Aggregation, Position Limits for Futures and Swaps, 31767-31783 [2012-12526]
Download as PDF
Federal Register / Vol. 77, No. 104 / Wednesday, May 30, 2012 / Proposed Rules
such government-sponsored programs:
The National Security Entry Exit
Registration System NSEERS, which
required non-immigrants to register at
ports of entry and targeted males from
Arab nations; stricter travel guidelines;
and ‘‘no-fly’’ lists which predominantly
contained the names of ArabAmericans. According to the Petition,
these restrictions hindered the ArabAmerican community’s freedom and as
a result, their ability to contribute to a
healthy American economy.19
srobinson on DSK4SPTVN1PROD with PROPOSALS
B. Economic Discrimination
According to the ADC Petition, ArabAmericans also face economic
discrimination as employees and
business owners. Citing instances where
employees are continuously harassed
because of their ethnicity and are
subject to constant name-calling and
racial profiling, the petition asserts that
Arab-Americans either have to
constantly deal with discrimination
enforced by their employers, their
fellow employees or customers that
frequent their places of employment.20
The petition also notes that ArabAmericans have fewer job opportunities,
a situation that has been exacerbated by
the September 11 attacks and asserts
that this fact is supported by a number
of studies that highlight employment
discrimination against Arab Americans
as well as the high number of
complaints the ADC receives yearly
despite the time that has passed since
9/11.21
According to the ADC Petition, the
discrimination that Arab-American
employees face has decreased their
earnings.22 One study showed that the
earning potential of Arab American men
dropped considerably between 2000 and
2002 as compared to U.S.-born nonHispanic white men.23 Their ability to
positively contribute to the economy
has also been significantly altered as a
result of the increased instances of
government-sponsored inspections of
workplaces that may have hired
individuals with suspected terrorist
ties.24
Arab-American business owners and
entrepreneurs also face economic
discrimination. Individuals from the
Arab-American community are unable
19 Pet.
at 18–21.
20 Pet. at 21.
21 Pet. at 21–25.
22 Id. at 23, citing American-Arab AntiDiscrimination Committee (ADC), 2010 Legal
Department: Legal and Policy Review, p. 1.
23 Pet. at 26, citing Alberto Davila and Marie
Mora, Changes in Earnings of Arab Men in the U.S.,
Journal of Population Economics, 2005, vol. 18,
issue 4, p. 588.
24 Pet. at 25–27.
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to earn up to their potential as
compared to their non-Hispanic white
counterparts in similar industries. The
Petition notes that while many ArabAmericans are educated and would
contribute tremendously to the U.S.
economy if they were able to enter into
the market, they are held back because
of their ethnic background. Also, many
times Arab-Americans are confined
solely to the small Arab-American
communities in which they live because
they face harassment if they attempt to
expand their business. The Petition
further asserts that Arab Americans
receive few prime government contracts,
as exemplified by a case study
conducted in San Francisco between
1992 and 1995.25 During that time
period, Arab-Americans received no
construction contracts despite
representing a significant amount of the
available professional service firms.
This can be compared to LatinoAmericans, a group already included in
the definition of ‘‘minority business
enterprise,’’ who only received 1
percent of professional service dollars
despite representing 6 percent of the
professional service firms.26
III. Objectives and Scope
By categorizing Arab-Americans as
‘‘socially and economically
disadvantaged business concerns’’
under 15 CFR part 1400, the same the
benefits granted to other socially and
economically disadvantaged persons
specified under Part 1400 will be
available to Arab-American persons and
businesses. Specifically, under 15 CFR
part 1400, Arab-Americans will be
eligible to qualify for MBDA programs
and opportunities that help minority
businesses overcome discrimination and
prejudice as business owners.27
The comments received will be
reviewed for applicability to the issues
to be addressed. MBDA will consider
only those comments that address the
relevance of including Arab-Americans
in the definition of those who are
‘‘socially and economically
disadvantaged.’’ Commenters should
address the following issues in the
context of the requirements of the
applicable regulations.28 If any
comments received meet the criterion,
they will be included in the final
decision.
25 Pet.
at 29.
at 29–31.
27 Pursuant to 15 CFR 1400.1, the designation for
eligibility under Executive Order 11625 will not
establish eligibility for any other Federal or
Federally-funded program.
28 See 15 CFR 1400.4.
26 Pet.
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31767
MBDA solicits general comments and
comments on the Petition that address
the following specific issues:
A. Societal Discrimination
1. Are there specific instances of
social discrimination against ArabAmericans that occur over a sustained
period of time, which results in
significant social or economic
disadvantage?
2. Are there any additional
characteristics specific to the ArabAmerican community, other than those
described in the ADC Petition, that
invoke societal discrimination?
3. Is there evidence that demonstrates
Arab-Americans have been subject to
employment or educational
discrimination? If so, please describe.
4. Is there evidence that demonstrates
that Arab-Americans have been denied
access to organizations, groups,
professional societies or other types of
business opportunities in comparison to
individuals who are not considered
socially or economically disadvantaged?
B. Economic Discrimination
1. What evidence exists that
demonstrates Arab-Americans have
faced economic discrimination over a
sustained period of time resulting in
social or economic disadvantage?
2. Please provide any specific
information which demonstrates that
Arab-Americans have experienced
difficulty in obtaining access to capital,
technical, or managerial resources as
compared to individuals who are not
considered socially or economically
disadvantaged.
3. Is there any additional evidence of
denied opportunities for ArabAmericans to access to those things
which would enable them to participate
more successfully in the American
economic system that is readily
available to individuals not considered
to be socially or economically
disadvantaged?
Josephine Arnold,
Chief Counsel, Minority Business
Development Agency.
[FR Doc. 2012–12968 Filed 5–29–12; 8:45 am]
BILLING CODE 3510–21–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 151
RIN 3038–AD82
Aggregation, Position Limits for
Futures and Swaps
Commodity Futures Trading
Commission.
AGENCY:
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ACTION:
Federal Register / Vol. 77, No. 104 / Wednesday, May 30, 2012 / Proposed Rules
Notice of proposed rulemaking.
