX Crude Oil Minute-Marker Calendar Month Swap Futures.
NYMEX Crude Oil Minute-Marker Futures.
WTI Average Price Option ...................
WTI Calendar Swap Futures ................
WTI Look-Alike Option .........................
RBOB Gasoline Futures .......................
RBOB Gasoline Option ........................
E-mini RBOB Gasoline Futures ...........
NYMEX RBOB Gasoline Minute-Marker Calendar Month Swap Futures.
NYMEX RBOB Gasoline Minute-Marker Futures.
RBOB Gasoline Average Price Option
RBOB Gasoline BALMO Swap Futures
RBOB Gasoline Calendar Swap Futures.
RBOB Gasoline Financial Futures .......
RBOB Gasoline Last Day Financial Futures.
RBOB Gasoline Look-Alike European
Option.
Heating Oil Option ................................
New York Harbor No. 2 Heating Oil
Futures.
E-mini Heating Oil Futures ...................
Heating Oil Average Price Option ........
Heating Oil BALMO Swap Futures ......
Heating Oil Calendar Swap Futures ....
Heating Oil Financial Futures ...............
Heating Oil Last Day Financial Futures
Heating Oil Look-Alike Option ..............
NYMEX Heating Oil Minute-Marker
Calendar Month Swap Futures.
CL ..........
LO .........
WS ........
26 ..........
6F ..........
6E ..........
1
0
1
1
0
0
1
1
1
1
1
1
1
1
1
1
12
3
CD .........
QM ........
XK .........
12
0
⁄
0
12
1
⁄
1⁄5
12
XC .........
4T ..........
0
1
15
⁄
1
15
6C ..........
1
1
1
AO .........
CS .........
LC ..........
RB .........
OB .........
QU .........
5T ..........
0
1
0
1
0
1⁄2
1
1
1
1
1
1
1⁄2
1
1
1
1
1
1
1⁄2
1
6R ..........
1
1
1
RA .........
1D ..........
RL ..........
1
1
1
1
1
1
1
1
1
RT .........
27 ..........
1
1
1
1
1
1
RF .........
0
1
1
OH .........
HO .........
0
1
1
1
1
1
QH .........
AT ..........
1G .........
MP .........
BH .........
23 ..........
LB ..........
7T ..........
12
⁄
1
1
1
1
1
0
1
12
⁄
1
1
1
1
1
1
1
12
Crude Oil/Cash-Settled/NYMEX ...........
Gasoline/Physical Delivery/NYMEX ......
Gasoline/Cash-Settled/NYMEX ............
Heating Oil/Physical Delivery/NYMEX ..
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
Heating Oil/Cash-Settled/NYMEX .........
example of an inter-commodity spread representing
the price difference between two referenced
commodities would be the NYMEX heating oil
crack spread swap futures (HK) contract, which
represents the price difference between two
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14:28 Jan 25, 2010
Jkt 220001
referenced energy contracts, the NYMEX New York
Harbor No. 2 heating oil futures settlement price
minus the NYMEX Light Sweet crude oil futures
settlement price. A different example of an intercommodity spread would be the NYMEX Mars
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1
⁄
1⁄5
⁄
1
⁄
1
1
1
1
1
1
1
(Argus) vs. WTI spread calendar swap (YX) which
represents the Mars midpoint price from Argus
Media minus the NYMEX Light Sweet crude oil
futures first nearby contract month settlement price.
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CONTRACT LIST WITHOUT SPREAD CONTRACTS—Continued
Natural Gas/Physical Delivery/NYMEX
Natural Gas/Cash-Settled/NYMEX .......
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
Natural Gas/Cash-Settled/ICE ..............
Contract
code
NYMEX Heating Oil Minute-Marker Futures.
Henry Hub Natural Gas Futures ..........
Henry Hub Natural Gas Option ............
Daily Natural Gas Option .....................
E-mini Henry Hub Natural Gas Penultimate Financial Futures.
E-mini Natural Gas Futures .................
Henry Hub Natural Gas Last Day Financial Futures.
Henry Hub Natural Gas Last Day Financial Option.
Henry Hub Natural Gas Look-Alike Option.
Henry Hub Natural Gas Penultimate
Financial Futures.
Henry Hub Natural Gas Swap Futures
Natural Gas Option on Calendar Futures Strip.
Natural Gas Option on Summer Futures Strip.
Natural Gas Option on Winter Futures
Strip.
Henry Hub Natural Gas Swap .............
6H ..........
1
1
1
.........
.........
.........
.........
1
1
0
1⁄4
1
1
1
1⁄4
1
1
1
1⁄4
QG .........
HH .........
14
⁄
1
14
⁄
1
14
E7 ..........
1
1
1
LN ..........
1
1
1
HP .........
1
1
1
NN .........
6J ..........
14
⁄
0
14
⁄
⁄
14
4D ..........
0
14
⁄
13⁄4
6I ...........
0
14
⁄
11⁄4
H ............
14
⁄
14
⁄
14
Once a class single-exchange final
open interest value is determined, under
the proposed regulations, the
Commission would sum this value for
all related classes on and across all
reporting markets to arrive at an
‘‘aggregated market open interest value’’
as a third reference point for each of the
four referenced energy contracts. The
proposed regulations would establish an
all-months-combined aggregate position
limit that is fixed by the Commission at
10% of the aggregated open interest
value discussed above, up to 25,000
contracts, with a marginal increase of
2.5% thereafter.76 This proposed
formula is similar to the formula
provided in current regulation 150.5(c).
The proposed regulations would set
the single-month aggregate position
limit at two-thirds of the position limit
fixed for the all-months-combined
aggregate position limit. This means that
the aggregate all-months-combined
position limit level would be 150% of
the aggregate single-month position
limit level. As previously discussed, in
2005 the Commission increased the allmonths-combined Federal speculative
position limits and reset the singlemonth levels to approximate the then
76 Proposed regulation 151.2(e)(3) provides that
the result of the formula is rounded up to the
nearest one hundred to calculate the level of the
limit.
14:28 Jan 25, 2010
All months
combined conversion factor
relative to referenced energy contract
Contract name
Class of contract
VerDate Nov<24>2008
Individual
month
conversion
factor relative
to referenced
energy contract
Spot-month
conversion
factor relative
to referenced
energy
contract
Jkt 220001
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ON
KD
NP
existing ratio between all-monthscombined and single-month levels (i.e.,
arriving at the single-month limits by
setting them at about two-thirds of the
relevant all-months-combined limits).
The proposed regulation’s reliance on
this approach for determining single
non-spot-month limits is therefore
consistent with prior Commission
determinations.
As proposed, the intent of the
aggregate position limits is to permit for
the netting of positions in a referenced
energy contract’s different classes on a
single exchange and across the
exchanges for the purpose of
determining compliance with the
aggregate all-months-combined and
aggregate single-month speculative
position limits. Accordingly, no trader
would be permitted to hold net long or
net short referenced energy contract
positions that, when combined with net
long or net short positions in the same
referenced energy contract on another
exchange, would exceed the aggregate
all-months-combined and aggregate
single-month speculative position
limits.
D. Single-Exchange Limits
In order to prevent the excessive
concentration of positions in a
particular class of contracts, for each
reporting market separately, the
proposed regulations would also
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14
⁄
1
⁄
3
⁄
establish an all-months-combined
position limit that would apply
specifically to contracts of the same
class at the lower of the aggregate
position limit for a referenced energy
contract or 30% of a class’s single
exchange final open interest value.
Accordingly, for the purpose of
applying these exchange and classspecific speculative position limits,
netting would only be permitted
between contracts of the same class.
For each reporting market separately,
the proposed regulations also would
establish a single-month position limit
for contracts of the same class that
would be two-thirds of the all-monthscombined position limit fixed for that
class of contracts. Thus, the singlemonth limit on each reporting market
for a class of contracts would be no
greater than 20% of a class’s single
exchange final open interest value (i.e.,
two-thirds of 30% of a class’s single
exchange final open interest value).
Proposed regulation 151.2 also
establishes a minimum position limit
for a reporting market of 5,000 contracts
or 1% of the aggregated open interest
value, whichever is greater. The
Commission notes that the 5,000
contract level is consistent with its
guidance on acceptable practices for
exchanges setting all-months-combined
position limits for newly listed energy
contracts in current regulation
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Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules
150.5(b)(3). Levels set by reference to
the 1% of aggregated open interest value
and the 5,000 contract limit are
intended to give newly listed contracts
or contracts with low open interest the
opportunity to attract liquidity. The
concentration of positions held by a
single trader on a particular reporting
market, such as a market marker,77
given the minimal impact that such
trading may have on commodity prices,
is acceptable because such levels
promote innovation and competition.
holding large positions that would
otherwise net out (e.g., offsetting
positions in last trading day and
penultimate contracts of the same class
for the same month) for the purpose of
applying the class single-month position
limits.
The following table groups contracts
by the classes in which they would be
included under the proposed
regulations:
In addition to the above mentioned
position limits, as proposed, a trader’s
positions in contracts of the same class
in a single month on a reporting market,
measured on a gross basis, would be
limited to no greater than two times the
all-months-combined class position
limit fixed for that reporting market. A
limit on a trader’s gross positions in a
single month would serve to prevent
sudden or unreasonable fluctuations or
unwarranted changes in commodity
prices that could arise from traders
CONTRACT LIST WITH SPREAD CONTRACTS
Contract
code
Spot-month
conversion
factor relative
to referenced
energy contract
Individual
month conversion factor relative to referenced energy contract
All months
combined conversion factor
relative to referenced energy contract
Class of contract
Contract name
Crude Oil/Physical Delivery/NYMEX.
Light Sweet Crude Oil Futures ..............................
CL
1
1
1
Light Sweet Crude Oil Option ................................
Heating Oil Crack Spread Option ..........................
RBOB Gasoline Crack Spread Option ...................
WTI Calendar Spread Option ................................
Crude Oil Financial Calendar Spread Option ........
LO
HC
RX
WA
7A
0
¥1
¥1
1
1
1
¥1
¥1
1
1
1
¥1
¥1
0
1
Crude Oil Financial Futures ...................................
Crude Oil Last Day Financial Futures ...................
Crude Oil Option on Calendar Strip .......................
Crude Oil Option on Quarterly Futures Strip .........
Daily Crude Oil Option ...........................................
E-mini Crude Oil Futures .......................................
Gulf Coast No. 2 (Platts) Crack Spread Swap Futures.
Gulf Coast No. 6 Fuel Oil (Platts) Crack Spread
Swap Futures.
Gulf Coast ULSD (Argus) Crack Spread Swap Futures.
Gulf Coast ULSD (Platts) Crack Spread Swap Futures.
Gulf Coast Unl 87 (Argus) Crack Spread Swap
Futures.
Gulf Coast Unl 87 (Platts) Crack Spread BALMO
Swap Futures.
Gulf Coast Unl 87 (Platts) Crack Spread Swap
Futures.
Heating Oil Crack Spread Average Price Option ..
Heating Oil Crack Spread BALMO Swap Futures
Heating Oil Crack Spread Swap Futures ..............
Mars (Argus) vs. WTI Spread Calendar Swap Futures.
Mars (Argus) vs. WTI Spread Trade Month Swap
Futures.
New York Harbor Residual Fuel (Platts) Crack
Spread Swap Futures.
New York Ultra Low Sulfur Diesel (ULSD) Crack
Spread Swap.
NYMEX Crude Oil Backwardation/Contango (B/C)
Index.
NYMEX Crude Oil MACI Index ..............................
NYMEX Crude Oil Minute-Marker Calendar Month
Swap Futures.
NYMEX Crude Oil Minute-Marker Futures ............
RBOB Gasoline Crack Spread Average Price Option.
WS
26
6F
6E
CD
QM
RD
1
1
0
0
0
1⁄2
¥1
1
1
1
1
1
1⁄2
¥1
1
1
12
3
1
1⁄2
¥1
MG
¥1
¥1
¥1
CF
¥1
¥1
¥1
GY
¥1
¥1
¥1
CK
¥1
¥1
¥1
1J
¥1
¥1
¥1
RU
¥1
¥1
¥1
3W
1H
HK
YX
¥1
¥1
¥1
¥1
¥1
¥1
¥1
¥1
¥1
¥1
¥1
¥1
YV
¥1
¥1
¥1
ML
¥1
¥1
¥1
YU
¥1
¥1
¥1
XK
0
15
⁄
15
XC
4T
0
1
15
⁄
1
15
6C
3Y
1
¥1
1
¥1
1
¥1
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
Crude Oil/Cash-Settled/
NYMEX.
77 A market maker is a trader that quotes both a
buy and a sell price in an attempt to profit from the
spread.
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CONTRACT LIST WITH SPREAD CONTRACTS—Continued
Class of contract
Gasoline/Physical Delivery/NYMEX.
Gasoline/Cash-Settled/
NYMEX.
Heating Oil/Physical Delivery/NYMEX.
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
Heating Oil/Cash-Settled/
NYMEX.
VerDate Nov<24>2008
RBOB Gasoline Crack Spread BALMO Swap Futures.
RBOB Gasoline Crack Spread Swap Futures .......
WTI Average Price Option .....................................
WTI Calendar Swap Futures .................................
WTI Look-Alike Option ...........................................
WTS (Argus) vs. WTI Spread Calendar Swap Futures.
WTS (Argus) vs. WTI Spread Trade Month Swap
Futures.
RBOB Gasoline Futures ........................................
RBOB Gasoline Option ..........................................
RBOB Gasoline Calendar Spread Option .............
RBOB Gasoline Crack Spread Option ...................
Chicago Unleaded Gasoline (Platts) vs. RBOB
Gasoline Spread Swap Futures.
E-mini RBOB Gasoline Futures .............................
Group Three Unleaded Gasoline (Platts) vs.
RBOB Spread Swap.
Gulf Coast Gasoline (OPIS) vs. RBOB Gasoline
Spread Swap Futures.
Gulf Coast Unl 87 (Argus) Up-Down Swap Futures.
Gulf Coast Unl 87 (Platts) Up-Down BALMO
Swap Futures.
Gulf Coast Unl 87 (Platts) vs. RBOB Gasoline
Spread Swap Futures.
Los Angeles CARBOB Gasoline (OPIS) Spread
Swap Futures.
New York Harbor Conv. Gasoline (Platts) vs.
RBOB Gasoline Swap Futures.
NY RBOB (Platts) vs. NYMEX RBOB Gasoline
Spread Swap Futures.
NYMEX RBOB Gasoline Minute-Marker Calendar
Month Swap Futures.
NYMEX RBOB Gasoline Minute-Marker Futures ..
RBOB Gasoline Average Price Option ..................
RBOB Gasoline BALMO Swap Futures ................
RBOB Gasoline Calendar Swap Futures ..............
RBOB Gasoline Crack Spread Average Price Option.
RBOB Gasoline Crack Spread BALMO Swap ......
RBOB Gasoline Crack Spread Swap Futures .......
RBOB Gasoline Financial Futures .........................
RBOB Gasoline Last Day Financial Futures .........
RBOB Gasoline Look-Alike European Option .......
RBOB Gasoline vs. Heating Oil Swap Futures .....
New York Harbor No. 2 Heating Oil Futures .........
Heating Oil Option ..................................................
Heating Oil Calendar Spread Options ...................
Heating Oil Crack Spread Option ..........................
Chicago ULSD (Platts) vs. Heating Oil Spread
Swap.
E-mini Heating Oil Futures .....................................
Group Three ULSD (Platts) vs. Heating Oil
Spread Swap Futures.
Gulf Coast Jet (Argus) Up-Down Swap Futures ....
Gulf Coast Jet (OPIS) vs. Heating Oil Spread
Swap Futures.
Gulf Coast Jet (Platts) Up-Down BALMO Swap
Futures.
Gulf Coast Jet (Platts) vs. Heating Oil Spread
Swap Futures.
Gulf Coast Low Sulfur Diesel (LSD) (Platts) UpDown Spread Swap Futures.
Gulf Coast ULSD (Argus) Up-Down Swap Futures
Jkt 220001
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Individual
month conversion factor relative to referenced energy contract
All months
combined conversion factor
relative to referenced energy contract
1E
¥1
¥1
¥1
RM
AO
CS
LC
FF
¥1
0
1
0
¥1
¥1
1
1
1
¥1
¥1
1
1
1
¥1
FH
¥1
¥1
¥1
RB
1
1
1
OB
ZA
RX
3C
0
1
0
¥1
1
1
1
¥1
1
0
1
¥1
QU
A8
1⁄2
¥1
1⁄2
¥1
1⁄2
¥1
4F
¥1
¥1
¥1
UZ
¥1
¥1
¥1
1K
¥1
¥1
¥1
RV
¥1
¥1
¥1
JL
¥1
¥1
¥1
RZ
¥1
¥1
¥1
RI
¥1
¥1
¥1
5T
1
1
1
6R
RA
1D
RL
3Y
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1E
RM
RT
27
RF
RH
HO
1
1
1
1
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
OH
FA
HC
5C
0
1
0
¥1
1
1
1
¥1
1
0
1
¥1
QH
A6
1⁄2
¥1
1⁄2
¥1
1⁄2
¥1
JU
W7
¥1
¥1
¥1
¥1
¥1
¥1
1M
¥1
¥1
¥1
ME
¥1
¥1
¥1
YL
¥1
¥1
¥1
US
¥1
¥1
¥1
Contract
code
Contract name
14:28 Jan 25, 2010
Spot-month
conversion
factor relative
to referenced
energy contract
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CONTRACT LIST WITH SPREAD CONTRACTS—Continued
Spot-month
conversion
factor relative
to referenced
energy contract
Individual
month conversion factor relative to referenced energy contract
All months
combined conversion factor
relative to referenced energy contract
5Q
¥1
¥1
¥1
LT
¥1
¥1
¥1
1L
HA
¥1
1
¥1
1
¥1
1
AT
1G
MP
3W
1H
HK
BH
23
LB
KL
1
1
1
1
1
1
1
1
0
¥1
1
1
1
1
1
1
1
1
1
¥1
1
1
1
1
1
1
1
1
1
¥1
JS
MQ
¥1
¥1
¥1
¥1
¥1
¥1
5U
¥1
¥1
¥1
1U
UY
¥1
¥1
¥1
¥1
¥1
¥1
7T
1
1
1
6H
RH
7Y
1
¥1
¥1
1
¥1
¥1
1
¥1
¥1
NG
1
1
1
Henry Hub Natural Gas Option ..............................
Henry Hub Natural Gas Calendar Spread Options
Daily Natural Gas Option .......................................
ON
IA
KD
1
1
0
1
1
1
1
0
1
E-mini Henry Hub Natural Gas Penultimate Financial Futures.
E-mini Natural Gas Futures ...................................
Henry Hub Natural Gas Last Day Financial Futures.
Henry Hub Natural Gas Last Day Financial Option
Henry Hub Natural Gas Look-Alike Option ............
Henry Hub Natural Gas Penultimate Financial Futures.
Henry Hub Natural Gas Swap Futures ..................
Henry Natural Gas Financial Calendar Spread
Option.
Natural Gas Option on Calendar Futures Strip .....
Natural Gas Option on Summer Futures Strip ......
Natural Gas Option on Winter Futures Strip .........
Henry Hub Natural Gas Swap ...............................
NP
14
⁄
14
⁄
14
QG
HH
14
⁄
1
14
⁄
1
14
E7
LN
HP
1
1
1
1
1
1
1
1
1
NN
G4
14
⁄
1
14
⁄
1
14
6J
4D
6I
H
0
0
0
1⁄4
14
⁄
⁄
1⁄4
1⁄4
3
13⁄4
11⁄4
1⁄4
Class of contract
Natural Gas/Physical Delivery/NYMEX.
Natural Gas/Cash-Settled/NYMEX.
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
Natural Gas/Cash-Settled/ICE.
Gulf Coast ULSD (OPIS) vs. Heating Oil Spread
Swap Futures.
Gulf Coast ULSD (Platts) Up-Down Spread Swap
Futures.
Gulf Coast ULSD (Platts) Up-Down Swap Futures
Heating Oil Arb : NYMEX Heating Oil vs. ICE
Gasoil.
Heating Oil Average Price Option ..........................
Heating Oil BALMO Swap Futures ........................
Heating Oil Calendar Swap Futures ......................
Heating Oil Crack Spread Average Price Option ..
Heating Oil Crack Spread BALMO Swap Futures
Heating Oil Crack Spread Swap Futures ..............
Heating Oil Financial Futures ................................
Heating Oil Last Day Financial Futures .................
Heating Oil Look-Alike Option ................................
Los Angeles CARB Diesel (OPIS) Spread Swap
Futures.
Los Angeles Jet (OPIS) Spread Swap Futures .....
Los Angeles Jet Fuel (Platts) vs. Heating Oil
Spread Swap Futures.
NY Jet Fuel (Argus) vs. Heating Oil Spread Swap
Futures.
NY Jet Fuel (Platts) vs. Heating Oil Swap Futures
NY ULSD (Platts) vs. NYMEX Heating Oil Spread
Swap Futures.
NYMEX Heating Oil Minute-Marker Calendar
Month Swap Futures.
NYMEX Heating Oil Minute-Marker Futures ..........
RBOB Gasoline vs. Heating Oil Swap Futures .....
ULSD (Argus) vs. Heating Oil Spread Swap Futures.
Henry Hub Natural Gas Futures ............................
E. Spot-Month Classes of Contracts
An energy contract that is in its spot
month, pursuant to industry practice
and as defined in proposed regulation
151.1, is a futures contract that is ‘‘next
to expire during that period of time
beginning at the close of trading on the
trading day preceding the first day on
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Contract
code
Contract name
14:28 Jan 25, 2010
Jkt 220001
which delivery notices can be issued to
the clearing organization of a registered
entity.’’ 78 In practice, the spot-month for
78 For a contract that does not allow trading
concurrently with the issuance of delivery notices,
spot-month means ‘‘the futures contract next to
expire during that period of time beginning at the
close of trading on the third trading day preceding
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the major energy contracts generally is
the last trading day.’’ For a contract that cash-settles
based on the price of one or more physicallydelivered contracts, spot-month means ‘‘the period
of time that is the spot-month for such physicallydelivered contracts.’’ The Commission intends the
spot-month for options on futures contracts to be
the same period of time as for the underlying
futures contract.
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WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
three days in duration. In view of the
heightened potential for manipulation,
corners, squeezes as well as excessive
speculation during this concentrated
period of time, only those contracts that
expire on the same day would be
deemed to be contracts of the same class
under the proposed regulations. This
would mean that, for example, during
the spot month, a cash-settled last
trading day contract would not be in the
same class as a cash-settled penultimate
contract. The most significant impact of
defining a class of contracts in a
narrower manner during the spot-month
is to prohibit the netting of spot-month
contracts that expire on different days
for the purpose of applying the
proposed speculative position limits. By
way of example, a trader that is 4,000
contracts long in a cash-settled last
trading day contract, and 4,000
contracts short in a cash-settled
penultimate contract on the same
exchange in a referenced energy
contract, would be subject to spotmonth position limits for each contract
and would not be deemed to be holding
a flat position. In contrast, outside the
spot month, each leg of this spread
would be considered to be in the same
class and therefore subject to netting for
the purpose of applying the proposed
class all-months-combined and singlemonth position limits.
F. Determining and Complying With the
Proposed Spot-Month Limits
For physically-delivered contracts, a
spot-month position limit would be
fixed by the Commission at one-quarter
of the estimated deliverable supply for
a spot-month class of contracts. This
proposed formula is consistent with
current regulation 150.5(b) and the
Acceptable Practices for Core Principle
5, in Appendix B to part 38, and the
Commission’s Guideline No. 1, in
Appendix A to part 40. Proposed
regulation 151.2(d) would require a
reporting market listing physicallydelivered contracts to submit to the
Commission an estimate of deliverable
supply for its contracts by December
31st of each calendar year. The
Commission, in setting the spot-month
limits, would take into consideration
the estimates of deliverable supply
provided by the reporting markets and
would base its own determination of
deliverable supply on data submitted by
the reporting markets unless the
Commission has a basis for questioning
the accuracy of the submitted data, in
which case the Commission would
derive its own estimates of deliverable
supply.
For cash-settled contracts based on
the prices of physically-delivered
VerDate Nov<24>2008
14:28 Jan 25, 2010
Jkt 220001
futures contracts, the proposed
regulations would establish a default
spot-month position limit equal to that
of the cash-settled contract’s physicallydelivered counterpart. The proposed
regulations would allow a trader to
acquire or hold positions in a spotmonth class of contracts, pursuant to
reporting market rules specifically
implemented to address such positions,
that is five times greater than the default
spot-month limit upon satisfying certain
conditions. A trader would be permitted
to hold positions under this conditionalspot-month limit only if that trader does
not hold a position in any physicallydelivered referenced energy contract to
which its cash-settled positions are
linked in the spot month and satisfies
the reporting requirements of proposed
regulation 20.00.
Proposed regulation 20.00 sets forth
reporting requirements for persons that
would acquire positions in a referenced
energy contract pursuant to the
conditional-spot-month position limit of
proposed regulation 151.2(a)(2).
Specifically, this regulation would
require such persons to file a completed
CFTC Form 40 and Part A of new CFTC
Form 404. CFTC Form 40, among other
things, facilitates the Commission’s
identification of the persons controlling
the trading of an account. Part A of new
CFTC Form 404 would collect
information on: A trader’s spot and
forward positions priced in relation to
the relevant referenced energy contract
or the contract’s underlying commodity;
the trader’s spot and forward positions
in contracts priced to a cash market
index that includes quotations or prices
for spot or forward contracts in the
referenced energy contract’s underlying
commodity; the trader’s positions in
swaps priced in relation to the
referenced energy contract or the
contract’s underlying commodity; and
the trader’s positions in other physically
or financially settled contracts related to
the trader’s positions held pursuant to
the conditional-spot-month position
limit. The collection of this information
would facilitate the Commission’s
surveillance program with respect to
detecting and deterring trading activity
that may tend to cause sudden or
unreasonable fluctuations or
unwarranted changes in the prices of
the referenced energy contracts and
their underlying commodities during
the spot-month.
G. Exemptions and Related
Requirements
1. Bona Fide Hedges
Proposed regulation 151.3(a) would
establish three exemptions for the
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following transactions and positions: (i)
Bona fide hedging transactions generally
consistent with paragraphs (1) and (2) of
regulation 1.3(z); (ii) swap dealer risk
management transactions outside of the
spot-month that are held to offset risks
associated with certain swap
agreements; and (iii) positions that
would be in compliance with the
speculative position limits when
adjusted by an appropriate
contemporaneous risk factor.
As proposed, a reporting market may
establish an exemption process for
traders holding positions in proprietary
accounts that are shown to be bona fide
hedging positions consistent with, but
that may differ from (to the extent such
differences are consistent with
commercial activity in the physical
energy markets), paragraphs (1) and (2)
of regulation 1.3(z). As is currently the
case for traders seeking exemptions
from exchange-set spot-month position
limits applicable to the referenced
energy contracts, the Commission
intends for traders seeking such bona
fide hedging transactions to apply to a
reporting market for exemptions from
the applicable spot and non-spot-month
limits. The Commission would audit
this process to ensure that the reporting
markets act appropriately in reviewing
and acting on trader bona fide hedge
exemption requests. In this manner, the
Commission would also enable a
reporting market to act expeditiously on
exemption requests.
Under the proposed regulations,
traders holding positions pursuant to a
bona fide hedge exemption would
generally be prohibited from also
trading speculatively. If bona fide
hedging positions outside the spot
month exceed twice an otherwise
applicable all-months-combined or
single-month position limit, then such
traders would also be prohibited from
holding positions as swap dealers. In
contrast, however, traders holding
positions in the spot-month pursuant to
a bona fide hedge exemption would not
be prohibited from holding positions
speculatively outside the spot month.
The intent of this proposed exception is
to not affect liquidity generated by
speculative trading outside the spot
month that would otherwise be
prohibited by virtue of a trader’s need
to invoke a hedge exemption to exceed
the lower spot-month position limits.
These ‘‘crowding out’’ provisions
would restrict a trader controlling large
positions used for hedging from also
entering into large speculative positions
or large swap dealer risk management
positions. The proposed regulations
would not impede a trader’s ability to
engage in bona fide hedging in any way,
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but would limit a trader’s ability to
acquire swap dealer risk management
positions or speculative positions when
that trader holds very large positions
pursuant to a bona fide hedge
exemption.
Proposed regulation 20.01 sets forth
reporting requirements for persons that
would acquire positions pursuant to the
bona fide hedge exemption of proposed
regulation 151.3(a)(1). Specifically, this
section would require such persons to
file a completed CFTC Form 40 and Part
B of new CFTC Form 404. Part B of
CFTC Form 404 would collect
information on: The quantity of stocks
owned of the commodity that underlies
the relevant referenced energy contract
and its products and by-products; the
ownership of shares of an investment
vehicle that holds or owns the
referenced energy contract or the
commodity that underlies the
referenced energy contract and its
products and by-products; the quantity
of fixed price purchase and sale
commitments on the relevant referenced
energy contract’s commodity; and, for
anticipatory hedging transactions,
annual sales or requirements for the
preceding three complete fiscal years
and anticipated sales or requirements of
such commodity for the period hedged.
For cross-hedge positions, traders would
be required to report the relevant
commercial activity in terms of the
actual or anticipated quantity of the
cross-hedged commodity, and on a
converted basis, equivalent positions in
the relevant referenced energy contract.
The Commission notes that this
proposed data collection is consistent
with data currently collected in grain
and cotton markets using CFTC Forms
204 and 304, respectively, pursuant to
part 19 of the Commission’s regulations.
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
2. Swap Dealers
Swap dealers can perform an
important economic function by taking
on risks to accommodate the specific
hedging and risk management needs of
various customers. Swap dealers often
are able to aggregate and standardize
these otherwise particularized risks, and
in turn, enter into commodity futures
and option contracts to manage them.
Accordingly, under the regulations as
proposed, swap dealers may apply to
the Commission for an exemption from
the proposed speculative position limits
for positions held outside of the spot
month to manage the risks associated
with swap agreements entered into to
accommodate swap customers.
Proposed regulation 151.1 would define
‘‘swap agreement’’ to have the same
meaning as in current Commission
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regulation 35.1(b)(1).79 Proposed
regulation 151.1 would also define
‘‘swap dealer’’ to mean ‘‘any person who,
as a significant part of its business,
holds itself out as a dealer in swaps,
makes a market in swaps, regularly
engages in the purchase of swaps and
their resale to customers in the ordinary
course of a business, or engages in any
activity causing the person to be
commonly known in the trade as a
dealer or market maker in swaps.’’
The proposed swap dealer exemption
would be limited to twice an applicable
all-months-combined or single non-spot
month speculative position limit.
Further, traders would be required to
aggregate positions held as swap dealer
risk management transactions with net
speculative positions for the purpose of
determining compliance with the
proposed Federal speculative position
limits. As with bona fide hedgers that
hold positions in excess of the proposed
limits, swap dealers holding large
positions pursuant to the proposed
swap dealer exemption would be unable
to also take on positions as speculators.
In effect, this proposed ‘‘crowding out’’
provision would restrict a trader
controlling a large position used for
swap risk management from also
entering into large speculative positions.
Proposed regulation 1.45 sets forth the
application procedure for swap dealers
that would seek an exemption from the
proposed Commission-set speculative
position limits. Specifically, this
regulation would require a person to file
a completed CFTC Form 40, an initial
application and an annual update to
certify that the person remains a swap
dealer, as defined in proposed
regulation 151.1. The exemption would
require the applicant to consent to the
publication of the fact that such person
received a swap dealer exemption from
the Commission. Such publication
would be made only once a year and
would not include the identity of a
swap dealer that first received an
exemption within the six calendar
months preceding a publication.
Furthermore, the publication would not
include any information that would
disclose the specific commodities for
which the swap dealer has sought an
exemption. In this regard, the
Commission reiterates that it will
protect all proprietary information in
accordance with the Freedom of
Information Act and part 145 of the
Commission’s regulations, headed
‘‘Commission Records and Information.’’
In addition, the Commission
emphasizes that section 8(a)(1) of the
Act strictly prohibits the Commission,
79 17
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unless specifically authorized otherwise
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.’’ 80
Proposed regulation 20.02 sets forth
reporting requirements for persons who
would receive a swap dealer limited risk
management exemption pursuant to
proposed regulation 151.3(a)(2).
Specifically, the proposed regulation
would require swap dealers to file
monthly a completed Form 404 Part C
with the Commission and with any
registered entity on which the swap
dealer’s referenced energy contract
positions are listed. The monthly report
would include, for each day, swap
positions based upon the commodity
underlying the referenced energy
contracts that are held in proprietary
and customer accounts and a summary
of dealing and trading activity in swaps
based upon the commodity underlying
the referenced energy contracts.
Furthermore, proposed regulation 20.02
would require the swap dealer to file a
supplemental report whenever it
establishes a larger position in
referenced energy contracts than
previously reported. In addition to the
above reporting requirements, traders
that receive a swap dealer limited risk
management exemption must also
maintain complete books and records
relating to their swap dealing activities
(including transaction data) and make
such books and records, along with a
list of counterparties to customer swap
agreements that support and
substantiate the need to offset swap
agreement risks on reporting markets,
available to the Commission upon
request.
3. Exemptions for Delta-Adjusted
Positions
The Commission understands that
option risk factors continuously change
with movements in the price of an
underlying futures contract. As the price
of the underlying futures contract
changes, a trader offsetting the risk of an
options position through a delta-neutral
position in the underlying futures
contract may need to adjust the futures
position substantially on an intra-day
basis to maintain a risk neutral position.
As currently defined in regulation
150.1, delta-neutrality is recognized by
reference to the previous day’s risk
factor. Proposed regulations 151.3 and
20.03 would set forth the exemption and
reporting requirements for persons
whose positions would have exceeded
the Federal speculative position limit
80 See
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WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
for a referenced energy contract when
adjusted by the previous day’s risk
factors (deltas), but that would not
exceed such a limit when positions are
calculated using an appropriate
contemporaneous risk factor. The
reporting requirements, as proposed,
would include the submission of
complete position data to demonstrate
that such positions remained within an
otherwise applicable speculative
position limit when adjusted by an
appropriate and contemporaneous risk
factor.
H. Account Aggregation
Proposed regulation 151.4 would
establish account aggregation standards
specifically for positions in referenced
energy contracts. Under the proposed
standards, the Federal position limits in
referenced energy contracts would
apply to all positions in accounts in
which any person, directly or indirectly,
has an ownership or equity interest of
10% or greater or, by power of attorney
or otherwise, controls trading. Proposed
regulation 151.4 includes a limited
exemption for positions in pools in
which a trader that is a limited partner,
shareholder or similar person has an
ownership or equity interest of less than
25% unless the trader in fact controls
trading that is done by the pool.
Proposed regulation 151.4 would also
treat positions held by two or more
persons acting pursuant to an express or
implied agreement or understanding the
same as if the positions were held by,
or the trading of the positions were done
by, a single person. Accordingly, the
proposed regulations would aggregate
positions in accounts at both the
account owner and controller levels.
In contrast to the disaggregation
exemptions of current regulations
150.3(a)(4) and 150.4, eligible entities
(such as mutual funds, commodity pool
operators and commodity trading
advisors) and futures commission
merchants will not be permitted to
disaggregate positions pursuant to the
independent account controller
framework established in part 150 of the
Commission’s regulations. The current
account disaggregation exceptions for
the agricultural contracts enumerated in
regulation 150.2, may be incompatible
with the proposed Federal speculative
position limit framework, however, and
used to circumvent its requirements.
The proposed framework sets high
position levels that are at the outer
bounds of the largest positions held by
market participants, permits for the
netting of positions across reporting
markets and within contracts of the
same class and in addition, includes a
conditional-spot-month limit for cash-
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settled contracts and exemptions for
bona fide hedgers, swap dealers and
delta-adjusted positions. Accordingly,
an exemption, such as the eligible entity
exemption, that would allow traders to
establish a series of positions each near
a proposed outer bound position limit,
without aggregation, may not be
appropriate. Instead, proposed
regulation 151.4 would establish a clear
general account aggregation standard
and a clear exception thereto for passive
pool participants and similar investors.
VII. The CME Group’s Proposal
In a concept paper published in
September of 2009, the CME Group
suggested an alternative position limit
framework that would require each
reporting market to set position limits
separately without inter-exchange
aggregation.81 The single-month and allmonths-combined limits, under the
CME’s proposal, would apply
collectively to physically-delivered
contracts and cash-settled contracts on a
referenced energy commodity, including
spread positions within the same
contract. The level of the limits would
be based on the collective open interest
of the lead month (i.e., the month with
the highest level of open interest) in
such contracts at that reporting market.
The CME Group also suggested that
each reporting market set a singlemonth limit at 10% of the first 25,000
contracts of that reporting market’s open
interest with a 5% marginal increase for
open interest in excess of 25,000
contracts at that reporting market. The
CME Group suggested that the allmonths-combined limit be set at 150%
of the single-month limit and suggested
establishing a flexible concentration
limit in deferred-month contracts.
Under the CME’s proposed approach, a
suggested concentration limit of 25% of
open interest would be applicable in a
single month that has developed
liquidity.82
With respect to applying aggregate
limits, the CME Group suggested that
the CFTC establish and enforce an
aggregate limit across all reporting
markets, conditioned on the CFTC
gaining authority to impose limits on
OTC trading and on the CFTC
developing a means to minimize the
impact of potential transfers of trading
to foreign jurisdictions or the physical
markets. With respect to the aggregation
of positions, the CME Group proposed
81 See, ‘‘Excessive Speculation and Position
Limits in Energy Derivatives Markets,’’ CME Group,
at page 10, https://www.cmegroup.com/company/
files/PositionLimitsWhitePaper.pdf.
82 The concept paper did not specify a method to
determine when a contract month had developed
liquidity.
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4161
that the aggregation standards of
Commission regulation 150.4 apply to
the aggregate limits.