On November 18, 2011, the
Commodity Futures Trading
Commission (‘‘Commission’’ or
‘‘CFTC’’) published in the Federal
Register a final rule and interim final
rule, which establish a position limits
regime for 28 exempt and agricultural
commodity futures and options
contracts and the physical commodity
swaps that are economically equivalent
to such contracts. In response to a
petition for exemptive relief under the
Commodity Exchange Act and certain
comments to the Commission’s interim
final rule for spot-month limits for cashsettled contracts, this notice proposes
certain modifications to the
Commission’s policy for aggregation
under the position limits regime in
CFTC regulations.
DATES: Comments must be received on
or before June 29, 2012.
ADDRESSES: You may submit comments,
identified by RIN number3038–AD82,
by any of the following methods:
• Agency Web Site: https://
www.cftc.gov.
• Mail: David A. Stawick, Secretary of
the Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW.,
Washington, DC 20581.
• Hand Delivery/Courier: Same as
mail above.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow
instructions for submitting comments.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to www.cftc.gov. You
should submit only information that
you wish to make available publicly. If
you wish the Commission to consider
information that is exempt from
disclosure under the Freedom of
Information Act, a petition for
confidential treatment of the exempt
information may be submitted according
to the procedure established in CFTC
regulation 145.9 (17 CFR 145.9).
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
remove any or all of your submission
from www.cftc.gov that it may deem to
be inappropriate for publication, such as
obscene language. All submissions that
have been redacted or removed that
contain comments on the merits of the
rulemaking will be retained in the
public comment file and will be
considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the Freedom of Information Act.
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SUMMARY:
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FOR FURTHER INFORMATION CONTACT:
Stephen Sherrod, Senior Economist,
Division of Market Oversight, at (202)
418–5452, ssherrod@cftc.gov; Neal
Kumar, Counsel, Office of General
Counsel, at (202) 418–5353,
nkumar@cftc.gov, Riva Spear Adriance,
Senior Special Counsel, Division of
Market Oversight, at (202) 418–5494,
radriance@cftc.gov, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Introduction
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(‘‘Dodd-Frank Act’’).1 Title VII of the
Dodd-Frank Act 2 amended the
Commodity Exchange Act (‘‘CEA’’) 3 to
establish a comprehensive new
regulatory framework for swaps and
security-based swaps. The legislation
was enacted to reduce risk, increase
transparency, and promote market
integrity within the financial system by,
among other things: (1) Providing for the
registration and comprehensive
regulation of swap dealers and major
swap participants; (2) imposing clearing
and trade execution requirements on
standardized derivative products; (3)
creating robust recordkeeping and realtime reporting regimes; and (4)
enhancing the Commission’s
rulemaking and enforcement authorities
with respect to, among others, all
registered entities and intermediaries
subject to the Commission’s oversight.
As amended by the Dodd-Frank Act,
sections 4a(a)(2) and 4a(a)(5) of the CEA
mandate that the Commission establish
limits for futures and option contracts
traded on a designated contract market
(‘‘DCM’’), as well as swaps that are
economically equivalent to such futures
or options contracts traded on a DCM.
This mandate directed the Commission
to establish position limits on the
expedited timeframe of 180 days from
the date of enactment for exempt
commodities and 270 days from the date
of enactment for agricultural
commodities. In response to the
Congressional mandate, the Commission
proposed and ultimately adopted final
rules in part 151 regarding position
1 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010). The text of the Dodd-Frank Act
may be accessed at https://www.cftc.gov/
LawRegulation/DoddFrankAct/index.htm.
2 Pursuant to section 701 of the Dodd-Frank Act,
Title VII may be cited as the ‘‘Wall Street
Transparency and Accountability Act of 2010.’’
3 7 U.S.C. 1 et seq.
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limits for 28 physical commodity
futures and option contracts (‘‘Core
Referenced Futures Contracts’’) and
physical commodity swaps that are
economically equivalent to such
contracts (collectively with Core
Referenced Futures Contracts referred to
as ‘‘Referenced Contracts’’).4
The regulations in the part 151
position limits regime, consistent with
the Commission’s historical approach to
position limits,5 generally includes
three components: (1) The level of the
limits, which set a threshold that
restricts the number of speculative
positions that a person may hold in the
spot-month, individual month, and all
months combined,6 (2) an exemption for
positions that constitute bona fide
hedging transactions,7 and (3) rules to
determine which accounts and positions
a person must aggregate for the purpose
of determining compliance with the
position limit levels.8
The Commission published Part 151
in the Federal Register in November of
2011, but determined to phase in
compliance with the new position limits
regime.9 Specifically, 60 days after the
Commission publishes a joint final
rulemaking with the Securities and
Exchange Commission (‘‘SEC’’) further
defining the term ‘‘swap’’ in the Federal
Register,10 the rules require market
participants to comply with spot-month
limits for the 28 physical commodities
as well as non-spot month limits for the
enumerated agricultural contracts. The
Commission also established the spotmonth position limit levels for cashsettled contracts on an interim final
basis and solicited comments on the
appropriateness of such levels.11
Finally, for the remaining non-spot
month limits (i.e., all commodities other
than the enumerated agricultural
commodities), the rules require
compliance on the first calendar day of
the third calendar month following a
4 See Position Limits for Futures and Swaps, 76
FR 71626, Nov. 18, 2011.
5 See 17 CFR 150 (1999). Prior to the Dodd-Frank
Act rulemaking, the Commission administered
position limits under Commission regulation 150,
which established federal position limits on certain
enumerated agricultural contracts. The position
limits on these agricultural contracts are referred to
as ‘‘legacy’’ limits, and the listed commodities are
referred to as ‘‘enumerated’’ agricultural
commodities.
6 See 17 CFR 151.4.
7 See 17 CFR 151.5. See also CEA section 4a(c)(1)
& (2).
8 See 17 CFR 151.7.
9 See 76 FR at 71632; and 151.4(d).
10 Id. See also Further Definition of ‘‘Swap,’’
‘‘Security-Based Swap,’’ and ‘‘Security Based Swap
Agreement’’; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, 76 FR 29818, May 23,
2011 (notice of proposed rulemaking).
11 See 76 FR 71637.
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Federal Register / Vol. 77, No. 104 / Wednesday, May 30, 2012 / Proposed Rules
Commission order providing the
numerical level of the non-spot month
limits based upon a formula provided in
part 151.12
As noted above, one of the three major
components to the Commission’s
position limits regime is determining
which accounts and positions a person
must aggregate.13 The final rule in
regulation 151.7 largely adopted the
Commission’s existing aggregation
policy under regulation 150.4. The
aggregation provisions generally require
that unless a particular exemption
applies, a person must aggregate all
positions for which that person controls
the trading decisions with all the
positions for which that person has a 10
percent or greater ownership interest in
an account or position, as well as the
positions of two or more persons acting
pursuant to an express or implied
agreement or understanding.14
Regulation 151.7 retained the scope of
exemptions from aggregation that were
contained in regulation 150.4, including
the ownership interests of limited
partners in pooled accounts,15
discretionary accounts and customer
trading programs of futures commission
merchants (‘‘FCM’’),16 and eligible
entities with independent account
controllers that manage customer
positions (‘‘IAC’’ or ‘‘IAC
exemption’’).17 Further, the Commission
provided two additional exemptions for
underwriters of securities,18 and where
the sharing of information between
persons would cause either person to
violate federal law or regulations
adopted thereunder.19 With the
exception of the exemption for
underwriters, market participants were
required to file a notice with the
Commission demonstrating compliance
with the conditions applicable to each
exemption.20
12 See
151.4(d)(3).
proposed rules in this release deal solely
with the aggregation of accounts.
14 See 17 CFR 151.7(a) & (b). In addition, the
Commission included a new aggregation provision
for persons with positions in accounts with
identical trading strategies. This provision applies
even if a person does not control trading and has
a less than 10 percent interest in an account. See
17 CFR 151.7(d).
15 17 CFR 151.7(c).
16 17 CFR 151.7(e).
17 17 CFR 151.7(f).
18 17 CFR 151.7(g).
19 See 17 CFR 151.7(i).
20 See 17 CFR 151.7(h). The exemption for federal
law information sharing restrictions in regulation
151.7(i), also requires that market participants
submit an opinion of counsel that the sharing of
information would cause a violation of federal law.
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B. Aggregation Petition and Interim
Final Rule Comments
On January 19th, 2012 the
Commission received a petition for
interim relief from, among other things,
part 151’s provision for aggregation of
positions across accounts (hereinafter
aggregation petition’’) 21 under CEA
section 4a(a)(7) for purposes of part
151.22 The Commission has also
received letters that generally support
the aggregation petition.23 In addition,
several commenters opined on the
aggregation rules in connection with the
Commission’s request for comment on
the interim final rule for spot-month
position limits on cash-settled
contracts.24 As further discussed below,
the aggregation petition and certain
interim final rule commenters argue that
the Commission should clarify the
exemption provided in regulation
151.7(i) where the sharing of
information would cause a violation of
federal law and expand the exemption
to include circumstances in which state
or foreign law would prohibit the
sharing of information necessary to
comply with the aggregation standard.
In addition, the aggregation petition and
commenters request that the
Commission create an aggregation
exemption for owned non-financial
entities.25 In this connection, some
21 The aggregation petition was originally filed by
the Working Group of Commercial Energy Firms;
certain members of the group later reconstituted as
the Commercial Energy Working Group. Both
groups (hereinafter, collectively, the ‘‘Working
Groups’’) wish to present one voice with respect to
the petition. A copy of the aggregation petition can
be found on the Commission’s Web site at
www.cftc.gov/stellent/groups/public/
@rulesandproducts/documents/ifdocs/
wgap011912.pdf.
22 CEA section 4a(a)(7) specifically provides:
‘‘The Commission, by rule, regulation, or order,
may exempt, conditionally or unconditionally, any
person or class of persons, any swap or class of
swaps, any contract of sale of a commodity for
future delivery or class of such contracts, any
option or class of options, or any transaction or
class of transactions from any requirement it may
establish under this section with respect to position
limits.’’ 7 U.S.C. 6a(a)(7).
23 See Commodity Markets Council (‘‘CMC’’) on
March 9, 2012; Edison Electric Institute and the
American Gas Association on March 1, 2012; and
the Futures Industry Association (‘‘FIA’’) on March
26, 2012.
24 See FIA on January 17, 2012 (‘‘CL–FIA’’);
Atmos Energy Holdings (‘‘ATMOS’’) on January 17,
2012 (‘‘CL–Atmos’’); Edison Electric Institute
(‘‘EEI’’) on January 17, 2012 (‘‘CL–EEI’’); and
American Gas Association (‘‘AGA’’) on January 17,
2012 (‘‘CL–AGA’’).
25 The Commission initially proposed but did not
adopt an exemption that would have permitted
persons with an ownership or equity interest in a
non-financial entity not to aggregate the positions
or accounts of the non-financial entity provided the
person filed an application demonstrating
compliance with certain conditions. See Position
Limits for Derivatives, 76 FR 4752, 4762–63, Jan. 26,
2011. The Commission determined not to adopt this
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31769
commenters argue that the Commission
should only aggregate on the basis of
control and not ownership. Finally, one
commenter requests that the
Commission expand the exemption
provided in 151.7(g) for the ownership
interests of broker-dealers connected
with specific market-making activity.
1. Exemption for Federal Law
Restriction
As noted above, section 151.7(i)
provides an exemption from aggregation
where the sharing of information
between persons would cause either
person to violate federal law. The
aggregation petition seeks to clarify that
the exemption would apply to potential
violations of federal law,26 and also
seeks to expand the exemption to apply
to local, state, foreign and international
law.27 According to the aggregation
petition, the standard in the rule could
be read as limited to per se violations
of the law, but not cover ‘‘indicia of
improper market activity.’’ 28 Further,
market participants may not be able to
rely on the exemption where they take
certain action to avoid the ‘‘potential’’ of
a violation. Moreover, the Working
Groups argue that the filing of an
opinion of counsel to claim the
exemption may act as a disincentive for
market participants to avail themselves
of the exemption because an adverse
opinion would harm the applicant.
Similar to the petition, certain
commenters to the interim final rule
argue that the requirement that the
sharing of information ‘‘would cause’’ a
violation of federal law sets the bar too
high to claim the exemption.29 In this
connection, commenters opine that such
a high standard makes it too difficult to
obtain an opinion of counsel to reach
the necessary conclusion.30 Therefore,
several commenters argue that the
Commission should clarify that the
standard to claim the exemption is that
the sharing of information presents
either party with a reasonable risk of
violating federal law.31 Commenters
also believe that the Commission should
expand this exemption to cover
potential violations of state and foreign
law.32 Finally, one commenter suggests
proposed exemption, but instead generally retained
the Commission’s existing aggregation policy. See
76 FR 71626.
26 Aggregation petition at 18.
27 Id. at 24.
28 Id. at 17.
29 See CL–FIA at 16–17; CL–Atmos at 5–6; and
CL–EEI at 17–18.