By way of comparison, the
Commission’s proposed limits would
apply aggregately across all exchanges
that list a referenced energy contract
and separately to physically-delivered
contracts and cash-settled contracts that
are listed by a particular reporting
market. The Commission’s proposed
class-based limits would prevent the
establishment of excessively large
positions in a single class and, thereby,
would reduce the potential for price
distortions.
Also, by way of contrast to the CME
Group’s approach, the level of limits
proposed by the Commission would be
based on the sum of the open interest in
all months, rather than only the lead
month’s open interest as proposed by
the CME. By using the entire open
interest, the Commission’s proposal
would avoid creating an incentive for
traders to shift open interest into the
lead month in an attempt to increase the
level of the limits. Furthermore, rather
than considering only a reporting
market’s open interest, the
Commission’s proposal would establish
limit levels that reflect both aggregated
open interest on all reporting markets
and open interest on an individual
reporting market. This tiered approach
would provide an opportunity for small
markets to grow, while establishing a
prudential all-months limit for a class of
contracts of no more than 30% of a
reporting market’s open interest in a
class of contracts as defined in proposed
regulation 151.1. The class limit, as
proposed by the Commission, would be
capped at a formula-determined level
based on the open interest in all
reporting markets in a referenced energy
contract. The 30% level was selected in
light of the expected opportunity for
arbitrage across classes and the cap was
set using the traditional all-months
position limit formula in regulation
150.5(c)(2).
As discussed previously, the
Commission’s proposal first establishes
an all-months-combined limit, then sets
a single-month limit at two-thirds of the
level of that all-months-combined limit.
This is the same ratio between limits if
first established in a single-month limit,
as proposed by the CME, and then
multiplied by 150% to arrive at an allmonths-combined position limit. This
two-thirds ratio, as proposed by the
Commission, is therefore the same ratio
that is proposed by the CME Group and
consistent with the ratio between the
single-month limits and the all-monthcombined limits in the existing Federal
agricultural positions limits which
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range from a low of 61% to a high of
77%. The table below provides a
comparison of position limits as they
would be set under the proposed
Commission and CME Group
approaches to establishing speculative
position limits:
PROPOSED FEDERAL SPECULATIVE POSITION LIMITS FOR REFERENCED ENERGY CONTRACTS
All-months-combined (AMC)
average open
interest (January
2008–December
2008)
Class of contract
NYMEX Light Sweet Crude Oil ................
NYMEX Physical Delivery ........................
NYMEX Cash-Settled ...............................
Aggregate Limit ........................................
NYMEX Physical Delivery ........................
2,881,901
963,871
3,845,772
252,564
98,100
98,100
98,100
9,000
65,400
65,400
65,400
6,000
NYMEX Cash-Settled ...............................
Aggregate Limit ........................................
NYMEX Physical Delivery ........................
29,306
281,870
254,442
8,800
9,000
10,100
5,900
6,000
6,800
NYMEX Cash-Settled ...............................
Aggregate Limit ........................................
NYMEX Physical Delivery ........................
NYMEX Cash-Settled ...............................
ICE Cash-Settled ......................................
Aggregate Limit ........................................
73,996
328,438
1,236,257
3,088,239
904,754
5,229,250
10,100
10,100
132,700
132,700
132,700
132,700
6,800
6,800
88,500
88,500
88,500
88,500
NYMEX New York Harbor
Blendstock (RBOB).
Gasoline
NYMEX New York Harbor No. 2 Heating
Oil.
NYMEX Henry Hub Natural Gas ..............
AMC limit
Single-month
limit
Referenced energy contract
PROPOSED ENERGY SPECULATIVE LIMITS BY CME GROUP
Average lead
month open
interest
January 2008–
December 2008)
All-monthscombined limit
Single-month
limit
Reference energy contract
Exchange
NYMEX Light Sweet Crude Oil ................
NYMEX New York Harbor Gasoline
Blendstock (RBOB).
NYMEX New York Harbor No. 2 Heating
Oil.
NYMEX Henry Hub Natural Gas ..............
NYMEX .....................................................
NYMEX .....................................................
841,607
107,439
65,000
10,000
43,400
6,700
NYMEX .....................................................
98,977
9,300
6,200
NYMEX .....................................................
ICE ............................................................
505,220
124,860
39,800
11,300
26,600
7,500
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
VIII. Request for Comment
The Commission requests comment
on all aspects of this proposal, and
particularly requests comments on the
following issues and responses to the
following questions:
1. Are Federal speculative position
limits for energy contracts traded on
reporting markets necessary to
‘‘diminish, eliminate, or prevent’’ the
burdens on interstate commerce that
may result from position concentrations
in such contracts?
2. Are there methods other than
Federal speculative position limits that
should be utilized to diminish,
eliminate, or prevent such burdens?
3. How should the Commission
evaluate the potential effect of Federal
speculative position limits on the
liquidity, market efficiency and price
discovery capabilities of referenced
energy contracts in determining whether
to establish position limits for such
contracts?
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4. Under the class approach to
grouping contracts as discussed herein,
how should contracts that do not cash
settle to the price of a single contract,
but settle to the average price of a subgroup of contracts within a class be
treated during the spot month for the
purposes of enforcing the proposed
speculative position limits?
5. Under proposed regulation
151.2(b)(1)(i), the Commission would
establish an all-months-combined
aggregate position limit equal to 10% of
the average combined futures and
option contract open interest aggregated
across all reporting markets for the most
recent calendar year up to 25,000
contracts, with a marginal increase of
2.5% of open interest thereafter. As an
alternative to this approach to an allmonths-combined aggregate position
limit, the Commission requests
comment on whether an additional
increment with a marginal increase
larger than 2.5% would be adequate to
prevent excessive speculation in the
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referenced energy contracts. An
additional increment would permit
traders to hold larger positions relative
to total open positions in the referenced
energy contracts, in comparison to the
proposed formula. For example, the
Commission could fix the all-monthscombined aggregate position limit at
10% of the prior year’s average open
interest up to 25,000 contracts, with a
marginal increase of 5% up to 300,000
contracts and a marginal increase of
2.5% thereafter. Assuming the prior
year’s average open interest equaled
300,000 contracts, an all-monthscombined aggregate position limit
would be fixed at 9,400 contracts under
the proposed rule and 16,300 contracts
under the alternative.
6. Should customary position sizes
held by speculative traders be a factor
in moderating the limit levels proposed
by the Commission? In this connection,
the Commission notes that current
regulation 150.5(c) states contract
markets may adjust their speculative
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limit levels ‘‘based on position sizes
customarily held by speculative traders
on the contract market, which shall not
be extraordinarily large relative to total
open positions in the contract * * *’’
7. Reporting markets that list
referenced energy contracts, as defined
by the proposed regulations, would
continue to be responsible for
maintaining their own position limits
(so long as they are not higher than the
limits fixed by the Commission) or
position accountability rules. The
Commission seeks comment on whether
it should issue acceptable practices that
adopt formal guidelines and procedures
for implementing position
accountability rules.
8. Proposed regulation 151.3(a)(2)
would establish a swap dealer risk
management exemption whereby swap
dealers would be granted a position
limit exemption for positions that are
held to offset risks associated with
customer initiated swap agreements that
are linked to a referenced energy
contract but that do not qualify as bona
fide hedge positions. The swap dealer
risk management exemption would be
capped at twice the size of any
otherwise applicable all-monthscombined or single non-spot-month
position limit. The Commission seeks
comment on any alternatives to this
proposed approach. The Commission
seeks particular comment on the
feasibility of a ‘‘look-through’’
exemption for swap dealers such that
dealers would receive exemptions for
positions offsetting risks resulting from
swap agreements opposite
counterparties who would have been
entitled to a hedge exemption if they
had hedged their exposure directly in
the futures markets. How viable is such
an approach given the Commission’s
lack of regulatory authority over the
OTC swap markets?
9. Proposed regulation 20.02 would
require swap dealers to file with the
Commission certain information in
connection with their risk management
exemptions to ensure that the
Commission can adequately assess their
need for an exemption. The Commission
invites comment on whether these
requirements are sufficient. In the
alternative, should the Commission
limit these filing requirements, and
instead rely upon its regulation 18.05
special call authority to assess the merit
of swap dealer risk management
exemption requests?
10. The Commission’s proposed part
151 regulations for referenced energy
contracts would set forth a
comprehensive regime of position limit,
exemption and aggregation
requirements that would operate
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separately from the current position
limit, exemption and aggregation
requirements for agricultural contracts
set forth in part 150 of the Commission’s
regulations. While proposed part 151
borrows many features of part 150, there
are notable distinctions between the
two, including their methods of position
limit calculation and treatment of
positions held by swap dealers. The
Commission seeks comment on what, if
any, of the distinctive features of the
position limit framework proposed
herein, such as aggregate position limits
and the swap dealer limited risk
management exemption, should be
applied to the agricultural commodities
listed in part 150 of the Commission’s
regulations.
11. The Commission is considering
establishing speculative position limits
for contracts based on other physical
commodities with finite supply such as
precious metal and soft agricultural
commodity contracts. The Commission
invites comment on which aspects of
the current speculative position limit
framework for the agricultural
commodity contracts and the framework
proposed herein for the major energy
commodity contracts (such as proposed
position limits based on a percentage of
open interest and the proposed
exemptions from the speculative
position limits) are most relevant to
contracts based on other physical
commodities with finite supply such as
precious metal and soft agricultural
commodity contracts.
12. As discussed previously, the
Commission has followed a policy since
2008 of conditioning FBOT no-action
relief on the requirement that FBOTs
with contracts that link to CFTCregulated contracts have position limits
that are comparable to the position
limits applicable to CFTC-regulated
contracts. If the Commission adopts the
proposed rulemaking, should it
continue, or modify in any way, this
policy to address FBOT contracts that
would be linked to any referenced
energy contract as defined by the
proposed regulations?
13. The Commission notes that
Congress is currently considering
legislation that would revise the
Commission’s section 4a(a) position
limit authority to extend beyond
positions in reporting market contracts
to reach positions in OTC derivative
instruments and FBOT contracts. Under
some of these revisions, the Commission
would be authorized to set limits for
positions held in OTC derivative
instruments and FBOT contracts.83 The
83 See,
e.g., the Over-the-Counter Derivatives
Markets Act of 2009 (OCDMA), H.R. 3795, 111th
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4163
Commission seeks comment on how it
should take this pending legislation into
account in proposing Federal
speculative position limits.
14. Under proposed regulation 151.2,
the Commission would set spot-month
and all-months-combined position
limits annually.
a. Should spot-month position limits
be set on a more frequent basis given the
potential for disruptions in deliverable
supplies for referenced energy
contracts?
b. Should the Commission establish,
by using a rolling-average of open
interest instead of a simple average for
example, all-months-combined position
limits on a more frequent basis? If so,
what reasons would support such
action?
15. Concerns have been raised about
the impact of large, passive, and
unleveraged long-only positions on the
futures markets. Instead of using the
futures markets for risk transference,
traders that own such positions treat
commodity futures contracts as distinct
assets that can be held for an
appreciable duration. This notice of
rulemaking does not propose
regulations that would categorize such
positions for the purpose of applying
different regulatory standards. Rather,
the owners of such positions are treated
as other investors that would be subject
to the proposed speculative position
limits.
a. Should the Commission propose
regulations to limit the positions of
passive long traders?
b. If so, what criteria should the
Commission employ to identify and
define such traders and positions?
c. Assuming that passive long traders
can properly be identified and defined,
how and to what extent should the
Commission limit their participation in
the futures markets?
d. If passive long positions should be
limited in the aggregate, would it be
feasible for the Commission to
apportion market space amongst various
traders that wish to establish passive
long positions?
e. What unintended consequences are
likely to result from the Commission’s
implementation of passive long position
limits?
16. The proposed definition of
referenced energy contract, diversified
commodity index, and contracts of the
same class are intended to be simple
definitions that readily identify the
affected contracts through an objective
and administerial process without
Congress, 1st Session (2009). OCDMA would also
abolish the DTEF, ECM and ECM–SPDC market
categories.
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relying on the Commission’s exercise of
discretion.
a. Is the proposed definition of
contracts of the same class for spot and
non-spot months sufficiently inclusive?
b. Is it appropriate to define contracts
of the same class during spot months to
only include contracts that expire on the
same day?
c. Should diversified commodity
indexes be defined with greater
particularity?
17. Under the proposed regulations, a
swap dealer seeking a risk management
exemption would apply directly to the
Commission for the exemption. Should
such exemptions be processed by the
reporting markets as would be the case
with bona fide hedge exemptions under
the proposed regulations?
18. In implementing initial spotmonth speculative position limits, if the
notice of proposed rulemaking is
finalized, should the Commission:
a. Issue special calls for information
to the reporting markets to assess the
size of a contract’s deliverable supply;
b. Use the levels that are currently
used by the exchanges; or
c. Undertake an independent
calculation of deliverable supply
without substantial reliance on
exchange estimates?
IX. Related Matters
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS2
A. Cost Benefit Analysis
Section 15(a) of the Act requires the
Commission to consider the costs and
benefits of its actions before issuing new
regulations under the Act. Section 15(a)
does not require the Commission to
quantify the costs and benefits of new
regulations or to determine whether the
benefits of adopted regulations
outweigh their costs. Rather, section
15(a) requires the Commission to
consider the cost and benefits of the
subject regulations. Section 15(a) further
specifies that the costs and benefits of
new regulations shall be evaluated in
light of five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of the market for
listed derivatives; (3) price discovery;
(4) sound risk management practices;
and (5) other public interest
considerations. The Commission may,
in its discretion, give greater weight to
any one of the five enumerated areas of
concern and may, in its discretion,
determine that, notwithstanding its
costs, a particular regulation is
necessary or appropriate to protect the
public interest or to effectuate any of the
provisions or to accomplish any of the
purposes of the Act.
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The proposed regulatory framework
for positions in the referenced energy
contracts, as defined by the proposed
regulations, would impose certain
compliance costs on Commissionregulated exchanges and traders that
hold large positions in the referenced
energy contracts. In addition to the
compliance costs that are directly
related to the proposed regulations, the
proposed position limits and their
concomitant limitation on trading
activity could impose certain general
but significant costs. The proposed
position limits could cause unintended
consequences by decreasing liquidity in
the markets for the referenced energy
contracts, impairing the price discovery
process in these markets, and pushing
large positions to trading venues over
which the Commission has no direct
regulatory authority.
Based on data received by the
Commission’s large trader reporting
system, the Commission believes the
proposed position limits would
accommodate the normal course of
speculative positions in markets for the
referenced energy contracts.
Commission data indicates that possibly
ten traders, including traders that hold
positions pursuant to exchangeapproved bona fide hedge exemptions,
could be affected by the proposed
limits. For the reasons discussed below,
the Commission anticipates that the
compliance costs associated with the
proposed limits and their impact on the
efficiency of the markets for the
referenced energy contracts would be
minimal.
The proposed spot-month position
limits, although applicable to a class of
contracts and across reporting markets,
are consistent with current exchange-set
spot-month position limits that have
been implemented and enforced by
NYMEX and ICE pursuant to DCM and
ECM–SPDC core principles and
Commission guidance. In addition, both
NYMEX and ICE implement position
accountability rules for positions
outside the spot month and routinely
monitor and solicit reports from large
traders. The affected exchanges and
large traders therefore are accustomed to
an existing compliance system for large
positions and the processing of hedge
and spread exemptions from exchangeset spot-month position limits. In
addition, a significant portion of the
affected traders are currently subject to
the Commission’s large trader reporting
system and should have compliance
systems in place to accommodate any
new potential regulatory requirements.
For these reasons, the compliance costs
associated with the proposed limits
should be minimal.
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Section 4a(a) has identified excessive
speculation that causes unwarranted
fluctuations in the price of a commodity
as an undue burden on commerce.
Accordingly section 4a(a) of the Act
gives the Commission the ability to
establish a position limit framework as
a prophylactic measure against sudden
or unreasonable price fluctuations or
unwarranted price changes in
accordance with the purposes and
findings of the Act. The Congressional
endorsement of the Commission’s
prophylactic use of speculative position
limits extends to any commodity and
does not require a specific finding of an
extant undue burden on interstate
commerce.
A primary intent of the proposed
position limit framework is to prevent a
single trader or several traders from
acquiring large or concentrated
positions that may cause unwarranted,
sudden or unreasonable fluctuations in
the price of energy commodities. The
Commission is concerned that
concentrated positions at or near the
proposed limits may directly lead to
market disruptions causing
unwarranted, sudden or unreasonable
fluctuations in the price of energy
commodities.
Another concern regarding the
existence of large speculative positions
is the possibility for disruption across
markets or trading platforms listing
similar or linked products. Because
individual markets have knowledge of
positions only on their own trading
platforms, it is difficult for them to
assess the full impact of a trader’s
activities. In recognition of this, the
proposed framework also would apply
to trading done in linked and
economically similar contracts across
markets. The Commission notes that it
has the unique capacity for monitoring
trading and implementing remedial
measures across interconnected futures
and option markets in the referenced
energy contracts. The position limits, as
proposed, are purposefully set at the
outer bounds of the levels that
speculators are likely to acquire in order
to avoid disrupting or interfering with
beneficial trading activity. Still, the
proposed regulations are intended to
fully achieve the prophylactic purpose
of section 4a(a) of the Act.
B. The Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA),
5 U.S.C. 601 et seq., requires that
agencies consider the impact of their
regulations on small businesses. The
requirements related to the proposed
amendments fall mainly on registered
entities, exchanges, futures commission
merchants, clearing members, foreign
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brokers, and large traders. The
Commission has previously determined
that exchanges, futures commission
merchants and large traders are not
‘‘small entities’’ for the purposes of the
RFA.84 Similarly, clearing members,
foreign brokers and traders would be
subject to the proposed regulations only
if carrying or holding large positions.
Accordingly, the Chairman, on behalf of
the Commission, hereby certifies,
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.
C. Paperwork Reduction Act
Certain provisions of the proposed
regulations would result in new
collection of information requirements
within the meaning of the Paperwork
Reduction Act of 1995 (‘‘PRA’’). The
Commission therefore is submitting this
proposal to the Office of Management
and Budget (‘‘OMB’’), along with
proposed new CFTC Form 404, for
review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11.
The title for this proposed collection
of information is ‘‘Regulation 1.45 and
Parts 20 and 151—Position Limit
Framework For Referenced Energy
Contracts’’ (OMB control number 3038–
NEW).
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.’’ 85
Under the proposed regulations,
reporting markets listing, and market
participants trading, the referenced
energy contracts would be subject to the
position limit framework established by
proposed part 151 and the application
and reporting requirements of proposed
regulation 1.45 and part 20. Proposed
regulation 1.45 sets forth the application
procedure for swap dealers that would
seek an exemption from the proposed
Commission-set Federal speculative
position limits for referenced energy
contracts. Proposed part 20 would
require similar reports from persons
84 47
85 7
FR 18618 (April 30, 1982).
U.S.C. 12(a)(1).
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holding large positions under the
proposed conditional-spot-month
position limit, as bona fide hedgers, as
swap dealers, and as traders with
certain delta-adjusted positions. The
Commission estimates that affected
traders, as a result of their diversified
business structure, would be subject to
most or all of the requirements and
exemptions of proposed regulation 1.45
and parts 20 and 151.