30 CL–EEI at 17–18; and CL–Atmos at 5–6.
31 CL–FIA at 16–17; CL–EEI at 17–18; and CL–
Atmos at 5–6.
32 CL–AGA at 2; CL–FIA at 16–17; CL–EEI at 17–
18; and CL–Atmos 5–6.
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that the Commission should remove the
requirement to file an opinion of
counsel to claim the exemption, which
the commenter believes is
burdensome.33
2. The Owned Non-Financial Entity
Exemption and Aggregation Based on
Ownership Generally
As noted above, the proposed rules
for part 151 proposed that a person with
a 10 percent or greater ownership or
equity interest in a non-financial entity
need not aggregate the positions of the
non-financial entity with his own
positions, if the person filed an
application with the Commission
demonstrating compliance with certain
conditions. This exemption was not part
of the Commission’s previously existing
aggregation policy for position limits on
the enumerated agricultural contracts in
part 150. Ultimately, the Commission
determined to largely retain its existing
aggregation policy with limited
additional exemptions, and did not
adopt the proposed owned nonfinancial entity exemption.
According to the aggregation petition,
the Commission’s failure to include an
exemption for a person’s ownership
interest in a non-financial entity will
result in ‘‘serious adverse
consequences’’ to the Working Groups
participants, and represents a ‘‘drastic
departure from current market
practices.’’ 34 In light of these
consequences, the aggregation petition
includes a draft owned non-financial
entity exemption for the Commission to
incorporate into its aggregation policy.
The draft exemption is similar, but not
identical to, the owned non-financial
entity exemption that the Commission
proposed but did not adopt as part of its
final rule.35
The aggregation petition suggests that
without an owned non-financial entity
exemption, the rules would force
information sharing and the
coordination of trading between entities,
which would be contrary to existing
best practices for antitrust
compliance.36 Given the conflict with
such practices, the Working Groups
argue that compliance with the position
limits rules may create liability under
the antitrust laws. The Working Groups
also argue that the aggregation rules, as
adopted by the Commission, are
33 CL–AGA
at 5.
Aggregation petition, pg. 5–16.
35 Id. at Exhibit A.
36 Id. at 7. The Working Groups cite to best
practices issued by the Federal Trade Commission
and the U.S. Department of Justice regarding
antitrust guidelines (‘‘Antitrust Guidelines for
Collaboration Among Competitors’’). Available at
www.ftc.gov/os/2000/04/ftcdojguidelines.pdf.
34 See
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contrary to certain industry best
practices that ‘‘go beyond the letter of
the law or applicable regulations in
order to ensure that activities of
unregulated entities are kept separate
from activities of regulated entities to
the greatest extent possible.’’ 37
The aggregation petition also opines
that the information sharing between
persons necessary to comply with the
position limits would impose significant
costs that would impact the physical
and derivatives markets.38 According to
the Working Groups, entities with
complex corporate structure
arrangements that include established
information barriers to ensure
compliance with other regulatory
requirements will face significant costs
to monitor positions on an intra-day
basis, notwithstanding the current lack
of control over such trading.39 In this
case, the Working Groups claim that
aggregation will significantly impact
holding companies and firms that invest
in commercial firms, particularly in the
context of ‘‘passive investment.’’ Such
firms will have to monitor the
commercial firm for compliance with
position limits and ‘‘insert itself into the
management of the firm.’’ 40 In addition,
according to the Working Groups, the
aggregation of futures, cleared swaps
and bilateral swaps across entities on a
real time basis requires technology that
does not yet exist.41 The aggregation
petition also points to concerns
surrounding allocation and reporting of
positions, sharing of information on
physical inventories, and information
sharing for the unwinding of accounts.42
The Working Groups assert that the
position limit rules represent a ‘‘drastic
departure from the status quo.’’ 43
According to the aggregation petition,
the Commission’s position limits
previously only applied to agricultural
commodity futures and options on
futures, and DCM position limits
applied to futures on energy and metals
commodities.44 However, the
37 Id.
at pg. 9.
at 10–16.
39 Similarly, according to the aggregation petition,
the aggregation requirements impose significant
compliance burdens where ownership interests may
involve international companies, or where a
corporate structure includes multiple levels of
companies between a parent company and a child
company with an account or position.
40 Id. at 11.
41 Id.
42 Id. at 12–14.
43 Id. at 14.
44 The Commission notes that although the
aggregation petition describes the final position
limit rules, including the aggregation requirements,
as a ‘‘drastic departure from the status quo,’’ and
seeks to differentiate between Commission and
DCM rules regarding treatment of owned positions
for purposes of aggregation, many current and past
38 Id.
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Commission’s new position limits rules
will apply to swaps for the first time.
Further, the Working Groups contend
that DCMs previously provided
‘‘aggregation exemptions that provided
the flexibility necessary for commercial
enterprises to manage their position
limit obligations across entities without
undue burden.’’ 45 In addition, the
aggregation of accounts across
commercial firms could lead to
decreased liquidity and competition in
the energy derivatives market.
In light of these changes, the Working
Groups believe that the Commission
should provide relief in the form of an
owned non-financial entity exemption.
The aggregation petition includes a draft
owned non-financial entity exemption
that follows the Commission’s prior
proposed exemption with some
modifications.46
Similar to the aggregation petition,
commenters to the interim final rule
request that the Commission adopt an
owned non-financial entity
exemption.47 FIA and EEI argue that
without such an exemption, market
participants would have to aggregate all
positions held by any entity in which it
has a ten percent ownership interest,
even if such interest is passive without
control over trading. According to FIA,
such a consequence would ‘‘have an
unnecessary and profoundly negative
impact on users of Referenced
Contracts, and their affiliates with no
corresponding benefit to the stability or
integrity of the market.’’ 48 EEI also
argues that the owned non-financial
entity exemption would provide
commercial firms the same aggregation
relief as eligible entities that rely on the
independent account controller
exemption.49
Several commenters also address the
requirement that persons aggregate
DCM rules require aggregation of the positions a
person either owns or controls. See Board of Trade
of the City of Chicago, Inc. (‘‘CBOT’’) Rule 559.D;
Chicago Mercantile Exchange, Inc. (‘‘CME’’) Rule
559.D; New York Mercantile Exchange, Inc.
(‘‘NYMEX’’) Rule 559.D; ICE Futures U.S., Inc.
(‘‘ICE US’’) Rule 6.12; Board of Trade of Kansas
City, Missouri, Inc. (‘‘KCBT’’) Rule 2008.00; and
Minneapolis Grain Exchange, Inc. (‘‘MGE’’) Rule
7310. See also NYMEX Rule 9.35, MGEX Rule 7310
and CBOT Rule 425.05 as examples of older rules
requiring aggregation of the positions a person
either owns or controls, which were in effect over
the last 10 years. Furthermore, acceptable practices
adopted by the Commission in August, 2001,
provided DCMs with a safe harbor for position limit
rules that aggregated positions a person owns or
controls. See 66 FR 42256, 42280, August 10, 2001,
Appendix B to Part 38, Core Principle 5. See also
https://www.cftc.gov/files/foia/fedreg01/
foi010810a.pdf.
45 Id. at 15.
46 Id. at Exhibit A.
47 CL–FIA at 17–18; and CL–EEI at 16–17.
48 CL–FIA at 18. See also CL–EEI at 16–17.
49 CL–EEI at 16.
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based upon ownership of positions
generally. These commenters
recommend that the Commission only
aggregate based on control, and not
aggregate positions based upon an
ownership interest in a position or
account.50 According to these
commenters, aggregation through an
ownership interest, absent control of
trading decisions, will impose
significant burdens for entities to
aggregate on an intra-day basis, may
harm liquidity, and does not address the
potential concerns about coordinated
trading. Similar to the comments
regarding the owned non-financial
entity exemption, commenters submit
that aggregating positions based solely
on ownership creates substantial
compliance burdens within the context
of a complex corporate structure. In this
connection, EEI suggests that the
Commission not require an entity to
aggregate owned positions if an entity
could show the independence of trading
decisions of the owned entity.51
3. Exemption for Underwriters
As noted above, Commission rule
151.7(g) includes an exemption from the
ownership criteria for aggregation if the
ownership interest:
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Is based on the ownership of securities
constituting the whole or a part of an unsold
allotment to or subscription by such person
as a participant in the distribution of such
securities by the issuer or by or through an
underwriter.
FIA submits that the Commission
should clarify and expand this
exemption to include an ownership
interest based on the acquisition or
disposition of securities acquired in
connection with the trading or marketmaking activities of a broker-dealer
registered with the SEC, or a comparable
broker-dealer.52 FIA believes that
aggregation based upon a 10 percent
ownership interest should not be
required if the broker-dealer acquires
the interest—(1) In anticipation of
demand, (2) as part of its normal
market-making activity, or (3) as a result
of a routine life cycle event, such as a
stock distribution. Such ownership
interests, according to FIA, do not
present the same concerns about sharing
transaction or position information that
may facilitate coordinated trading.53
In response to the issues raised in the
aggregation petition and comments to
the interim final rule, the Commission
has determined to propose
50 See e.g., CL–FIA at 15; CL–EEI at 1–2, 14–15;
CL–Atmos at 3–5; and CL–AGA at 1–3.
51 See e.g., CL–EEI at 14–15.
52 CL–FIA at 6, 16.
53 CL–FIA at 16.
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modifications to certain position limits
aggregation provisions.
II. Proposed Rules
A. Proposed Rules for Information
Sharing Restriction
The Commission is proposing to
clarify that the scope of the exemption
in regulation 151.7(i) includes a
reasonable risk of a violation of federal
law. The Commission intended to cover
such risks in the final rule and is
therefore proposing to amend regulation
151.7(i) to make clear that the
exemption includes circumstances in
which the sharing of information would
create a reasonable risk of a violation of
federal law or regulations adopted
thereunder.
The proposed rules retain the
requirement that market participants file
an opinion of counsel to rely on the
exemption in regulation 151.7(i). The
opinion allows Commission staff to
review the legal basis for the asserted
regulatory impediment to the sharing of
information, and is particularly helpful
where the asserted impediment arises
from laws and/or regulations that the
Commission does not directly
administer. Further, Commission staff
will have the ability to consult with
other federal regulators as to the
accuracy of the opinion, and to
coordinate the development of rules
surrounding information sharing and
aggregation across accounts in the
future. The Commission also notes that
the proposed clarification should
address the concerns of commenters
that obtaining an opinion of counsel
could be difficult if the Commission
read the existing standard to include
only per se violations.
With regard to comments that the
exemption should permit persons to
rely upon ‘‘best practices’’ or other
‘‘guidelines,’’ the Commission notes that
the proposed exemption applies to
situations where the sharing of
information creates a reasonable risk of
violating federal law or regulations
adopted thereunder. Whether a
reasonable risk exists will depend on
the interconnection of the applicable
statute and regulatory guidance, as well
as the particular facts and circumstances
as applied to the statute and guidance.
Notwithstanding the Commission’s facts
and circumstances review of potentially
conflicting federal law or regulations,
the exemption in regulation 151.7(i) is
effective upon filing of the notice in
151.7(h) and opinion of counsel. These
provisions authorize the Commission to
request additional information beyond
that contained in the notice filing, and
the Commission may amend, suspend,
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31771
terminate or otherwise modify a
person’s aggregation exemption upon
further review. As the Commission
gains further experience with the
exemption for federal law information
sharing restriction in regulation 151.7(i),
the Commission anticipates providing
further guidance to market participants.