Should the proposed regulations be
adopted, the total number of traders that
would be subject to the regulations is
estimated at 10, with each providing an
estimated 20 reports to the Commission
at an estimated compliance time of four
hours per response. Accordingly, the
Commission estimates the aggregate
annual burden that would be imposed
by the regulations, as proposed, to be
800 hours. The Commission specifically
notes that the estimated annual burden
provided on the affected exchanges and
traders is in addition to, and does not
include, costs incurred from compliance
with other regulatory and operational
requirements. 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: (i) 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; (ii) evaluate the
accuracy of the Commission’s estimate
of the burden of the proposed
collections of information; (iii)
determine whether there are ways to
enhance the quality, utility, and clarity
of the information to be collected; and
(iv) 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.
You may submit your comments
directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395–
6566 or by e-mail at OIRAsubmissions@omb.eop.gov. Please
provide the Commission with a copy of
your comments so that we can
summarize all written comments and
address them in any subsequent notice
of rulemaking. Refer to the Addresses
section of this notice for comment
submission instructions to the
Commission. You may obtain a copy of
the supporting statements for the
collection of information discussed
above by visiting RegInfo.gov. OMB is
required to make a decision concerning
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4165
the collection of information between 30
to 60 days after publication of this
notice. 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.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures,
Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 20
Commodity futures, Reporting and
recordkeeping requirements.
17 CFR Part 151
Position limits, Bona fide hedge
positions, Spread exemptions, Energy
commodities.
In consideration of the foregoing,
pursuant to the authority contained in
the Commodity Exchange Act, the
Commission hereby proposes to amend
chapter I of title 17 of the Code of
Federal Regulations as follows:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1 is
revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o,
6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1,
16, 16a, 19, 21, 23, and 24, as amended by
Title XIII of the Food, Conservation and
Energy Act of 2008, Pub. L. No. 110–246, 122
Stat. 1624 (June 18, 2008).
2. Add § 1.45 in part 1 to read as
follows:
§ 1.45. Application for a swap dealer
exemption.
(a) Persons seeking an exemption
from the speculative position limits
established by the Commission for
referenced energy contracts under
§ 151.2 of this chapter, pursuant to an
exemption for swap dealers under
§ 151.3(a)(2) of this chapter, shall:
(1) File an initial application for an
exemption and, thereafter, update such
application annually, as the
Commission shall require;
(2) Provide as part of the application,
all information required by the
Commission, including but not limited
to:
(i) A completed Form 40 along with
the information required under § 18.04
of this chapter;
(ii) A certification that the person is
a swap dealer as defined in § 151.1 of
this chapter; and
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(iii) Specific consent to having their
name published on the Commission’s
Web site (https://www.cftc.gov) as having
received a swap dealer exemption from
the speculative position limits; provided
however, that such list shall be
published no more than once annually,
that no publication of the name of a
swap dealer shall be made earlier than
six calendar months following the date
on which the exemption was granted,
and that such publication shall not
disclose the related commodities in
which the person is swap dealer or any
other information provided by the swap
dealer to the Commission that would be
inconsistent with section 8(a)(1) of the
Act; and
(3) Comply with the reporting
requirements of § 20.02 of this chapter.
(b) Form, manner and time of filing.
(1) An application under paragraph
(a) of this section shall be submitted in
the format and in the manner and
within the time specified by the
Commission.
(2) The Commission hereby delegates,
until such time as the Commission
orders otherwise, to the Director of the
Division of Market Oversight and to
such members of the Commission’s staff
acting under the Director’s direction as
the Director may designate, the
authority to specify the format, manner
and time period for applications to be
submitted under paragraph (a) of this
section. The Director may submit to the
Commission for its consideration any
matter that has been delegated in this
paragraph. Nothing in this paragraph
prohibits the Commission, at its
election, from exercising the authority
delegated in this paragraph.
3. Add part 20 to read as follows:
PART 20—REPORTS IN CONNECTION
WITH POSITIONS IN REFERENCED
ENERGY CONTRACTS
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Sec.
20.00 Conditional-spot-month position
limit.
20.01 Bona fide hedging.
20.02 Reports from swap dealers.
20.03 Delta-adjusted positions.
20.04 Form, manner and time of filing.
Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f,
6g, 6i, 6k, 6m, 6n, 7, 7a, 12a, 19 and 21, as
amended by Title XIII of the Food,
Conservation and Energy Act of 2008, Public
Law 110–246, 122 Stat. 1624 (June 18, 2008).
§ 20.00
limit.
Conditional-spot-month position
(a) Information required. All persons
that acquire positions in a referenced
energy contract pursuant to the
conditional-spot-month position limit of
§ 151.2(a)(2) of this chapter shall submit
to the Commission a Form 40 and
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provide the information required under
§ 18.04 of this chapter.
(b) Additional cash and derivatives
position data. All persons subject to
paragraph (a) of this section shall also
submit the following position data, net
long or short, on Part A of Form 404:
(1) The trader’s cash positions in
contracts priced at a fixed price
differential (including a zero
differential) to the referenced energy
contract or the contract’s underlying
commodity;
(2) The trader’s cash positions in
contracts priced to a cash market index
that includes quotations or prices for
spot or forward contracts in the
referenced energy contract’s underlying
commodity;
(3) The trader’s positions in cleared or
bilateral swap agreements with a fixed
price differential (including zero) to the
referenced energy contract or the
contract’s underlying commodity; and
(4) Positions in any other physically
or financially settled contracts that are
economically related to the trader’s
positions that are acquired pursuant to
the conditional-spot-month position
limit.
§ 20.01
Bona fide hedging.
(a) Information required. All persons
that acquire positions in a referenced
energy contract pursuant to the bona
fide hedge exemption of § 151.3(a)(1) of
this chapter shall submit to the
Commission a Form 40 and provide the
information required under § 18.04 of
this chapter.
(b) Additional information on cash
market activities. All persons subject to
paragraph (a) of this section shall also
submit the following information on
Part B of Form 404:
(1) The quantity of stocks owned of
the commodity that underlies a
referenced energy contract and its
products and by-products;
(2) The quantity of fixed price
purchase commitments open in such
commodity and its products and byproducts;
(3) The quantity of fixed price sale
commitments open in such commodity
and its products and by-products;
(4) For unsold anticipated commercial
services or output directly connected to
producing, transporting, refining,
merchandising, marketing, or processing
a commodity underlying a referenced
energy contract:
(i) Annual sales of such services or
output for the three complete fiscal
years preceding the current fiscal year;
and
(ii) Anticipated sales of such services
or output for the period hedged; and
(5) For unfilled anticipated
requirements:
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(i) Annual requirements of such
commodity for the three complete fiscal
years preceding the current fiscal year;
and
(ii) Anticipated requirements of such
commodity for the period hedged.
(6) The shares of an investment
vehicle, including, but not limited to,
exchange-traded funds, registered
investment companies, commodity
pools and private investment
companies, that holds or owns a
referenced energy contract or the
commodity that underlies a referenced
energy contract and its products and byproducts.
(c) Conversion methodology. Persons
engaged in the hedging of commercial
activity that does not involve the same
quantity or commodity as the quantity
or commodity associated with positions
in referenced energy contracts shall
furnish this information both in terms of
the actual quantity and commodity used
in the trader’s normal course of business
and in terms of the referenced energy
contracts that are sold or purchased. In
addition, such persons shall explain the
methodology used for determining the
ratio of conversion between the actual
or anticipated cash positions and the
trader’s positions in referenced energy
contracts.
§ 20.02
Reports from swap dealers.
(a) Initial reports. Persons who have
received a swap dealer exemption
pursuant to § 151.3(a)(2) of this chapter
from the speculative position limits
established by the Commission for
referenced energy contracts under
§ 151.2 of this chapter shall provide on
Part C of Form 404 to the Commission,
and to any registered entity on which
the swap dealer’s referenced energy
contract positions are listed, a monthly
report including:
(1) Swap positions based upon the
commodity underlying the referenced
energy contracts separately for
proprietary and customer accounts on a
daily basis; and
(2) A daily summary of dealing and
trading activity in swaps based upon the
commodity underlying the referenced
energy contracts.
(b) Supplemental reports. Whenever
the risk management requirements of a
swap dealer require it to increase its
positions in referenced energy contracts
from levels justified by information
provided in its initial application under
§ 1.45 of this chapter or the swap
dealer’s most recent report submitted
under this section, the swap dealer shall
file, on the business day following the
date on which such positions were
acquired, a supplemental report in
compliance with the requirements of
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paragraph (a) of this section that
supports the increase in position levels.
(c) Recordkeeping. Traders that
receive a swap dealer exemption under
§ 151.3(a)(2) of this chapter shall
maintain complete books and records
relating to their swap dealing activities
(including transactional data) and make
such books and records, along with a
list of counterparties to customer swap
agreements that support and
substantiate the need to offset swap
agreement risks on reporting markets,
available to the Commission upon
request.
§ 20.03
Delta-adjusted positions.
(a) Information required. All persons
with referenced energy contract
positions in excess of the position limits
of § 151.2 of this chapter that acquire
such positions in reliance on
§ 151.3(a)(3) of this chapter shall submit
to the Commission a Form 40 and
provide the information required under
§ 18.04 of this chapter.
(b) Additional information. In
addition, such persons shall provide the
following on Part D of Form 404:
(1) A certification that their positions,
in whole or in part, are in excess of the
applicable limits as a result of the
application of a futures-equivalent
calculation that adjusts option positions
by the previous day’s risk factor, or
delta coefficient; and
(2) Complete position data that
demonstrates that the application of a
contemporaneous risk factor, or delta
coefficient, renders the trader compliant
with the position limits of § 151.2 of this
chapter on an adjusted basis.
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§ 20.04
Form, manner and time of filing.
Unless otherwise instructed in this
part or by the Commission or its
designee, the Forms and information
required to be filed under this part shall
be submitted at such time and in a form
and manner specified by the
Commission. The Commission hereby
delegates, until such time as the
Commission orders otherwise, to the
Director of the Division of Market
Oversight and to such members of the
Commission’s staff acting under the
Director’s direction as the Director may
designate, the authority to specify the
format, manner and time period within
which the Forms and information
required to be filed under this part shall
be submitted to the Commission. The
Director may submit to the Commission
for its consideration any matter that has
been delegated in this paragraph.
Nothing in this paragraph prohibits the
Commission, at its election, from
exercising the authority delegated in
this paragraph.
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4. Add part 151 to read as follows:
PART 151—FEDERAL SPECULATIVE
POSITION LIMITS FOR REFERENCED
ENERGY CONTRACTS
Sec.
151.1 Definitions.
151.2 Position limits for referenced energy
contracts.
151.3 Exemptions for referenced energy
contracts.
151.4 Aggregation of positions.
Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f,
6g, 6i, 6k, 6m, 6n, 7, 7a, 12a, 19 and 21, as
amended by Title XIII of the Food,
Conservation and Energy Act of 2008, Public
Law 110–246, 122 Stat. 1624 (June 18, 2008).
§ 151.1
Definitions.
As used in this part—
Basis contract means a futures or
option contract that is cash settled based
on the difference in price of the same
commodity (or substantially the same
commodity) at different delivery points;
Calendar spread contract means a
futures or option contract that
represents the difference between the
settlement prices in one month of a
referenced energy contract and another
month’s settlement price for the same
referenced energy contract;
Contracts of the same class mean
referenced energy contracts (including
option contracts on a futures-equivalent
basis) on a single reporting market that
are based on the same commodity and
delivered in the same manner (cashsettled or physically-delivered),
provided however, that during their spot
month, contracts shall be considered
contracts of the same class if, in
addition, such contracts expire on the
same trading day;
Diversified commodity index means a
commodity index with price
components that include energy as well
as non-energy commodities, provided
however, that futures and option
contracts based on a diversified
commodity index that incorporates the
price of a commodity underlying a
referenced energy contract’s commodity
which are used to circumvent the
speculative position limits, shall be
considered to be referenced energy
contracts for the purpose of applying the
position limits of § 151.2 of this chapter;
Inter-commodity spread contract
means a futures or option contract that
is based on the price difference between
a referenced energy contract and
another commodity contract;
Referenced energy contract means a
physically-delivered or cash-settled
futures or option contract, other than a
basis contract or contract on a
diversified commodity index, that is a:
(1) New York Mercantile Exchange
Henry Hub natural gas contract (NG), or
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any other natural gas contract that is
exclusively or partially based on a
trading unit of 10,000 million British
thermal units (mmBtu) of natural gas
delivered at the Henry Hub pipeline
interchange in Erath, Louisiana;
(2) New York Mercantile Exchange
Light Sweet crude oil contract (CL), or
any other crude oil contract that is
exclusively or partially based on a
trading unit of 1,000 U.S. barrels of light
sweet crude oil delivered at the Cushing
crude oil storage complex in Cushing,
Oklahoma;
(3) New York Mercantile Exchange
New York Harbor No. 2 heating oil
contract (HO), or any other heating oil
contract that is exclusively or partially
based on a trading unit of 1,000 U.S.
barrels of No. 2 fuel oil delivered at an
ex-shore facility in New York Harbor;
(4) New York Mercantile Exchange
New York Harbor gasoline blendstock
(RBOB) contract, or any other gasoline
contract that is exclusively or partially
based on a trading unit of 1,000 U.S.
barrels of reformulated gasoline
blendstock for oxygen blend delivered
at an ex-shore facility in New York
Harbor; or
(5) Fraction or multiple of the
contracts described in paragraphs (1)
through (4) of this section, so that when
viewed on a fractional basis or as a
multiple, such contract is based on the
same commodity in equivalent trading
units;
Reporting market means a reporting
market as defined in § 15.00 of this
chapter;
Spot month means:
(1) For a contract that allows trading
concurrently with the issuance of
delivery notices, the futures contract
next to expire during that period of time
beginning at the close of trading on the
trading day preceding the first day on
which delivery notices can be issued to
the clearing organization of a registered
entity;
(2) For a contract that does not allow
trading concurrently with the issuance
of delivery notices, the futures contract
next to expire during that period of time
beginning at the close of trading on the
third trading day preceding the last
trading day; or
(3) For a contract that cash-settles
based on the price of one or more
physically-delivered contracts, the
period of time that is the spot-month for
such physically-delivered contracts;
Spread contract means either a
calendar spread contract or an intercommodity spread contract;
Swap agreement means a swap
agreement as defined in § 35.1(b)(1) of
this chapter;
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Swap dealer means, solely for the
purposes of this part and § 1.45 and part
20 of this chapter, any person who, as
a significant part of its business, holds
itself out as a dealer in swaps, makes a
market in swaps, regularly engages in
the purchase of swaps and their resale
to customers in the ordinary course of
a business, or engages in any activity
causing the person to be commonly
known in the trade as a dealer or market
maker in swaps;
Unless specifically defined otherwise,
the terms defined in § 150.1 of this
chapter shall have the same meaning as
they do in that section.
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§ 151.2 Position limits for referenced
energy contracts.
(a) Spot-month position limits. Except
as otherwise authorized in § 151.3, no
person may hold or control positions in
contracts of the same class when such
positions, net long or net short, are in
excess of:
(1) For physically-delivered contracts,
a spot-month position limit, fixed by the
Commission at one-quarter of the
estimated spot-month deliverable
supply; or
(2) For contracts that cash settle based
on prices of physically-delivered
contracts, a conditional-spot-month
position limit, fixed by the Commission
at one-quarter of the estimated spotmonth deliverable supply, provided
that, a trader may, if permitted by
reporting market rules adopted to
implement this paragraph, acquire or
hold spot-month positions equal to the
product of the above specified level and
the spot-month multiplier of five if the
trader does not hold positions in spotmonth physically-delivered referenced
energy contracts and the trader complies
with the reporting requirements of part
20 of this chapter.
(b) All-months-combined and singlemonth limits. Except as otherwise
authorized in § 151.3, no person may
hold or control positions in a referenced
energy contract when such positions,
net long or net short, are in excess of:
(1) Aggregate position limits:
(i) An all-months-combined aggregate
position limit, across reporting markets,
fixed by the Commission at 10% of the
open interest of that referenced energy
contract aggregated across all reporting
markets up to an open interest level of
25,000 contracts with a marginal
increase of 2.5% of aggregated open
interest thereafter; or
(ii) A single-month aggregate position
limit that is two-thirds of the position
limit fixed pursuant to paragraph
(b)(1)(i) of this section.
(2) Reporting market position limits:
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(i) For a reporting market, an allmonths-combined position limit for
contracts of the same class that is the
lower of the aggregate position limit for
a referenced energy contract under
paragraph (b)(1)(i) of this section or, for
contracts of the same class, 30% of a
class’s average combined futures and
delta-adjusted option month-end open
interest for the most recent calendar
year on that reporting market; or
(ii) For a reporting market, a singlemonth position limit for contracts of the
same class that is two-thirds of the
position limit fixed pursuant to
paragraph (b)(2)(i) of this section,
provided however, that such positions
shall not be greater than two times the
level of the position limit fixed pursuant
to paragraph (b)(2)(i) of this section on
a gross basis.
(c) Minimum position limit. The
position limits of § 151.2(b)(2)(i) shall be
replaced by an all-months-combined
position limit, fixed by the Commission
at the greater of 5,000 contracts or 1%
of the open interest aggregated across all
reporting markets, if the resulting
position limit calculated under this
paragraph is higher than an otherwise
applicable position limit.
(d) Deliverable supply.
(1) Reporting markets listing
physically-delivered referenced energy
contracts are required to submit to the
Commission an estimate of deliverable
supply by the 31st of December of each
calendar year.
(2) The estimate submitted under
paragraph (d)(1) of this section shall be
accompanied by a description of the
methodology used to derive the estimate
along with any statistical data
supporting the reporting market’s
estimate of deliverable supply.
(3) The Commission shall base its
fixing of spot-month position limits on
the estimate provided under paragraph
(d)(1) of this section unless the
Commission determines to rely on its
own estimate of deliverable supply.
(4) The Commission may base its
initial fixing of spot-month position
limits solely on its own estimates of
deliverable supply.
(e) Calculation of limits for the
purposes of this section.
(1) For the purpose of calculating
positions under this section, referenced
energy option contracts that do not
settle into futures contracts shall be
included in any calculation on a
futures-equivalent basis and treated as
futures contracts under the provisions of
this section.
(2) Open interest shall be calculated
by combining the month-end futures
open interest and the open interest in its
related option contract, on a delta-
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adjusted basis, for all months listed on
a reporting market during the most
recent calendar year.
(3) In determining or calculating all
levels and limits under this section, a
resulting number shall be rounded up to
the nearest hundred.
(4) For the purpose of calculating
position limits under this section,
referenced energy contracts that are
spread contracts, as defined by § 151.1,
shall be excluded from any calculation
of open interest.
(f) Administrative process for fixing
and publishing position limits.
(1) The Commission shall fix the spotmonth position limits (and estimates of
deliverable supply) and the all-monthscombined position limits under § 151.2,
aggregately across all reporting markets
and separately for each reporting
market, by January 31st of each calendar
year, provided that, the initial fixing of
position limits may occur on a different
date.