1. Proposed Rules for Information
Sharing Restriction—Foreign Law
For the same reasons the Commission
adopted the exemption for federal
information sharing restrictions, the
Commission proposes extending the
exemption to the law of a foreign
jurisdiction. In addition, similar to the
clarification for the exemption for
federal law information sharing
restriction, the Commission is also
proposing an exemption where the
sharing of information creates a
reasonable risk of violating the law of a
foreign jurisdiction. However, the
Commission remains concerned that
certain market participants could
potentially use the existing and
proposed expansion of the exemption in
regulation 151.7(i) to evade the
requirements for the aggregation of
accounts. In this regard, this proposed
rule, consistent with the exemption for
federal law information sharing
restriction, includes the requirement to
file an opinion of counsel specifically
identifying the restriction of law and
facts particular to the market participant
claiming the exemption.54
The Commission notes that the
aggregation petition references
information sharing restrictions that
arise from ‘‘international’’ law. The
proposed rules include relief from
aggregation for information sharing that
could create a reasonable risk of
violating the law of a foreign
jurisdiction. The Commission seeks
comment as to whether this proposal
adequately addresses the concerns of
market participants outlined in the
interim final rule comments and the
54 The Commission notes that the proposed
expansion of this exemption includes a proposed
technical change to regulation 151.7(i). The
proposed technical change specifies that the
‘‘notice’’ filing referenced in current regulation
151.7(i) is a reference to the notice filing
requirements set forth in regulation 151.7(h). In
addition, the Commission has proposed a technical
change to the FCM exemption in current regulation
151.7(e). Proposed regulation 151.7(e)(4) is
designed for ease of reference for market
participants to follow the filing requirements in
regulation 151.7(h), which requires persons
claiming the FCM exemption in regulation 151.7(e)
to file pursuant to regulation 151.7(h). Finally, the
Commission is also proposing a technical change to
the form and manner of filing for an aggregation
exemption in regulation 151.10(b)(4). Specifically,
this proposed change makes clear that a notice
filing for an aggregation exemption is effective upon
filing.
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aggregation petition, and as to whether
those concerns are valid. The
Commission specifically requests
comment on the types of ‘‘international’’
law, if any, which could create
information sharing restrictions other
than the law of a foreign jurisdiction.
Should the regulation 151.7(i)
exemption include ‘‘international’’ law
or is it sufficient to refer to the ‘‘law of
a foreign jurisdiction’’? Alternatively,
the Commission is considering a caseby-case approach through petitions
submitted pursuant to CEA section
4a(a)(7). Should the Commission adopt
such a case-by-case approach?
2. Proposed Rules for Information
Sharing Restriction—State Law
After consideration of the aggregation
petition and the interim final rule
comments the Commission is also
proposing to establish an exemption for
situations where information sharing
restrictions could trigger state law
violations. In addition, similar to the
clarification for the exemption for
federal law information sharing
restriction, the Commission is also
proposing that the state law information
sharing restriction apply to situations
where the sharing of information creates
a reasonable risk of violating the state
law. However, as noted above, the
Commission remains concerned about
the potential for evasion within the
context of this exemption. In this regard,
this proposed rule, consistent with the
federal law information sharing
restriction, includes the requirement to
file an opinion of counsel specifically
identifying the restriction of law and
facts particular to the market participant
claiming the exemption.
The Commission solicits comments as
to the appropriateness of extending the
information sharing exemption to state
law. Should the Commission provide for
such an exemption? Alternatively, the
Commission is considering a case-bycase approach through petitions
submitted pursuant to CEA section
4a(a)(7). Should the Commission adopt
such a case-by-case approach and
otherwise rely upon the preemption of
state law in administering its
aggregation policy?
The Commission notes that the
aggregation petition cites to Texas
Public Utility Code Substantive Rule
25.503, which provides that ‘‘a market
participant shall not collude with other
market participants to manipulate the
price or supply of power.’’ 55 That
provision applies to intra-state
transactions and resembles regulations
of the Federal Energy Regulatory
Commission.56 In this regard, should the
Commission limit application of the
proposed exemption for state law
information sharing restrictions to laws
that have a comparable provision at the
federal level? What criteria should the
Commission use in identifying state
laws that a person may rely upon for an
exemption from aggregation?
The Commission also solicits
additional comment as to the types of
state laws, including specific laws,
which could create an information
sharing restriction in conflict with the
Commission’s aggregation policy.
The Commission further notes that
the aggregation petition seeks to extend
the exemption to information sharing
restrictions that arise from ‘‘local’’
law.57 However, neither the aggregation
petition nor interim final rule
commenters have provided examples,
and the Commission is concerned that
an exemption for local law would be
difficult to implement due to the
number of laws and/or regulations that
would need to be considered and the
vast numbers of localities that might
issue such laws and/or regulations.
The Commission solicits comment as
to the appropriateness of extending the
information sharing exemption to
‘‘local’’ law. Commenters are asked to
provide the scope of local law and
identify any specific laws that create
information sharing restrictions that
would conflict with the Commission’s
aggregation policy. What criteria could
the Commission use in identifying local
laws that a person may rely upon for an
exemption from aggregation? Should the
Commission adopt a case-by-case
approach through petitions submitted
pursuant to CEA section 4a(a)(7) and
otherwise rely upon the preemption of
local law in administering its
aggregation policy?
B. Proposed Rules—Ownership of
Positions Generally
The Commission continues to
consider ownership an appropriate
measure for aggregation. Section 4a(a)(1)
of the CEA provides for the general
aggregation standard with regard to
position limits, and specifically
provides:
In determining whether any person has
exceeded such limits, the positions held and
trading done by any persons directly or
indirectly controlled by such person shall be
included with the positions held and trading
done by such person; and further, such limits
upon positions and trading shall apply to
positions held by, and trading done by, two
or more persons acting pursuant to an
56 See
55 Aggregation
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e.g. 18 CFR 1c.1 & 1c.2.
petition at 24.
57 Aggregation
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expressed or implied agreement or
understanding, the same as if the positions
were held by, or the trading were done by,
a single person.58
Congress incorporated this provision
into Section 4a as part of the CEA
Amendments of 1968 (‘‘1968 Act’’).59
The legislative history to the 1968 Act
indicates that Congress added this
language to expressly incorporate prior
administrative determinations of the
Commodity Exchange Authority
(predecessor to the Commission).60
Prior to the 1968 Act, administrative
determinations as well as regulations of
the Commodity Exchange Authority
announced standards that included
control of trading and the ownership of
positions.61
In light of the language in section 4a,
the legislative history and regulatory
developments, the Commission has
58 7
U.S.C. 6a.
Law 90–258, 82 Stat. 26 (1968).