(2) The Commission hereby delegates,
until such time as the Commission
orders otherwise, to the Director of the
Division of Market Oversight and to
such members of the Commission’s staff
acting under the Director’s direction as
the Director may designate, the
authority to fix the position limits to be
established pursuant to paragraph (f)(1)
of this section. The Director may submit
to the Commission for its consideration
any matter that has been delegated in
this paragraph. Nothing in this
paragraph prohibits the Commission, at
its election, from exercising the
authority delegated in this paragraph.
(3) The fixed position limits shall be
published on the Commission’s Web
site (https://www.cftc.gov) and shall
become effective on the 1st day of
March immediately following the fixing
date (or 30 complete calendar days
following an initial fixing of position
limits under this part if such fixing is on
a date other than the 31st of January)
and shall remain effective until the last
day of the immediately following
February.
§ 151.3 Exemptions for referenced energy
contracts.
(a) Positions that may exceed limits.
The position limits set forth in § 151.2
may be exceeded to the extent that such
positions are:
(1) Upon application to a reporting
market for an exemption, positions
(other than positions that are held to
offset risks associated with swap
agreements under paragraph (a)(2) of
this section) held in a proprietary
account (as defined in § 1.3(y) of this
chapter) shown to be bona fide hedging
transactions, as defined and approved
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by a reporting market in a manner
consistent with, but that may differ from
(to the extent that such differences are
consistent with commercial activity in
the physical energy markets),
§§ 1.3(z)(1) and (2) of this chapter,
provided that:
(i) Traders holding positions outside
the spot month, and traders holding
spot-month positions with respect to
spot-month positions only, that are
greater than or equal to a position limit
set under § 151.2 pursuant to a bona fide
hedge exemption shall not also hold or
control positions speculatively; and
(ii) Traders holding positions that are
greater than or equal to twice a position
limit set under to § 151.2 pursuant to a
bona fide hedge exemption shall not
also hold or control positions pursuant
to an exemption under paragraph (a)(2)
of this section;
(2) Upon application under § 1.45 of
this chapter, swap dealer risk
management transactions outside of the
spot month that are held to offset risks
associated with swap agreements, which
are entered into to accommodate swap
customers and are either directly linked
to the referenced energy contracts or the
fluctuations in value of the swap
agreements are substantially related to
the fluctuations in the value of the
referenced energy contracts, and which
do not exceed twice the applicable
speculative position limits in allmonths-combined or in any single nonspot-month, provided that traders
holding positions under this paragraph
shall not also hold or control positions
speculatively when such the trader’s
total positions are greater than or equal
to a position limit set under to § 151.2;
or
(3) Subsequently demonstrated, in a
report to be filed on the calendar day
following the acquisition of such
positions pursuant to part 20 of this
chapter, to be below an applicable
position limit once option contracts that
are a part of a trader’s overall position
are adjusted by a contemporaneous risk
factor or delta coefficient for such
options.
(b) Other exemptions. The position
limits set forth in § 151.2 of this chapter
may be exceeded to the extent that such
positions remain open and were entered
into in good faith prior to the effective
date of any rule, regulation, or order that
specifies a limit.
(c) Call for information. Upon call by
the Commission, the Director of the
Division of Market Oversight or the
Director’s designee, any reporting
market issuing, or any person claiming,
an exemption from speculative position
limits under this section must provide
to the Commission such information as
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specified in the call relating to the
positions owned or controlled by that
person, trading done pursuant to the
claimed exemption, the futures, options,
over-the-counter, or cash market
positions that support the claim of
exemption, and the relevant business
relationships supporting a claim of
exemption.
§ 151.4
Aggregation of positions.
(a) Positions to be aggregated. The
position limits set forth in § 151.2 of this
chapter shall apply to:
(1) All positions in accounts in which
any person, directly or indirectly, has an
ownership or equity interest of 10% or
greater or, by power of attorney or
otherwise, controls trading; or
(2) Positions held 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 of the positions were
done by, a single person.
(b) Positions in pools. Positions in
pools in which a trader that is a limited
partner, shareholder or similar person
has an ownership or equity interest of
less than 25% need not be aggregated
with other positions of the trader unless
such person, by power of attorney or
otherwise, controls trading that is done
by the pool.
Issued by the Commission this 14th day of
January 2010, in Washington, DC.
David Stawick,
Secretary of the Commission.
Note: The following appendix will not
appear in the Code of Federal Regulations.
Appendix Statements
Statement of Gary Gensler Chairman,
Commodity Futures Trading Commission
Meeting of the Commodity Futures Trading
Commission
The CFTC is charged with a significant
responsibility to ensure the fair, open and
efficient functioning of futures markets. Our
duty is to protect both market participants
and the American public from fraud,
manipulation and other abuses. Central to
these responsibilities is our duty to protect
the public from the undue burdens of
excessive speculation that may arise,
including those from concentration in the
marketplace.
The CFTC does not set or regulate prices.
Rather, the Commission is directed to ensure
that commodity markets are fair and orderly.
It is for that reason that I support the staff’s
recommended rulemaking regarding position
limits in the energy markets and exemptions
for swap dealer risk management
transactions.
The CFTC is directed in its original 1936
statute to set position limits to protect against
the burdens of excessive speculation,
including those caused by large concentrated
positions. In that law—the Commodity
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4169
Exchange Act (CEA)—Congress said that the
CFTC ‘‘shall’’ impose limits on trading and
positions as necessary to eliminate, diminish
or prevent the undue burdens that may come
as a result of excessive speculation. We are
directed by statute to act in this regard to
protect the American public.
A transparent and consistent playing field
for all physical commodity futures should be
the foundation of our regulations. Thus,
position limits should be applied
consistently to all markets and trading
platforms and exemptions to them also
should be consistent and well-defined.
While we currently set and enforce
position limits on certain agriculture
products, we do not for energy markets.
Though there are some differences between
energy markets and agricultural markets,
those distinctions do not suggest to me that
the federal government should set position
limits on one and not the other.
When the CFTC set position limits in the
past, the agency sought to ensure that the
markets were made up of a broad group of
market participants with a diversity of views.
At the core of our obligations is promoting
market integrity, which the agency has
historically interpreted to include ensuring
markets do not become too concentrated.
Position limits help to protect the markets
both in times of clear skies and when there
is a storm on the horizon. In 1981, the
Commission said that ‘‘the capacity of any
contract market to absorb the establishment
and liquidation of large speculative positions
in an orderly manner is related to the relative
size of such positions, i.e., the capacity of the
market is not unlimited.’’ I believe this is still
true today.
The futures exchanges also have
obligations with regard to the setting of
position limits. As was explored in our
summer hearings, though, the Commodity
Futures Modernization Act (CFMA) changed
the exchanges’ obligations. They have to
comply with a core principal that speaks to
protecting against manipulation or
congestion, ‘‘especially during trading in the
delivery month.’’ These core principles do
not explicitly require the exchanges to set
position limits to guard against the burdens
of excessive speculation. The CEA, in section
4a, though, left the obligations of the CFTC
unchanged with regard to setting position
limits to protect against the possible burdens
of excessive speculation. Our governing
statute importantly distinguishes between
these two distinct, but sometimes related,
public policy goals—protecting against
manipulation and protecting against possible
burdens of excessive speculation. The CFMA
clearly established that the exchanges had to
address the first while the CFTC had a
broader mandate to address both. Though the
CFTC had in 1992 first allowed exchanges to
establish accountability regimes, it was only
in 2001 that they did so in lieu of position
limits in the energy markets.
The past eight years have provided further
evidence as to the difference. Accountability
levels are regularly and repeatedly exceeded.
In fact, they are neither stop signs nor even
yield signs for market participants. As
reviewed at our summer hearings, in the 12
months between July 2008 and June 2009,
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accountability levels for individual months
were exceeded in the four main energy
contracts by 69 different traders, some
exceeding the levels during every trading day
in the period.
The staff recommendation builds upon the
Commission’s experience and previous
guidance in setting position limits,
particularly for agricultural commodities.
• Limits are set across the same contract
month groupings: All-months-combined
(AMC); single-month; and spot-month.
• Limits apply to aggregate positions in
futures and options combined.
• There are exemptions for bona fide
hedging transactions involving commodity
inventory hedges and anticipatory purchases
or sales of the commodity.
In addition, the proposed energy limits
incorporate CFTC guidance to exchanges in
setting speculative position limits:
• The basic formula for the level of the allmonths-combined limit is the same—10% of
the first 25,000 contracts of open interest
plus 2.5% of open interest over 25,000
contracts.
• The approach to setting the level of the
spot-month limit in the physical delivery
contracts is the same—25% of the estimated
deliverable supply.
The proposed energy Federal limits builds
upon the Commission’s experience in several
ways:
• The proposed energy limits would be
responsive to the size of the market and
administratively reset on an annual basis,
rather than remaining unchanged until a new
rule is issued.
• The proposal extends contract
aggregation by applying all-monthscombined and single-month energy
speculative position limits both to classes of
contracts (all physical delivery or cash
settled contracts in a commodity at a
reporting market) and to positions held
across all reporting markets.
• The proposed energy limits aggregate
positions at the owner level rather than
permitting disaggregation for independent
account controllers.
I believe that the staff recommendation is
a measured and balanced approach to setting
position limits in the energy markets.
In addition to resetting position limits in
the energy futures and options markets, the
proposed rulemaking both addresses
exemptions for bona fide hedgers and
establishes a consistent framework for certain
swap dealer risk management exemptions.
The Commission and the exchanges currently
grant relief from agriculture and energy
position limits to swap dealers on a case-bycase basis via staff no-action letters or similar
methods at the exchanges. The proposed rule
would, for the first time, bring uniformity to
swap dealer exemptions. Swap dealers would
be required to file an exemption application
and update the application annually.
Exempted swap dealers also would be
required to provide monthly reports of their
actual risk management needs and maintain
records that demonstrate their net risk
management needs. The CFTC would
publicly disclose the names of swap dealers
that have filed for an exemption after a sixmonth delay.
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This rule proposal is one step in a very
important process. Our vote on the proposed
rulemaking begins a 90-day public comment
period. Many important questions are listed
in the proposal, and we are all very
interested to hear from the public on these
significant issues.
I look forward to hearing from hedgers and
speculators, dealers and exchanges and other
market participants and economists regarding
the proposal and how and if it would
improve the functioning of the markets. I am
also interested in hearing any changes that
they may suggest.
As we vote to on a proposed rulemaking
to set position limits in the energy futures
and options markets, we also are working
with Congress to bring comprehensive
regulatory reform to the over-the-counter
derivatives markets. I was pleased that the
House included in the recently passed
financial reform legislation enhanced
authority for the CFTC to set aggregate
position limits for over-the-counter
derivatives contracts when they perform or
affect a significant price discovery function
with respect to regulated entities. While
Congress continues to work on regulatory
reform, it is important that the Commission
continue its work under current authority to
consider setting energy position limits. The
CFTC is working in parallel with the
legislative process.
I thank the staff and my fellow
Commissioners for all of the preparation that
went into the recommended rulemaking. I
will now entertain a motion that the
Commission issue a proposed rule to set
position limits for futures and option
contracts in the major energy markets and
establish consistent, uniform exemptions for
certain swap dealer risk management
transactions.
Statement of Commissioner Michael V. Dunn
Regarding the Notice of Proposed
Rulemaking for Speculative Position Limits
for Referenced Energy Contracts
Today I am voting to release the proposed
notice of rulemaking entitled Federal
Speculative Position Limits for Referenced
Energy Contracts and Associated Regulations.
My vote to release this proposed rule should
in no way be construed as an agreement with
the opinions expressed in the proposal or to
the approach advocated in setting these
proposed position limits. Despite my serious
reservations, I have agreed to the release of
this proposal so that the public at-large has
ample opportunity to voice their opinions
and concerns on this topic.
At the close of the Commission’s position
limits hearings on August 5, 2009, I stated
that:
[T]he CFTC does not have the authority to
set speculative position limits in all of the
venues that may be affected by excessive
speculation, specifically over-the-counter
markets (OTC) and on foreign boards of trade
(FBOT). Unilateral Commission action in
only the markets we currently regulate may
not have the desired effect of reigning in
excessive speculation in the futures market.
Without similar steps in the OTC markets
and on FBOTs, those seeking to evade the
limits we set could simply move to venues
outside our authority.
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I believe this is still true today, and that
forging ahead on a position limits regime for
political expediency is not the course of
action that this agency needs or one that
promotes the health and integrity of the
futures industry in the United States. The
simple announcement of our hearings several
months ago caused business to migrate to
OTC markets and FBOTs currently outside
our purview. This is an unacceptable
consequence of regulation and is, I fear, a
sign of things to come if this agency does not
take a coordinated approach to bringing
sensible regulation to the futures markets.
I think it needs to be made clear that the
Proposed Position Limits do not set trading
limitations on any particular class of
investor, including passively managed longonly index funds. The Proposed Position
Limits’ sole objective is to prevent excessive
speculation by a single entity. I would be
very interested to hear from the public on
whether this incremental approach best
addresses the market wide concerns raised by
those who participated in our hearings last
summer.
I would like to reiterate that my vote to
release this document should in no way be
construed as an agreement of any kind to
final rules setting federal speculative position
limits on energy contracts. My commitment
remains to accept comments and information
during the next few months with an open
mind, and to work with my fellow
Commissioners to ensure that we have a
functioning futures industry.
Statement of Commissioner Jill Sommers
Regarding the Notice of Proposed
Rulemaking for Speculative Position Limits
for Referenced Energy Contracts
Dissenting
The Commission and its predecessors have
grappled with the complex issues
surrounding federal speculative position
limits for many years in connection with
transactions based on agricultural
commodities. As prices rose across the board
in virtually all commodities throughout 2007
and 2008, the Commission focused its
attention on possible causes, including the
influx of new traders into the markets, in
particular swap dealers hedging the risk
resulting from over-the-counter (OTC)
business and traders seeking exposure to
commodities as an asset class through
passive, long-term investment in exchange
traded funds (ETFs) and commodity index
funds. Concerns were raised in numerous
Congressional hearings that excessive
speculation in both exchange-traded and
OTC markets was to blame for rising prices,
particularly in the energy sector. The
Commission held three days of hearings in
July and August of 2009 to discuss a number
of different approaches and has received
continuous feedback from the industry for
the past several months. We now have before
us a proposal from staff which would
implement federal speculative position limits
for futures and options contracts in certain
energy commodities.
I dissent from issuing the proposal for the
following reasons. I am concerned that hard
positions limits may be imposed on exchange
trading without similar limits in place for
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OTC markets. Legislation giving us the
authority to impose OTC limits may be
enacted this year, but the timing and final
form of such legislation is unknown. While
I wholeheartedly support efforts to enhance
our authority in this area, I am concerned
that forging ahead with federal limits in a
piecemeal fashion is unwise. I am especially
concerned that doing so will have the
perverse effect of driving portions of the
market away from centralized trading and
clearing at the very time we are urging all
standardized OTC activity to be traded onexchange or cleared. Likewise, I am
concerned that, without global standards,
trading will move to other financial centers
around the world. A report issued by the
United Kingdom’s Financial Services
Authority and HM Treasury last month urges
caution in introducing a position limits
regime. See Financial Services Authority &
HM Treasury, Reforming OTC Derivative
Markets, A UK Perspective at 31–35 (Dec.
2009). Clearly, more work is needed to
achieve a uniform approach.
A delay in promulgating position limits
will not leave the markets unprotected. The
proposal before us ‘‘sets high position levels
that are at the outer bounds of the largest
positions held by market participants.’’
Proposal at 59. Exchange position limits and
accountability rules remain in place and will
continue to trigger the first line of defense
against potential market manipulations or
other disruptions. Even if the proposed
federal limits were enacted, exchanges would
be obligated to begin monitoring positions on
their markets well before traders reach the
federal limits. Aggressive use of the
Commission’s surveillance authority in
partnership with the exchanges should be
sufficient to closely monitor and protect the
integrity of the markets.
Finally, the proposal makes no distinction
between passive ETF and index traders and
speculators. While the proposal does seek
comment on the feasibility of categorizing
such traders differently, I am discouraged
that we are no closer to an answer than we
were prior to our 2009 hearings, the
numerous Congressional hearings that
focused on index trading, and the
Commission’s extensive collection of index
investment data since June 2008, which it
now publishes on a quarterly basis. There is
no doubt that passive long-only investors do
not behave as typical speculative traders.
They have a unique footprint in the markets.
If the data demonstrates that passive long
traders are disrupting the markets, through
the rolling of their positions or otherwise, the
Commission should make an affirmative
finding and tailor a solution that addresses
the problem.
It is also my hope that if the Commission
adopts the limits included in the proposal,
that it also promulgate federal limits for all
other commodities with a finite supply, such
as metals and the agricultural commodities
not currently subject to federal limits. The
rationale given for the current proposal
applies equally to contracts in those
commodities. Another inconsistency that
would result if the Commission adopts the
proposed rulemaking is that swap dealers
would continue to receive bona fide hedge
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exemptions for positions related to
agricultural commodities subject to federal
limits, but the new proposed risk
management exemption regime would apply
to positions related to the four energy
commodities included in the proposal. A
uniform policy would benefit not only the
Commission and market participants from an
operational efficiency standpoint, but would
also enhance transparency by eliminating
needless complexities in the process.
Statement of Commissioner Bart Chilton
Regarding the Notice of Proposed
Rulemaking for Speculative Position Limits
for Referenced Energy Contracts
‘‘Moving Forward’’
During the last decade, while traditional
hedgers and speculators increased their use
of the futures markets, many new nontraditional participants entered the arena,
bringing with them capital and a wealth of
innovative approaches to trading. The trend
helped fuel the economic engine of our
democracy—a good and positive outcome. As
markets and market participants evolve, the
Commission has an inherent responsibility to
examine the impact, as well as to proactively
anticipate the potential impact, of changing
dynamics on those markets we are entrusted
to oversee.
There is certainly no consensus about the
potential and net impact of new nontraditional speculators on commodity
markets. Did the massive passives—very
large traders who have no interest in the
underlying physical commodity and have, in
general, a fairly inactive long trading
strategy—contribute to $147 barrel oil in
2008? Some say there is no impact on
markets, others (like researchers at MIT, Rice
and Princeton—and a new study out this
week from Lincoln University of Missouri)
absolutely disagree.
Regardless, what is important to remember
is that having an impact is not equivalent to
manipulation (or other abuse) under current
law, rule or regulation; it is not per se
negative. However, any conduct that
potentially can distress markets, that has the
propensity to create artificiality in the
markets, needs to be understood and curbed
as necessary.
The Commodity Exchange Act (CEA) has
as its fundamental purpose the deterrence
and prevention of fraud, market abuse and
manipulation. To accomplish our mission
requires vigilance and thoughtful
consideration of the potential for market
aberrations. It requires agile, balanced and
prudent action in a timely manner—not
usually the mark of government. Our role in
striking the right balance with regard to the
massive passives and other new dynamics in
the futures industry requires that we not
merely review and respond, but that we
anticipate, deter and prevent.
That is why I support moving forward on
the energy proposal before the Commission.
This proposal strikes a reasonable balance.