60 See S. Rep No. 947, 90th Cong., 2 Sess. 5
(1968). This senate report provides:
Certain longstanding administrative
interpretations would be incorporated in the act. As
an example, the present act authorizes the
Commodity Exchange Commission to fix limits on
the amount of speculative ‘‘trading’’ that may be
done. The Commission has construed this to mean
that it has the authority to set limits on the amount
of buying or selling that may be done and on the
size of positions that may be held. All of the
Commission’s speculative limit orders, dating back
to 1938, have been based upon this interpretation.
The bill would clarify the act in this regard * * *.
Section 2 of the bill amends section 4a(1) of the
act to show clearly the authority to impose limits
on ‘‘positions which may be held.’’ It further
provides that trading done and positions held by a
person controlled by another shall be considered as
done or held by such other; and that trading done
or positions held by two or more persons acting
pursuant to an express or implied understanding
shall be treated as if done or held by a single
person.
61 See Administrative Determination (‘‘A.D.’’) 163
(Aug. 7, 1957) (‘‘[I]n the application of speculative
limits, accounts in which the firm has a financial
interest must be combined with any trading of the
firm itself or any other accounts in which it in fact
exercises control.’’). In addition, the Commission’s
predecessor, and later the Commission, provided
the aggregation standards for purposes of position
limits in the large trader reporting rules. See
Supersedure of Certain Regulations, 26 FR 2968,
Apr. 7, 1961. In 1961, then regulation 18.01 read:
‘‘(a) Multiple Accounts. If any trader holds or has
a financial interest in or controls more than one
account, whether carried with the same or with
different futures commission merchants or foreign
brokers, all such accounts shall be considered as a
single account for the purpose of determining
whether such trader has a reportable position and
for the purpose of reporting.’’ 17 CFR 18.01 (1961).
The provisions concerning aggregation for
position limits generally remained part of the
Commission’s large trader reporting regime until
1999 when the Commission incorporated the
aggregation provisions into part 150.4 with the
existing position limit provisions in part 150. See
64 FR 24038, May 5, 1999. The Commission’s part
151 rulemaking also incorporates the aggregation
provisions in part 151.7 along with the remaining
position limit provisions in part 151. See 76 FR
71626, Nov. 18, 2011.
59 Public
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historically viewed, and continues to
view, section 4a as requiring aggregation
on the basis of either ownership or
control.62 The Commission also believes
that aggregation of positions across
accounts based upon ownership is a
necessary part of the Commission’s
position limit regime.63 An ownership
standard establishes a bright-line test
that provides certainty to market
participants and the Commission.64
Absent aggregation on the basis of
ownership, the Commission would have
to apply a control test in all cases,
which poses significant administrative
challenges to individually assess control
across all market participants. Further,
if the statute only required aggregation
based on control, market participants
may be able to use an ownership
interest to circumvent aggregation in
circumstances where an ownership
interest is used to directly or indirectly
influence control over the account or
position. The Commission also notes
that the ownership prong attributes a
position to the beneficial owner of
multiple accounts that amount to an
unduly large position, which position
limits are intended to prevent.
Therefore, the proposed rules would
continue to require aggregation based
upon either ownership or control.
Regarding a threshold level to
aggregate on the basis of ownership, the
Commission has generally found that an
ownership or equity interest of less than
10 percent in an account or position that
is controlled by another person who
makes discretionary trading decisions
does not present a concern that such
ownership interest results in control
over trading or can be used indirectly to
create a large speculative position
through ownership interests in multiple
accounts. As such, the Commission has
traditionally viewed an ownership
62 See e.g., Exemptions from Speculative Position
Limits for Positions which have a Common Owner
but which are Independently Controlled and for
Certain Spread Positions, 53 FR 41563, 41564, Oct.
24, 1988); and Exemption from Speculative Position
Limits for Positions which have a Common Owner
but which are Independently Controlled and for
Certain Spread Positions, 55 FR 30926, July 30,
1990.
63 See also, Exemptions from Speculative Position
Limits for Positions which have a Common Owner
but which are Independently Controlled and for
Certain Spread Positions, 53 FR 13290, 13292, Apr.
22, 1988. In response to two separate petitions, the
Commission proposed the independent account
controller exemption from speculative position
limits, but declined to remove the ownership
standard from its aggregation policy.
64 See also Revision of Federal Speculative
Position Limits and Associated Rules, 64 FR 24038,
24044, May 5, 1999 (‘‘[T]he Commission * * *
interprets the ‘held or controlled’ criteria as
applying separately to ownership of positions or to
control of trading decisions.’’); and 53 FR 13290,
13293 (1988).
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interest below 10 percent as not
warranting aggregation.65 Commenters
suggest that a similar analysis should
prevail for an ownership interest of 10
percent or more where such ownership
represents a passive investment that
does not involve control of the trading
decisions of the owned entity.
Commenters argue that under these
conditions, such passive investments
would present a reduced concern for
trading pursuant to direct or indirect
control, as well as a reduced risk for
persons with positions in multiple
accounts to hold an unduly large overall
position.
While prior Commission rulemakings
have generally restricted exemptions to
the ownership criteria to limited
partners of commodity pools and
independent account controllers
managing customer funds for an eligible
entity, the Commission has considered
a broader passive investment
exemption.66 Further, the Commission
indicated in the part 151 final rule that
the development of aggregation
exemptions could occur over time.67
This incremental approach to account
aggregation standards reflects the
Commission’s historical practice.68
65 The Commission codified this aggregation
threshold in its 1979 statement of policy on
aggregation, which was derived from the
administrative experience of the Commission’s
predecessor. See Statement of Policy on
Aggregation of Accounts and Adoption of Related
Reporting Rules, 44 FR 33839, 33843, Jun. 13, 1979.
Note, however, rule 151.7(d) will separately require
aggregation of investments in accounts with
identical trading strategies.
66 See e.g., 53 FR 13290, 13292 (1988) (proposal).
The 1988 proposal for the independent account
controller rule requested comment on the
possibility of a broader passive investment
exemption, and specifically noted:
‘‘[Q]uestions also have been raised regarding the
continued appropriateness of the Commission’s
aggregation standard which provides that a
beneficial interest in an account or positions of ten
percent or more constitutes a financial interest
tantamount to ownership. This threshold financial
interest serves to establish ownership under both
the ownership criterion of the aggregation standard
and as one of the indicia of control under the 1979
Aggregation Policy.