Simply put, it seeks to impose mandatory
hard cap position limits. Doing so is not the
mark of wild-eyed overzealous regulators. In
fact, the position limits called for in the
proposal are similar to limits already in effect
for agricultural commodities. This proposal
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simply seeks to expand such mandatory hard
cap position limits to four heavily traded
energy contracts.
Specifically, the energy proposal would
establish four different hard cap mandatory
speculative position limits. They are: An
exchange-specific spot-month limit; a single
month limit; an all-months-combined limit;
and an all-encompassing, cumulative U.S.
exchange position limit for substantially
similar-traded contracts. These limits would
be dynamic in that they would be responsive
to the size of the market and subject to
annual recalculation by the Commission.
While I have been a staunch advocate for
strong position limits, the levels set for the
limits, in my opinion, actually err on the
high side. The proposed limits will certainly
be seen by some as higher than appropriate.
However, should the limits prove inadequate,
the agency can, and I hope will, recalibrate
to ratchet them down or even increase them
as deemed appropriate. The most important
thing is to establish a thoughtful position
limit system.
Furthermore, while the proposed limits err
on the high side, such levels would still
ensure that the very largest traders’ positions,
those with the greatest potential for causing
market-contortions, would be limited.
Moreover, if limits were set too low, there
would be a possibility that trading migration
could take place, transferring traders to overthe-counter markets or overseas exchanges.
This is particularly noteworthy because
Congress has yet to pass regulatory reform
legislation that would grant the CFTC
authority to properly regulate the over-thecounter markets—markets that are currently
dark in that there is not government
regulation or oversight. Hundreds of trillions
of dollars are traded in these dark markets
and they can influence the price that
consumers pay for everything from gasoline,
to a loaf of bread, to a home mortgage.
Passage of such legislation to provide
regulators with authority in this area is
critically needed, and soon.
In addition to position limits, the proposal
contains a mechanism to consider certain
exemptions to those limits. I have suggested
that any exemptions should be approved by
the CFTC, targeted for legitimate business
purposes, verifiable and transparent. This
proposal meets all four of those criteria.
Traders hedging commercial risks, i.e.
those who have inventory or have an interest
in the underlying physical commodity,
would qualify for a bona fide hedging
exemption from the proposed speculative
position limits upon application to the
exchange. The CFTC would audit the use of
this exemption to ensure its consistency with
our rules and regulations. Importantly, no
longer included in this class of traders would
be swap dealers who establish positions to
offset the financial risk of customer initiated
swap positions. Instead, those traders could
apply directly to the CFTC for a limited risk
management exemption for positions held
outside of the spot month. Swap dealers who
receive this exemption from the CFTC would
be subject to rigorous and regular reporting
requirements to verify and qualify their need
for the exemption. Currently, neither the
names nor the numbers of such exemptions
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are available to the public. Under the
proposal, in order to increase transparency,
the CFTC would make public the identities
of those who receive exemptions.
Finally, the proposal seeks comment from
the public on the question of expanding
position limits to the metals complex and to
soft agricultural commodities. While I am
pleased that this question is at least posited
through the proposed rule, I am extremely
disappointed that metals are not a part of this
proposal as I have sought. In essence, failure
to include a proposed rule relative to metals
such as gold and silver prevents the
inclusion of metals in the final rule covering
position limits in energy. As a result of the
omission, CFTC attorneys have opined that
should the Commission wish to establish
position limits in metals as a result of public
comment, the agency would have to
undertake an entirely separate rulemaking. I
strongly support thoughtful position limits in
the metals complex. I have advocated for
their inclusion in this proposal with each of
my colleagues and staff, and regret the lack
of consensus that remains. It is my sincere
hope and expectation that the upcoming
hearing on position limits with regard to
metals will enable us to move more
expeditiously on a parallel regulatory process
for metals.
I thank everyone involved in conceiving
and designing this thoughtful proposal with
regard to energy. We seek comment, for an
ample period of 90 days, on not only the
overall proposal, but also specifically on the
question of expanding the concept to the
metals and soft agricultural commodities and
on the question of imposing separate position
limits for the massive passives as a class of
investors. I look forward to the comments
and ultimately to putting a sensible position
limit system in place.
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Concurring Statement of Commissioner Scott
D. O’Malia
Regarding the Proposed Federal Speculative
Position Limits for Referenced Energy
Contracts and Associated Regulations
I concur on the release of the Federal
Register notice of proposed Federal
speculative position limits for certain energy
commodities because I think it is important
that the Commission receive comments on
the proposal. I encourage our market
participants, the public, and anyone with an
interest in the markets to inform the
Commission about the impact of the
proposed limits or other limits, meaning
limits as currently proposed, or potentially
lower limits as a result of this rulemaking or
future rulemaking.
Notwithstanding my concurrence on the
release for comments, I have many concerns
regarding the proposal’s effectiveness and
justification. Keeping in mind the importance
of maintaining the market’s fundamental
purpose of allowing customers to hedge
commercial risk, I question the utility of
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rules that either present any potential for
circumventing CFTC authority or make
energy markets less transparent or liquid.
The Proposed Limits Could Result in Less
U.S. Regulatory Oversight
I question the effectiveness of these
regulatory changes, especially as Congress is
considering a much broader and
comprehensive financial reform package. I
remain particularly concerned with the
impact of enacting the proposed position
limits on the regulated exchanges, while the
Commission lacks the regulatory authority to
impose limits equitably upon all similar
energy transactions, including over-thecounter transactions. As we work to increase
transparency in these markets, the proposed
position limits may undermine our efforts by
allowing participants to turn to the less
regulated and less transparent over-thecounter markets, which would be detrimental
to the markets and to the public.
Status Quo for Index and Speculative
Investors
Earlier this year, the Commission held
hearings and heard testimony from witnesses
who were frustrated with recent prices and
volatility in commodity markets. Some
advocated that the Commission immediately
impose position limits as a solution. This
created high expectations that any
Commission proposal would impose
limitations on passive index and speculative
investors. The release states that no more
than ten trading entities would be affected
and most of those would likely be entitled to
a bona fide hedge exemption. This means
that few, if any, passive index and
speculative investors will be significantly
impacted by the proposed position limits.
The proposed position limits will not change
the investing behavior of passive index
investors, so long as they remain under the
limits or utilize the over-the-counter markets
over which the Commission has limited
authority. The Commission would benefit
from receiving information on the impact, if
any, the proposed position limits might have
on the trading strategies of passive index
investors going forward. In addition, the
Commission should endeavor to improve its
understanding of the impacts of passive
index investors rolling over their position on
a monthly basis to determine what, if any,
action is required.
Concerns About Effectiveness and Necessity
This proposal makes a case for the
statutory justification for the CFTC to impose
position limits under Section 4a(a) of the Act.
However, the proposal fails to make a
compelling argument that the proposed
position limits, which only target large
concentrated positions, would dampen price
distortions or curb excessive speculation. In
large part, the lack of a compelling
justification may be due to the CFTC’s own
research and the Interagency Task Force on
PO 00000
Frm 00030
Fmt 4701
Sfmt 9990
Commodity Market’s conclusion that the rise
in oil prices was largely attributable to
fundamental supply and demand factors,
which is also supported by independent
analysis. In addition, the fact that the
proposed position limits are modeled on the
agricultural commodities position limits
forces us to examine whether those
agriculture limits were effective in
preventing the price spikes in 2007 and 2008.
Despite federal position limits, contracts
such as wheat, corn, soybeans, and cotton
contracts were not spared record setting price
increases.
Missed Opportunity for Transparency
The proposed position limits provide swap
dealers with twice the single and all-months
combined levels. This is a divergence from
the current practice of providing swap
dealers with a hedge exemption for
commercial risk taken on over-the-counter
transactions. I question whether the
Commission has missed an opportunity to
consider an alternative approach to provide
swap dealers with a ‘‘look through’’
exemption, meaning swap dealers would
receive a bona fide hedge exemption for
business related to counterparties who would
have been entitled to a hedge exemption if
the counterparties had used the futures
markets. In exchange for this ‘‘look through’’
exemption, swap dealers would provide the
Commission with their customer’s over-thecounter position data. That data would allow
the Commission to determine whether
customers are attempting to circumvent the
position limits. I would be interested to
receive comments on whether the
Commission should impose this ‘‘look
through’’ exemption, rather than the swap
dealer exemption in the proposed rule. In
addition, I am interested to know what types
of data could be made available under a ‘‘look
through’’ exemption. While I am aware that
the proposed rule contains a provision for
‘‘look through’’ recordkeeping, meaning data
would be provided only upon Commission
request, this would not provide the same
transparency as the above.
Position Limits Must Not Hinder Commercial
Risk Management
If position limits are implemented, the
Commission must ensure that such limits do
not affect market liquidity and thus hinder
the market’s fundamental purpose of
allowing commercial hedgers to manage risk.
This is true for position limits on energy
products or for any other commodity.
In light of the many questions and
concerns I have, I look forward to receiving
comments from market participants, the
public, and anyone with an interest in the
markets that would be impacted by the
proposed position limits.
[FR Doc. 2010–1209 Filed 1–25–10; 8:45 am]
BILLING CODE 6351–01–P
E:\FR\FM\26JAP2.SGM
26JAP2
Agencies
[Federal Register Volume 75, Number 16 (Tuesday, January 26, 2010)]
[Proposed Rules]
[Pages 4144-4172]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-1209]
[[Page 4143]]
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Part II
Commodity Futures Trading Commission
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17 CFR Parts 1, 20 and 151
Federal Speculative Position Limits for Referenced Energy Contracts and
Associated Regulations; Proposed Rule
Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 /
Proposed Rules
[[Page 4144]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 20 and 151
RIN 3038-AC85
Federal Speculative Position Limits for Referenced Energy
Contracts and Associated Regulations
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is proposing to implement speculative position limits
for futures and option contracts in certain energy commodities. The
Commodity Exchange Act of 1936 (``CEA'' or ``Act'') gives the
Commission the authority to establish limits on positions to diminish,
eliminate or prevent excessive speculation causing sudden or
unreasonable fluctuations in the price of a commodity, or unwarranted
changes in the price of a commodity. In addition to identifying the
affected energy contracts and the position limits that would apply to
them, the notice of proposed rulemaking includes provisions relating to
exemptions from the position limits for bona fide hedging transactions
and for certain swap dealer risk management transactions. The notice of
proposed rulemaking also sets out an application process that would
apply to swap dealers seeking a risk management exemption from the
position limits, as well as related definitions and reporting
requirements. In addition, the notice of proposed rulemaking includes
provisions regarding the aggregation of positions under common
ownership for the purpose of applying the limits.
DATES: Comments must be received on or before April 26, 2010.
ADDRESSES: Comments should be submitted to David Stawick, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Comments also may be sent by
facsimile to (202) 418-5521, or by electronic mail to
secretary@cftc.gov. Reference should be made to ``Proposed Federal
Speculative Position Limits for Referenced Energy Contracts and
Associated Regulations.'' Comments may also be submitted by connecting
to the Federal eRulemaking Portal at https://www.regulations.gov and
following comment submission instructions.
FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Acting Director of
Surveillance, (202) 418-5452, ssherrod@cftc.gov, David P. Van Wagner,
Chief Counsel, (202) 418-5481, dvanwagner@cftc.gov, Donald Heitman,
Senior Special Counsel, (202) 418-5041, dheitman@cftc.gov, or Bruce
Fekrat, Special Counsel, (202) 418-5578, bfekrat@cftc.gov, Division of
Market Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581, facsimile number
(202) 418-5527.
SUPPLEMENTARY INFORMATION:
I. Overview
The majority of futures and options trading on energy commodities
in the United States occurs on the New York Mercantile Exchange
(``NYMEX''), a designated contract market (``DCM'') that operates as
part of the CME Group.\1\ Energy commodity trading also takes place on
the Intercontinental Exchange (``ICE''), an Atlanta-based exchange that
operates as an exempt commercial market (``ECM'') and is, as of July
2009, a registered entity with respect to its Henry Financial LD1 Fixed
Price natural gas contract.\2\ NYMEX currently lists physically-
delivered and cash-settled futures contracts (and options on such
futures contracts) in crude oil, natural gas, gasoline and heating oil.
ICE lists a cash-settled look-alike contract on natural gas, and
options thereon, that settles directly to the settlement price of
NYMEX's physically-delivered natural gas futures contract.\3\
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\1\ The CME Group is the parent company of four DCMs: NYMEX, the
Chicago Board of Trade (``CBOT''), the Chicago Mercantile Exchange
(``CME''), and the Commodity Exchange (``COMEX'').
\2\ Under section 2(h)(7) of the Act, ECM contracts that have
been determined by the Commission to be significant price discovery
contracts (``SPDCs'') are subject to Commission regulation. 7 U.S.C.
2(h)(7). ECMs listing SPDCs (``ECM-SPDCs'') are also deemed to be
registered entities with self-regulatory responsibilities with
respect to such contracts. To date, ICE's Henry Financial LD1 Fixed
Price natural gas contract is the first and only ECM contract to
have been determined by the Commission to be a SPDC under section
2(h)(7) of the Act. 74 FR 37988 (July 30, 2009).
\3\ US-based traders also enter into various energy contracts
listed by the ICE Futures Europe Exchange (``ICE Futures Europe''),
a London-based exchange. These energy contracts include futures on
West Texas Intermediate (WTI) light sweet crude oil, a New York
Harbor heating oil futures contract and a New York Harbor unleaded
gasoline blendstock futures contract. All of the listed contracts
directly cash-settle to the price of NYMEX futures contracts that
are physically-settled. ICE Futures Europe is a foreign board of
trade (``FBOT'') and, unlike NYMEX and ICE, is not registered in any
capacity with the Commission. Instead, ICE Futures Europe and its
predecessor, the International Petroleum Exchange, have operated in
the US since 1999 pursuant to Commission staff no-action relief.
CFTC Staff Letter No. 99-69 (November 12, 1999). Since 2008, ICE
Futures Europe's no-action relief has been conditioned on, among
other things, the requirement that the Exchange implement position
limit requirements for its NYMEX-linked contracts that are
comparable to the position limits that NYMEX applies to its
contracts. CFTC Staff Letter No. 08-09 (June 17, 2008); CFTC Staff
Letter No. 08-10 (July 3, 2008). Generally, comparable position
limits for FBOT contracts that link to CFTC-regulated contracts
serve to ensure the integrity of prices for CFTC-regulated
contracts.
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ICE's Henry Financial LD1 Fixed Price natural gas contract and
virtually all NYMEX energy contracts are currently subject to exchange-
set spot-month speculative position limits that are in effect for the
last three days of trading of the respective contracts. Under an
exchange's speculative position limit rules, no trader, whether
commercial or noncommercial, may exceed a specified limit unless the
trader has requested and received an exemption from the exchange.
Outside of a contract's spot month, these energy contracts are subject
to exchange all-months-combined and single-month position
accountability rules. Under an exchange's position accountability
rules, once a trader exceeds an accountability level in terms of
outstanding contracts held, the exchange has the right to request
supporting justification from the trader for the size of its position,
and may order a trader to reduce or not increase its positions further.
As described in detail in section VI of this release, the
Commission is proposing to impose all-months-combined, single-month,
and spot-month speculative position limits for contracts based on a
defined set of energy commodities. Broadly described, the Commission's
proposal, for non-spot-month positions, would apply exchange-specific
speculative position limits to a set of economically similar contracts
that settle in the same manner. In addition, the Commission is
proposing to implement and enforce aggregate non-spot-month speculative
position limits that would apply across registered entities that list
substantially similar energy contracts. As discussed in the Paperwork
Reduction Act section of this notice of proposed rulemaking, should the
proposed regulations be adopted, the Commission estimates that the
total number of traders with significant positions that could be
affected by the proposed regulations would be approximately ten.
Particular data concerning the distribution of speculative traders
in a market and an analysis of market conditions and variables,
including open interest, can support a range of acceptable speculative
position limit requirements. The Commission, in structuring the
speculative position
[[Page 4145]]
limit framework as proposed, has considered its recent and historical
actions in setting position limits, its continuous oversight of
exchange-set speculative position limit and accountability rules, its
experience in administering Commission-set speculative position limits
\4\ and its observations of energy commodity market conditions and
developments, particularly during the past four years. The Commission
notes that the proposed Federal speculative position limits on energy
contracts would be in addition to, and not a substitute for, a
reporting market's existing speculative position limit and
accountability requirements. Reporting markets, defined in Commission
regulation 15.00 to include DCMs and ECM-SPDCs, are self-regulatory
organizations with an independent responsibility for adopting and
implementing appropriate position limit and accountability rules.
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\4\ The Commission sets Federal speculative position limits for
certain agricultural commodities enumerated in section 1a(4) of the
Act. See 17 CFR 150.2.
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This notice of proposed rulemaking does not propose regulations
that would classify and treat differently passive long-only positions.
The Commission does, however, in section VIII of this notice, solicit
comment on specific issues related to large, passive long-only
positions. In particular, the Commission solicits comments on how to
identify and define such positions and whether such positions should,
including collectively, be limited in any way.
II. Statutory Background
Speculative position limits have been identified as an effective
regulatory tool for mitigating the potential for market disruptions
that could result from uncontrolled speculative trading. Section 4a(a)
of the Act, 7 U.S.C. 6a(a), which in significant part retains language
that was initially adopted in 1936, provides that:
Excessive speculation in any commodity under contracts of sale
of such commodity for future delivery made on or subject to the
rules of contract markets or derivatives transaction execution
facilities, or on electronic trading facilities with respect to a
significant price discovery contract causing sudden or unreasonable
fluctuations or unwarranted changes in the price of such commodity,
is an undue and unnecessary burden on interstate commerce in such
commodity.
Accordingly, section 4a(a) of the Act provides the Commission with
the following authority:
For the purpose of diminishing, eliminating, or preventing such
burden, the Commission shall, from time to time * * * proclaim and
fix such limits on the amounts of trading which may be done or
positions which may be held by any person under contracts of sale of
such commodity for future delivery on or subject to the rules of any
contract market or derivatives transaction execution facility, or on
an electronic trading facility with respect to a significant price
discovery contract, as the Commission finds are necessary to
diminish, eliminate, or prevent such burden.
Amendments introduced to the Act by the Futures Trading Act of 1982
supplemented this longstanding statutory framework for Commission-set
Federal speculative position limits by explicitly acknowledging the
role of the exchanges in setting their own speculative position
limits.\5\ The 1982 legislation also gave the Commission, under section
4a(5) of the Act, the authority to directly enforce violations of
exchange-set, Commission-approved speculative position limits in
addition to position limits established directly by the Commission
through orders or regulations.\6\ Thus, since 1982, the Act's framework
explicitly anticipates the concurrent application of Commission and
exchange-set speculative position limits. The concurrent application of
limits is particularly consistent with an exchange's close knowledge of
trading activity on that facility and the Commission's greater capacity
for monitoring trading and implementing remedial measures across
interconnected commodity futures and option markets.
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\5\ Futures Trading Act of 1982, Pub. L. No. 97-444, 96 Stat.
2299-30 (1983).
\6\ Section 4a(5) has since been redesignated as section 4a(e)
of the Act. 7 U.S.C. 4a(e).
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The Commodity Futures Modernization Act of 2000 (``CFMA'') \7\
introduced substantial changes to the CEA. Broadly described, the CFMA
established a principles-based approach to regulating the futures
markets, allowed for the implementation of exchange rules through a
certification process without requiring the exchanges to obtain prior
Commission approval, and delineated specific designation criteria and
core principles with which a DCM must comply to receive and maintain
designation. Among these, Core Principle 5 in section 5(d) of the Act
provides:
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\7\ Commodity Futures Modernization Act of 2000, Appendix E of
Public Law No. 106-554, 114 Stat. 2763 (2000).
Position Limitations or Accountability--To reduce the potential
threat of market manipulation or congestion, especially during
trading in the delivery month, the board of trade shall adopt
position limitations or position accountability for speculators,
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where necessary and appropriate.
Most recently the CEA was amended by the CFTC Reauthorization Act
of 2008.\8\ The 2008 legislation amended the CEA by, among other
things, adding core principles in new section 2(h)(7) governing SPDCs
traded on electronic trading facilities operating in reliance on the
exemption in section 2(h)(3) of the Act.\9\ The 2008 legislation
amended the Act to impose certain self-regulatory responsibilities on
ECM-SPDCs through core principles, as did the CFMA with respect to
DCMs, including a core principle that requires such facilities to
``adopt, where necessary and appropriate, position limitations or
position accountability for speculators in significant price discovery
contracts * * *'' \10\ The 2008 legislation also amended section 4a(e)
of the Act to incorporate references to ECM-SPDCs, thereby assuring
that violation of an ECM-SPDC's position limits, regardless of whether
such position limits have been approved by or certified to the
Commission, would constitute a violation of the Act that the Commission
could independently enforce.
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\8\ Food, Conservation and Energy Act of 2008, Public Law No.
110-246, 122 Stat. 1624 (June 18, 2008).
\9\ 7 U.S.C. 2(h)(3)-(7).
\10\ 7 U.S.C. 2(h)(7)(C)(ii)(IV).
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As mentioned above, the CFMA generally replaced the Act's exchange
rule approval process with a certification process. On a practical
level, this shift has tended to reduce the Commission's ability to more
directly shape the specific requirements of exchange-set speculative
position limit and accountability rules through approving such rules
prior to implementation. In light of this, the Commission's broad
authority to independently set position limits under CEA section 4a(a)
could be viewed as an increasingly important enabling provision that
allows the Commission to take the initiative in acting, when
appropriate, to bolster market confidence and curb or prevent excessive
speculation that may cause sudden, unwarranted, or unreasonable
fluctuations in commodity prices.
III. Federal Speculative Position Limits
A. Historical Background
From the earliest days of federal regulation of the futures
markets, Congress made it clear that unchecked speculative positions,
even without intent to manipulate the market, can cause price
disturbances.\11\ To protect
[[Page 4146]]
markets from the adverse consequences associated with large speculative
positions, Congress expressly authorized the Commodity Exchange
Commission (``CEC'') \12\ to impose speculative position limits
prophylactically.\13\ The Congressional endorsement of the Commission's
prophylactic use of position limits rendered unnecessary a specific
finding that an undue burden on interstate commerce had actually
occurred. Additionally, Congress closely restricted exemptions from
position limits to bona fide hedging transactions, initially defined as
sales or purchases of futures contracts offset by sales or purchases of
the same cash commodity.
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\11\ The Congressional finding that excessive speculation can
have detrimental consequences even without manipulative intent is
consistent with the series of studies and reports made to Congress
urging the adoption of measures to restrict speculative trading
notwithstanding the absence of ``the deliberate purpose of
manipulating the market.'' See e.g., Fluctuations in Wheat Futures,
69th Cong., 1st Sess., Senate Document No. 135 (June 28, 1926).
\12\ The CEC is the predecessor of the Commodity Exchange
Authority, which is, in turn, the predecessor of the Commission.
\13\ Requiring a specific demonstration of the need for position
limits is contrary to section 4a(a) of the Act, which provides that
the Commission shall set position limits from time to time, among
other things, to prevent excessive speculation. 7 U.S.C. 4a(a).
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In December of 1938, the CEC promulgated the first Federal
speculative position limits for futures contracts in grains (then
defined as wheat, corn, oats, barley, flaxseed, grain sorghums and rye)
after finding that large speculative positions tended to cause sudden
and unreasonable fluctuations and changes in the price of grain.\14\ At
that time, the CEC did not impose limits in the other commodities
enumerated in the 1936 Act.
---------------------------------------------------------------------------
\14\ 3 FR 3145 (December 24, 1938).
---------------------------------------------------------------------------
Over the following years, Federal position limits were extended to
various other commodities enumerated in the Act. However, no uniform
approach regarding speculative position limits was applied to those
enumerated commodities. In some cases (e.g., soybeans), a commodity
added to the Act's list of enumerated commodities was also added to the
roster of commodities subject to Federal speculative position limits.
In other cases (e.g., livestock products, butter, and wool),
commodities added to the list of enumerated commodities in the Act
never became subject to Federal position limits.
In 1974, Congress overhauled the CEA to create the CFTC and
simultaneously expanded the new agency's jurisdictional scope beyond
the enumerated agricultural commodities to include futures contracts in
any commodity. In expanding the CFTC's jurisdiction, Congress
reiterated a fundamental precept underlying the Act, namely, to
minimize or prevent the harmful effect of uncontrolled speculation.\15\
When the Commission came into existence in April 1975, ``various
contract markets [had] voluntarily placed speculative position limits
on 23 contracts involving 17 commodities.'' \16\ At that time,
``position limits were in effect for almost all actively traded
commodities then under regulation and the limits for positions in about
one half of these actively traded commodities had been specified by the
contract markets.'' \17\ Initially, the Commission retained the
position limits enacted by the CEC, as then in effect, but did not
establish position limits for any additional commodities.\18\ In the
years immediately following, the Commission implemented a few
relatively minor changes to position limit regulations, but undertook
no significant expansion of Federal speculative position limits.
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\15\ ``The fundamental purpose of the measure is to insure fair
practice and honest dealing on the commodity exchanges and to
provide a measure of control over those forms of speculative
activity which too often demoralize the markets to the injury of
producers and consumers and the exchanges themselves.'' S. Rep. No.
93-1131, 93rd Cong., 2d. Sess. (1974).
\16\ 45 FR 79831 (December 2, 1980).
\17\ Id. at 79832. ``Commodity Exchange Authority regulations
included limits for wheat, corn, oats, soybeans, cotton, eggs and
potatoes. Exchange rules included limits for live cattle, feeder
cattle, live hogs, frozen pork bellies, soybean oil, soybean meal,
and grain sorghums.'' (Id. n.1)
\18\ Pursuant to section 4l of the Commodity Futures Trading
Commission Act of 1974, all regulations previously adopted by the
Commodity Exchange Authority continued in full force and effect, to
the extent they were not inconsistent with the Act, as amended,
unless or until terminated, modified or suspended by the Commission.
Sec. 205, 88 Stat. 1397 (effective July 18, 1975).
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After the silver futures market crisis during late 1979 to early
1980, commonly referred to as ``the Hunt Brothers silver
manipulation,'' \19\ the Commission concluded that ``[t]he recent
events in silver * * * suggest that the capacity of any futures market
to absorb large positions in an orderly manner is not unlimited.'' \20\
Accordingly, in 1981 the Commission adopted regulation 1.61, which
required all exchanges to adopt and submit for Commission approval
speculative position limits in active futures markets for which no
exchange or Commission limits were then in effect.\21\ Although
regulation 1.61 directed the exchanges to implement position limit
rules, the pre-CFMA exchange rule approval process, on a practical
level, gave the Commission the ability to shape the requirements of
exchange-set position limit rules as measures that guarded against
excessive speculation in accordance with the purposes and findings of
section 4a(a) of the Act.
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\19\ See, In re Nelson Bunker Hunt et al., CFTC Docket No. 85-
12.
\20\ 45 FR 79831, at 79833 (December 2, 1980).
\21\ 46 FR 50938 (October 16, 1981).
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The next significant development occurred in 1986, when the
Commission undertook a comprehensive review of speculative position
limit policies, including position limit levels. During the
Commission's 1986 reauthorization, the CFTC's Congressional authorizing
committees suggested that this subject should be addressed. The Report
of the House Agriculture Committee stated:
[T]he Committee believes that, given the changes in the nature
of these markets and the influx of new market participants over the
last decade, the Commission should reexamine the current levels of
speculative position limits with a view toward elimination of
unnecessary impediments to expanded market use.\22\
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\22\ H.R. Rep. No. 624, 99th Cong., 2d Sess., at 4 (1986).
Subsequently, the Commission reviewed its Federal speculative
position limit framework and, in October 1987, adopted final amendments
that raised some of the Federal speculative position limits and revised
the general structure of the Federal speculative position limit
regulations.\23\ The amendments introduced in 1987 retained the then
current spot-month and individual month position limits but increased
the all-months-combined position limits. The revised limits, which had
historically been set on a generic commodity basis, established
position limits for each contract ``according to the individual
characteristics of that contract market,'' particularly ``the
distribution of speculative position sizes in recent years and recent
levels of open interest.'' \24\ In response to a petition by the CBOT,
the Commission also established position limits for CBOT soybean oil
and soybean meal contracts, which had been subject solely to exchange-
set position limits, to provide ``consistency with all other
agricultural commodities traded at the CBOT.'' \25\
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\23\ 52 FR 38914 (October 20, 1987).
\24\ Id. at 38917, 38919.
\25\ Petition for rulemaking of the CBOT, dated July 24, 1986,
cited in 52 FR 6814 (March 5, 1987).
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In 1992, the Commission issued proposed regulations adhering to the
principle that speculative position limits should be formulaically
adjusted based upon increases in the size of a contract's open interest
(in addition to the traditional standard of distribution of speculative
traders in a market).\26\
[[Page 4147]]
The formula was thereafter ``routinely applied [hellip] as a matter of
administrative practice when reviewing proposed exchange speculative
position limits under Commission [regulation] 1.61.'' \27\
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\26\ 57 FR 12766 (April 13, 1992).
\27\ 63 FR 38525 (July 17, 1998).
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During this same time frame, the Commission began a process that
led to the adoption of position accountability rules for contracts that
were subject to exchange-set speculative position limits. Beginning in
1991, the Commission approved several exchange rules establishing
position accountability provisions in lieu of position limits for
certain contracts exhibiting significant trading volume and open
interest, a highly liquid underlying cash market and ready
opportunities for arbitrage between the cash and futures markets.\28\
An exchange's position accountability rules, as opposed to position
limits that bar traders from acquiring contracts that quantitatively
exceed a specific number of outstanding contracts, require persons
holding a certain number of open contracts to report the nature of
their positions, trading strategy, and hedging needs to the exchange,
upon the exchange's request.
---------------------------------------------------------------------------
\28\ See, e.g., 56 FR 51687 (October 15, 1991) and 57 FR 29064
(June 30, 1992).
---------------------------------------------------------------------------
In 1999, the Commission simplified and reorganized its speculative
position limit regulations to consolidate requirements for both
Commission-set limits and exchange-set limits under regulation 1.61 in
part 150 of the Commission's regulations. Regulation 150.5(e),
currently, and as initially adopted in 1999, establishes a ``trader
accountability exemption'' \29\ and generally codifies the position
accountability conditions that initially were imposed as a matter of
administrative practice beginning in 1991.\30\
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\29\ 64 FR 24038, at 24048 (May 5, 1999).
\30\ Regulation 150.5(e) provides that, for futures and option
contracts that have been listed for trading for at least 12 months,
an exchange may submit a position accountability rule, in lieu of a
numerical limit, as follows:
``(1) For futures and option contracts on a financial
instrument or product having an average open interest of 50,000
contracts and an average daily trading volume of 100,000 contracts
and a very highly liquid cash market, an exchange bylaw, regulation
or resolution requiring traders to provide information about their
position upon request by the exchange;
(2) For futures and option contracts on a financial instrument
or product or on an intangible commodity having an average month-end
open interest of 50,000 and an average daily volume of 25,000
contracts and a highly liquid cash market, an exchange bylaw,
regulation or resolution requiring traders to provide information
about their position upon request by the exchange and to consent to
halt increasing further a trader's positions if so ordered by the
exchange;
(3) For futures and option contracts on a tangible commodity,
including but not limited to metals, energy products, or
international soft agricultural products having an average month-end
open interest of 50,000 contracts and an average daily volume of
5,000 contracts and a liquid cash market, an exchange bylaw,
regulation or resolution requiring traders to provide information
about their position upon request by the exchange and to consent to
halt increasing further a trader's positions if so ordered by the
exchange, provided, however, such contract markets are not exempt
from the requirement of paragraphs (b) or (c) that they adopt an
exchange bylaw, regulation or resolution setting a spot month
speculative position limit with a level no greater than one quarter
of the estimated spot-month deliverable supply * * *'' 17 CFR
150.5(e).
Notably, the Commission's concerns regarding spot-month limits
were eventually mirrored by the CFMA, which provides in DCM Core
Principle 5 (section 5(d)(5) of the Act), that ``[t]o reduce the
potential threat of market manipulation or congestion, especially
during trading in the delivery month, the board of trade shall adopt
position limitations or position accountability for speculators,
where necessary and appropriate.''
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The reorganized rules also included new regulation 150.5(c), which
codified the Commission's 1992 formula for calculating Federal
speculative position limits based upon open interest, and applied it to
exchanges for their use in calculating the levels of exchange-imposed
numerical speculative position limits.\31\ The formula provided for
``combined futures and option speculative position limits for both a
single month and for all-months-combined at the level of 10 percent of
open interest up to an open interest of 25,000 contracts, with a
marginal increase of 2.5% thereafter.'' \32\ In initially proposing to
use this formula, the Commission noted that:
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\31\ The formulaic approach, initially developed by Blake Imel,
former Acting Director of the Division of Economic Analysis (the
Division has since been merged into the Division of Market
Oversight), was premised on limiting the concentration of positions
in the hands of one or a few traders by requiring a minimum number
of distinct market participants.
\32\ 64 FR 24038, at 24039 (May 5, 1999).
[I]ts large trader data indicates that limits based on open
interest as described above should accommodate the normal course of
speculative positions in agricultural markets. The levels derived
using this method of analysis generally are consistent with the
largest exchange-set speculative limits approved by the Commission
under Rule 1.61 for contract markets in agricultural commodities at
corresponding levels of open interest. However, the Commission,
based on its surveillance experience and monitoring of exchange and
Federal speculative position limits, is satisfied that the levels
indicated by this methodology, although near the outer bounds of the
levels which have been approved previously, nevertheless will
achieve the prophylactic intent of Section [4a] of the Act and
Commission Rule 1.61, thereunder [emphasis supplied].\33\
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\33\ 57 FR 12766, at 12771 (April 13, 1992).
The Commission also emphasized that particular data can result in a
range of acceptable speculative position limits, and that based on its
experience overseeing exchange-set speculative limits and its direct
administration of the Federal limits establishing ``a single-month and
all-month limits on futures positions combined with option positions on
a delta-equivalent basis of no more than ten percent of the combined
markets' open interest for contracts with combined open interest below
25,000'' was within the range of acceptable speculative position
limits.\34\ For those markets with combined average open interest
greater than 25,000 contracts, the Commission proposed a marginal
increase of 2.5% after noting that ``the size of the largest individual
positions in a market do not continue to grow in proportion with
increases in the overall open interest of the market.''\35\
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\34\ Id. at 12770.
\35\ Id.
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As noted above, Core Principle 5, introduced to the Act in 2000 by
the CFMA, requires DCMs to implement position limits or position
accountability rules for speculators ``where necessary and
appropriate.'' In 2001, the Commission established Acceptable Practices
for complying with Core Principle 5, set out in Appendix B to part 38
of the Commission's regulations.\36\ The Acceptable Practices
specifically reference part 150 of the Commission's regulations as
providing guidance on how to comply with the requirements of the Core
Principle.\37\ The CFMA, however, did not change the treatment of the
enumerated agricultural commodities, which remained subject to Federal
speculative position limits.
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\36\ 17 CFR part 38, Appendix B, Core Principle 5(d)(5).
\37\ 66 FR 42256 (August 10, 2001).
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In 2005, the Commission increased the all-months-combined Federal
speculative position limits and reset the single-month levels to
roughly approximate the existing numerical relationship between all-
months-combined and single-month levels (i.e., arriving at the single-
month limits by setting them at about two-thirds of the relevant all-
months-combined limits), based generally on the 1992 open interest
formula (as incorporated into regulation 150.5(e)).\38\
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\38\ 70 FR 24705 (May 11, 2005).
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In 2008, Congress, in response to high prices and volatility in the
energy markets and concerns regarding excessive speculation on
unregulated energy exchanges, including ECMs, adopted the CFTC
Reauthorization Act of 2008 and amended two CEA provisions aimed at
curbing possible manipulation and excessive speculation
[[Page 4148]]
in the energy markets. Specifically, the 2008 legislation amended CEA
section 4a(e) to give the CFTC enforcement authority over position
limits certified by the exchanges and adopted new section 2(h)(7) to
apply a position limit and position accountability core principle to
ECM-SPDCs.\39\ Notably, the legislation also extended the Commission's
authority to set Federal speculative position limits, under CEA section
4a(a), to ECM-SPDCs.
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\39\ See 7 U.S.C. 2(h)(7)(C)(IV).
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B. Statutory Basis and Need for Energy Speculative Position Limits
Energy futures and option contracts have never been subject to
CFTC-set speculative position limits. These contracts began to attract
significant trading volumes in the early 1980s beginning with NYMEX's
New York Harbor No. 2 heating oil futures contract,\40\ followed by
NYMEX's gasoline futures contract in 1981 and crude oil futures
contract in 1983. NYMEX did not initially adopt position limits for
heating oil futures contracts. However, with the adoption of Commission
regulation 1.61, effective November 16, 1981, each exchange was
required to submit for Commission approval speculative position limits
for each actively traded futures contract. Thereafter, newly designated
contracts (e.g., NYMEX's crude oil futures contract in 1983) were
required to be accompanied by exchange speculative position limit rules
as a condition of designation.
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\40\ The contract was designated in October 1974, but
significant volume first developed in 1980.
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As noted above, in 1999 the Commission reorganized its speculative
position limit regulations to codify its earlier administrative
practice of allowing exchanges to adopt position accountability rules
in lieu of numerical position limits for positions outside of the spot
month. Currently, virtually all of NYMEX's energy futures and option
contracts and ICE's single SPDC contract are subject to exchange-set
position accountability rules during non-spot months and to hard
speculative position limits during spot months.
From 2007 to mid 2008, commodity prices generally, and energy
prices in particular, increased significantly and experienced unusual
volatility. As a result of this, Commission-regulated energy markets,
as well as the over-the-counter (``OTC'') energy swap markets over
which the Commission has no direct regulatory authority, were the
subject of numerous Congressional hearings \41\ and formal and informal
studies, including a preliminary review by an Interagency Task Force
chaired by CFTC staff. \42\ In the summer of 2009, the Commission held
three days of hearings ``to discuss energy position limits and hedge
exemptions'' (``Energy Hearings'').\43\ The Commission heard from 26
witnesses, including members of the U.S. House and Senate, swap
dealers, money managers, futures market participants (including
commercial hedgers), trade associations, exchanges, and consumer
advocates.\44\ In addition, a total of 5,281 email comments were
received (including some 1,200 identical emails from a single
commenter).\45\
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\41\ At the hearings, numerous witnesses expressed concern
regarding the impact on energy prices of speculation on commodity
futures markets, including particularly the price impact of trading
by swap dealers and index funds. Alternatively, many other witnesses
expressed the view that fundamental market conditions were the
primary driver of prices.
\42\ The Task Force included staff representatives from the
Departments of Agriculture, Energy and the Treasury, the Board of
Governors of the Federal Reserve, the Federal Trade Commission, and
the Securities and Exchange Commission. The Task Force looked at the
crude oil market between January 2003 and June 2008. The staff
members of the various agencies did not find direct causal evidence
for the general increase in oil prices between January 2003 and June
2008. Interagency Task Force on Commodity Markets, Interim Report on
Crude Oil (July 22, 2008).
\43\ Commodity Futures Trading Commission, ``CFTC to Hold Three
Open Hearings to Discuss Energy Position Limits and Hedge
Exemptions,'' CFTC Release 5681-09 (July 21, 2009).
\44\ See the following Commission Releases for a listing of
agendas and witnesses and related links:
5681-09 (July 21, 2009) https://www.cftc.gov/newsroom/generalpressreleases/2009/pr5681-09.html;
5682-09 (July 27, 2009) https://www.cftc.gov/newsroom/generalpressreleases/2009/pr5682-09.html;
and 5685-09 (July 31, 2009) https://www.cftc.gov/newsroom/generalpressreleases/2009/pr5685-09.html.
\45\ Persons wishing to review these comments may contact the
Commission's Secretariat at secretary@cftc.gov.
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As with the Congressional hearings and market studies, there were
mixed opinions among the Energy Hearing participants as to the causes
of the price rises and market volatility. With respect to position
limits for energy commodities, a number of witnesses expressed concern
over the impact on energy prices of excessive speculation and supported
position limits.\46\ Others cautioned that such limits could be
ineffective, hurt market liquidity or distort the price discovery
process if not properly constructed.\47\
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\46\ ``This increase in volatility has been associated with a
massive increase in speculative investment in oil futures.'' Ben
Hirst, Senior Vice President and General Counsel for Delta Airlines;
``* * *[S]peculative trading strategies may not always have a benign
effect on the markets.'' Laura Campbell, Assistant Manager of Energy
Resources, Memphis Light, Gas & Water, on behalf of The American
Public Gas Association; ``That ability [to hedge heating fuel
costs], however, is now being undermined by an erratic market,
questionable investment tactics and purely speculative market
forces.'' Sean Cota, President, Cota & Cota, Inc. Hearings on Energy
Position Limits and Hedge Exemptions, July 28, July 29 and August 5,
2009, at the Commodity Futures Trading Commission.
\47\ ``If [limits] are set too tight, traders who possess
important market information and provide crucial liquidity are kept
away.'' Todd E. Petzel. Chief Investment Officer, Offit Capital
Advisors; ``Simply eliminating or limiting swap dealer hedge
exemptions will impair liquidity, have other unintended consequences
and would very likely not achieve the stated objective.'' Donald
Casturo, Managing Director, Goldman Sachs & Co.; ``Position limits
no matter how well meaning create real market migration risk and
pushing price discovery of agricultural, energy or metals markets to
overseas or other trading venues would be contrary to the purposes
of the Act.'' Mark D. Young, Kirkland & Ellis LLP. Hearings on
Energy Position Limits and Hedge Exemptions, July 28, July 29 and
August 5, 2009, at the Commodity Futures Trading Commission.
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As discussed above, section 4a(a) represents an explicit
Congressional finding that extreme or abrupt price fluctuations
attributable to unchecked speculative positions are harmful to the
futures markets and that position limits can be an effective
prophylactic regulatory tool to diminish, eliminate or prevent such
activity. Accordingly, Congress charged the Commission with
responsibility for setting contract position limits in any commodity to
prevent or minimize extreme or abrupt price movements resulting from
large or concentrated positions. Under the authority granted to it, the
Commission may impose speculative position limits without finding an
extant undue burden on interstate commerce resulting from excessive
speculation.\48\ Section 8a(5) of the Act also provides that the
Commission may make and promulgate such rules and regulations that in
its judgment are reasonably necessary to accomplish any of the purposes
of the Act.
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\48\ Moreover, the exchanges' independent responsibility to
monitor trading and implement position limits and position
accountability rules does not detract from or otherwise impair the
Commission's broad authority to impose speculative limits.
---------------------------------------------------------------------------
Large concentrated positions in the energy futures and option
markets can potentially facilitate abrupt price movements and price
distortions. The prevention of unreasonable and abrupt price movements
that are attributable to large or concentrated speculative positions is
a congressionally endorsed regulatory objective. This objective is
furthered by position limits, particularly given that the capacity of
any reporting market to absorb the establishment and liquidation of
large speculative
[[Page 4149]]
positions in an orderly manner is related to the relative size of such
positions and is not unlimited. Specifically, when large speculative
positions are amassed in a contract, or contract month, the potential
exists for unreasonable and abrupt price movements should the positions
be traded out of or liquidated in a disorderly manner. Concentration of
large positions in one or a few traders' accounts can also create the
unwarranted appearance of appreciable liquidity and market depth.
Trading under such conditions can result in greater volatility than
would otherwise prevail if traders' positions were more evenly
distributed among market participants.
Furthermore, concurrent trading in economically similar and
equivalent energy futures and option contracts on multiple exchanges
effectively creates a single but fragmented market for such contracts.
Because individual exchanges have knowledge of positions only on their
own trading facilities, it is difficult for them to assess the full
impact of a trader's positions on the greater market. As such,
monitoring and limiting positions through exchange-specific position
limits and through the enforcement of exchange position accountability
rules, though necessary and beneficial, may not sufficiently guard
against potential market disruptions.
For these reasons, the Commission is proposing to establish
reporting market-specific Federal speculative position limits for
futures and option contracts in certain energy commodities and
aggregate position limits that would apply across economically similar
contracts, regardless of whether such contracts are listed on a single
or on multiple reporting markets, to curb the impact of disruptive
excessive speculation.
IV. Exemptions and Account Aggregation
The Commission's current regulatory framework for Federal
speculative position limits consists of three elements, (i) the levels
of the Commission-set speculative position limits (discussed above),
(ii) certain exemptions from the limits (e.g., for hedging, spreading
or arbitraged positions), and (iii) the policy on aggregating related
accounts for purposes of applying the limits.
Commission regulation 150.3, headed ``Exemptions,'' lists certain
types of positions that may be exempted from (and thus may exceed) the
Federal speculative position limits delineated in regulation 150.2. In
particular, under regulation 150.3(a)(1), bona fide hedging
transactions, as defined in Commission regulation 1.3(z), may exceed
Commission-set position limits.\49\ The first two parts of the bona
fide hedging definition include a general definition of bona fide
hedging (see paragraph (z)(1)) and a listing of certain enumerated
hedging transactions in the agricultural commodities that are currently
subject to Federal position limits (see paragraph (z)(2)). Paragraph
(z)(3) of the definition provides flexibility to the Commission in
granting exemptions by permitting additional transactions to be
recognized as bona fide hedging upon a trader's request, made in
accordance with the application provisions of Commission regulation
1.47. Regulation 1.47 requires a person seeking a bona fide hedge
exemption under regulation 1.3(z)(3) to provide the Commission with
various information that will, among other things, ``demonstrate that
the purchases and sales are economically appropriate to the reduction
of risk exposure attendant to the conduct and management of a
commercial enterprise.'' \50\
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\49\ Commission regulation 1.3(z) provides:
``Bona fide hedging transactions and positions--(1) General
definition. Bona fide hedging transactions and positions shall mean
transactions or positions in a contract for future delivery on any
contract market, or in a commodity option, where such transactions
or positions normally represent a substitute for transactions to be
made or positions to be taken at a later time in a physical
marketing channel, and where they are economically appropriate to
the reduction of risks in the conduct and management of a commercial
enterprise, and where they arise from:
(i) The potential change in the value of assets which a person
owns, produces, manufactures, processes, or merchandises or
anticipates owning, producing, manufacturing, processing, or
merchandising,
(ii) The potential change in the value of liabilities which a
person owns or anticipates incurring, or
(iii) The potential change in the value of services which a
person provides, purchases, or anticipates providing or purchasing.
Notwithstanding the foregoing, no transactions or positions
shall be classified as bona fide hedging unless their purpose is to
offset price risks incidental to commercial cash or spot operations
and such positions are established and liquidated in an orderly
manner in accordance with sound commercial practices and, for
transactions or positions on contract markets subject to trading and
position limits in effect pursuant to section 4a of the Act, unless
the provisions of paragraphs (z)(2) and (3) of this section and
Sec. Sec. 1.47 and 1.48 of the regulations have been satisfied.
(2) Enumerated hedging transactions. The definitions of bona
fide hedging transactions and positions in paragraph (z)(1) of this
section includes, but is not limited to, the following specific
transactions and positions:
(i) Sales of any commodity for future delivery on a contract
market which do not exceed in quantity:
(A) Ownership or fixed-price purchase of the same cash commodity
by the same person; and
(B) Twelve months' unsold anticipated production of the same
commodity by the same person provided that no such position is
maintained in any future during the five last trading days of that
future.
(ii) Purchases of any commodity for future delivery on a
contract market which do not exceed in quantity:
(A) The fixed-price sale of the same cash commodity by the same
person;
(B) The quantity equivalent of fixed-price sales of the cash
products and by-products of such commodity by the same person; and
(C) Twelve months' unfilled anticipated requirements of the same
cash commodity for processing, manufacturing, or feeding by the same
person, provided that such transactions and positions in the five
last trading days of any one future do not exceed the person's
unfilled anticipated requirements of the same cash commodity for
that month and for the next succeeding month.
(iii) Offsetting sales and purchases for future delivery on a
contract market which do not exceed in quantity that amount of the
same cash commodity which has been bought and sold by the same
person at unfixed prices basis different delivery months of the
contract market, provided that no such position is maintained in any
future during the five last trading days of that future.
(iv) Sales and purchases for future delivery described in
paragraphs (z)(2)(i), (ii), and (iii) of this section may also be
offset other than by the same quantity of the same cash commodity,
provided that the fluctuations in value of the position for future
delivery are substantially related to the fluctuations in value of
the actual or anticipated cash position, and provided that the
positions in any one future shall not be maintained during the five
last trading days of that future.
(3) Non-enumerated cases. Upon specific request made in
accordance with Sec. 1.47 of the regulations, the Commission may
recognize transactions and positions other than those enumerated in
paragraph (z)(2) of this section as bona fide hedging in such amount
and under such terms and conditions as it may specify in accordance
with the provisions of Sec. 1.47. Such transactions and positions
may include, but are not limited to, purchases or sales for future
delivery on any contract market by an agent who does not own or who
has not contracted to sell or purchase the offsetting cash commodity
at a fixed price, provided that the person is responsible for the
merchandising of the cash position which is being offset.'' 17 CFR
1.3(z).
\50\ 17 CFR 1.47(b)(2).
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In addition to regulation 150.3(a)(1)'s bona fide hedging
exemption, regulation 150.3(a) includes two other exemptions from the
Federal speculative position limits. Regulation 150.3(a)(3) exempts
``spread or arbitrage positions between single months of a futures
contract * * * outside of the spot-month, in the same crop year * * *
.'' Subject to various conditions, regulation 150.3(a)(4) exempts
positions ``[c]arried for an eligible entity as defined in regulation
150.1(d), in the separate account or accounts of an independent account
controller, as defined in regulation 150.1(e) * * * .'' Eligible
entities include mutual funds, commodity pool operators and commodity
trading advisors. Entities claiming this exemption are required, upon
call by the Commission, to provide information supporting their claim
that the account controllers for
[[Page 4150]]
these positions are acting independently.
Also, in order to achieve the intended effect of the Federal
speculative position limits, Commission regulation 150.4, headed
``Aggregation of positions,'' requires the Commission and the exchanges
to treat multiple accounts subject to common ownership or control as if
they are held by a single trader. Such accounts are typically
considered to be under a common ownership if one or more traders have a
10% or greater financial interest in the accounts and do not otherwise
qualify for an exemption from aggregation, such as the independent
account controller exemption discussed above. The aggregation standards
are applied in a manner calculated to aggregate related positions. For
example, each participant with a 10% or greater financial interest in
an account must aggregate the entire position of that account--not just
the participant's fractional share--together with other positions that
the participant may independently hold. Likewise, a commodity futures
or option contract pool comprised of many traders is allowed only to
hold positions as if it were a single trader. The Commission also
treats positions that are not commonly owned, but are traded pursuant
to an express or implied agreement, as a single aggregated position for
purposes of applying the Federal speculative position limits.
Exceptions to the aggregation standards exist for certain pool
participants, such as limited partners and shareholders that cannot
exercise control over the positions of the pool.
V. Bona Fide Hedge Exemptions
Prior to 1974, the CEA included a limited statutory hedging
definition that applied only to agricultural commodities. When the
Commission was created in 1974, the Act's definition of commodity was
expanded. At that time, Congress was concerned that the limited hedging
definition, even if applied to newly regulated commodity futures, would
fail to accommodate the commercial risk management needs of market
participants that could emerge over time. Accordingly, Congress, in
section 404 of the Commodity Futures Trading Commission Act of 1974,
repealed the statutory definition and gave the Commission the authority
to define bona fide hedging.
The Commission exercised this authority in 1977 by adopting
regulations 1.3(z) and 1.47.\51\ Those regulations have remained
unchanged since 1977. By the mid 1980s, new concerns had emerged. Under
the Commission's definition, bona fide hedge transactions ``normally
represent a substitute for transactions to be made or positions to be
taken at a later time in a physical marketing channel,'' and are
``economically appropriate to the reduction of risks in the conduct of
a commercial enterprise.'' \52\ This aspect of the hedging definition
proved to be ill fitted to the economic realities of financial futures.
Portfolio managers utilize the financial futures markets to add
incremental income to managed assets, to manage overall risk, or to
rebalance a portfolio. Indeed, futures market positions are often
acquired entirely as an alternative to cash market transactions (in
view of the lower transaction costs, speed, and minimal price impact),
rather than as a temporary substitute for positions that will later be
taken in the underlying cash market.
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\51\ 42 FR 42748 (August 24, 1977).
\52\ 17 CFR 1.3(z)(1).
---------------------------------------------------------------------------
In 1986, in response to concerns raised in testimony regarding the
constraints on investment decisions imposed by position limits, the
House Committee on Agriculture, in its report accompanying the
Commission's 1986 reauthorization legislation, instructed the
Commission to reexamine its approach to speculative position limits and
its definition of hedging.\53\ Specifically, the Committee Report
``strongly urge[d] the Commission to undertake a review of its hedging
definition * * * and to consider giving certain concepts, uses, and
strategies `non-speculative' treatment * * * whether under the hedging
definition or, if appropriate, as a separate category similar to the
treatment given certain spread, straddle or arbitrage positions * * *''
\54\ The Committee Report singled out four categories of trading and
positions that the Commission should recognize as non-speculative: (i)
``Risk management'' trading by portfolio managers as an alternative to
the concept of ``risk reduction;'' (ii) futures positions taken as
alternatives to, rather than as temporary substitutes for, cash market
positions; (iii) other positions acquired to implement strategies
involving the use of financial futures including, but not limited to,
asset allocation (altering portfolio exposure in certain areas such as
equity and debt), portfolio immunization (curing mismatches between the
duration and sensitivity assets and liabilities to ensure that
portfolio assets will be sufficient to fund the payment of
liabilities), and portfolio duration (altering the average maturity of
a portfolio's assets); and (iv) certain options trading, in particular
the writing of covered puts and calls.\55\
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\53\ House Committee on Agriculture, Futures Trading Act of
1986, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44-46 (1986).
\54\ Id. at 46.
\55\ Id.
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The Senate Committee on Agriculture, Nutrition and Forestry, in its
report on the 1986 CFTC reauthorization legislation, also directed the
Commission to reassess its interpretation of bona fide hedging.\56\ The
Commission heeded Congress's recommendation, and its staff issued
interpretive statements directing that risk management exemptions be
included as speculative position limit exemptions in addition to the
existing exemptions for hedging, arbitrage and spreading.\57\ The
interpretive statements recognized new types of ``risk reducing'' and
``risk shifting'' strategies in financial futures (including ``dynamic
asset allocation strategies'') as falling within the bona fide hedging
category.
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\56\ Senate Committee on Agriculture, Nutrition and Forestry,
Futures Trading Act of 1986, S. Rep. No. 291, 99th Cong., 2d Sess.
at 21-22 (1986). Specifically, the Senate Committee directed the
Commission to consider ``whether the concept of prudent risk
management [should] be incorporated in the general definition of
hedging as an alternative to this risk reduction standard.'' Id., at
22.
\57\ See, Clarification of Certain Aspect of the Hedging
Definition, 52 FR 27195 (July 20, 1987); Risk Management Exemptions
from Speculative Position Limits Approved under Commission
Regulation 1.61, 52 FR 34633 (September 14, 1987).
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The next significant change in trading patterns and practices in
derivatives markets involved an influx of new traders into the market
seeking exposure to commodities as an asset class through passive,
long-term investment in commodity indexes as a way of diversifying
portfolios that might otherwise be limited to equities and debt
instruments.\58\ New market participants included commodity index
traders (including pension and endowment funds, as well as individual
investors participating in commodity index-based funds or trading
programs) and swap dealers seeking to hedge price risk from OTC trading
activity (frequently opposite those same commodity index traders).
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\58\ The argument has also been made that commodities act as a
general hedge of liability obligations that are linked to inflation.
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The development of the OTC swaps industry, over which the
Commission generally has no regulatory authority, is related to the
exchange-traded futures and options industry in that a swap agreement
\59\ can either compete with or
[[Page 4151]]
complement regulated commodity futures and options trading.\60\ Market
participants often enter into OTC swap agreements because, unlike more
standardized futures contracts, they can be customized to match
particular hedging or price exposure needs. Swap dealers, often
affiliated with a bank or other large financial institution, act as
swap counterparties to both commercial firms seeking to hedge price
risks and speculators seeking to gain price exposure. Swap dealers, in
turn, utilize the more standardized futures markets to manage the
residual risk of their swaps book.\61\ In addition, some swap dealers
also deal directly in the merchandising of physical commodities.
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\59\ A swap agreement is typically a privately negotiated
exchange of one asset or cash flow for another asset or cash flow.
In a commodity swap, at least one of the assets or cash flows is
related to the price of one or more commodities.
\60\ The bilateral contracts that swap dealers create can vary
widely, from terms tailored to meet the needs of a specific
customer, to relatively standardized contracts.
\61\ Because swap agreements can be highly customized, and the
liquidity for a particular swap contract can be low, swap dealers
may also use other swap agreements and physical market positions, in
addition to futures, to offset the residual risks of their swap
book.
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In accor