In particular, certain instances have come to the
Commission’s attention where beneficial ownership
in several otherwise unrelated accounts may be
greater than ten percent, but the circumstances
surrounding the financial interest clearly exclude
the owner from control over the positions. The
Commission is requesting comment on whether
further revisions to the current Commission rules
and policies regarding ownership are advisable in
light of the exemption hereby being proposed. If
such financial interests raise issues not addressed
by the proposed exemption for independent
account controllers, what approach best resolves
those issues while maintaining a bright-line
aggregation test?’’
67 See 76 FR 71626, 71654.
68 See e.g., 53 FR 41563, 41567, Oct. 24, 1988 (the
definition of eligible entity for purposes of the IAC
exemption originally only included CPOs, or
exempt CPOs or pools, but the Commission
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Consistent with that practice, the
Commission has considered the
additional information provided and the
concerns raised by the aggregation
petition and interim final rule
commenters, and believes it appropriate
to propose certain relief from the
ownership criteria of aggregation.69
1. Disaggregation Relief for Owned
Entities
Proposed rule 151.7(b) continues the
Commission’s longstanding rule that
persons with an ownership or equity
interest in an account or position of less
than 10 percent need not aggregate such
positions solely on the basis of the
ownership criteria. Persons with a 10
percent or greater ownership interest
would still generally be required to
aggregate the account or positions.
However, proposed rule 151.7(b)(1)
establishes a notice filing procedure to
permit a person in specified
circumstances to disaggregate the
positions of a separately organized
entity (‘‘owned entity’’), even if such
person has a 10 percent or greater
interest in the owned entity. The notice
filing would need to demonstrate
compliance with certain conditions set
forth in 151.7(b)(1)(i), and such relief
would not be available to persons with
a greater than 50 percent ownership or
equity interest in the owned entity.
Similar to other exemptions from
aggregation, the notice filing would be
effective upon submission to the
Commission, but the Commission may
subsequently call for additional
information as well as reject, modify or
otherwise condition such relief. Further,
such person is obligated to amend the
notice filing in the event of a material
change to the circumstances described
in the filing.
The proposed criteria to claim relief
under 151.7(b)(1) address the
Commission’s concerns that an
indicated a willingness to expand the exemption
after a ‘‘reasonable opportunity’’ to review the
exemption.); 56 FR 14308, 14312, Apr. 9, 1991 (The
Commission expanded eligible entities to include
commodity trading advisors, but did not include
additional entities requested by commenters until
the Commission had the opportunity to assess the
current expansion and further evaluate the
additional entities); and 64 FR 24038, May 5, 1999
(The Commission expanded the list of eligible
entities to include many of the entities commenters
requested in the 1991 rulemaking).
69 The Commission notes that ownership and
control are considered separately for the aggregation
of accounts. As such, if the Commission were to
adopt the proposed exemption outlined below, and
a market participant qualified for the exemption,
such person would nonetheless have to aggregate
those same accounts or positions identified in the
exemption if such person otherwise controlled
trading, acted pursuant to an express or implied
agreement or held positions in accounts with
identical trading strategies.
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ownership or equity interest of 10
percent and above may facilitate or
enable control over trading of the owned
entity or allow a person to accumulate
a large position through multiple
accounts that could overall amount to
an unduly large position. Essentially,
the proposed rules amending the
ownership criteria for aggregation across
accounts establish a rebuttable
presumption that persons with an
ownership or equity interest of 10
percent or greater must aggregate, but
such persons may file for disaggregation
relief if their ownership interest does
not exceed 50 percent and they can
demonstrate independence by meeting
the criteria described below.70
Proposed rule 151.7(b)(1)(i)(A)
conditions aggregation relief for the
ownership interest in another entity on
a demonstration that a person filing for
disaggregation relief and the owned
entity do not have knowledge of the
trading decisions of the other. The
Commission believes that where an
entity has an ownership interest in
another entity and neither entity share
trading information, such entities
demonstrate independence. In contrast,
persons with knowledge of trading
decisions of another in which they have
an ownership interest are likely to take
such decisions into account in making
their own trading decisions, which
implicates the Commission’s concern
about independence and enhances the
risk for coordinated trading. For
purposes of this provision, the
Commission does not consider
knowledge of overall end-of-day
position information to necessarily
constitute knowledge of trading
decisions, so long as the position
information cannot be used to dictate or
infer trading strategies. As such, the
knowledge of end-of-day positions for
the purpose of monitoring credit limits
for corporate guarantees would not
necessarily constitute knowledge of
trading information. However, the
ability to monitor the development of
positions on a real time basis could
constitute knowledge of trading
70 The Commission notes that the conditions for
independence apply to the person filing the notice
as well as the owned entity. In addition, for
purposes of complying with the proposed
conditions, such ‘‘person’’ shall include any entity
that such person must aggregate pursuant to
regulation 151.7. For example, if company A files
a notice under proposed regulation 151.7(b)(1) for
company A’s equity interest of 30 percent in
company B, then company A must comply with the
conditions for the exemption, including any entity
with which company A aggregates positions under
151.7. In this connection, if company A controls the
trading of company C, then there must be
independence between company B and company C
for purposes of company A’s 151.7(b)(1) notice
filing.
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decisions because of the substantial
likelihood that such knowledge might
affect trading strategies or influence
trading decisions of the other.
Proposed rule 151.7(b)(1)(i)(B)
conditions aggregation relief on a
demonstration that such person seeking
disaggregation relief and the owned
entity trade pursuant to separately
developed and independent trading
systems. Further, proposed rule
151.7(b)(1)(i)(C) conditions relief on a
demonstration that such person and the
owned entity have, and enforce, written
procedures to preclude the one entity
from having knowledge of, gaining
access to, or receiving data about, trades
of the other. Such procedures must
include document routing and other
procedures or security arrangements,
including separate physical locations,
which would maintain the
independence of their activities. The
Commission has applied these same
conditions in connection with the IAC
exemption to ensure independence of
trading between an eligible entity and
an affiliated independent account
controller.71 Such conditions have been
useful in ensuring that trading is not
coordinated through the development of
similar trading systems, and that
procedures are in place to prevent the
sharing of trading decisions between
entities. Similar to the IAC exemption,
the proposed owned entity exemption
in proposed rule 151.1(b)(1) would
permit disaggregation if there is
independence of trading between two
entities. Thus the Commission proposes
to include the above conditions, which
are already applicable in the IAC
context, and which should also
strengthen the independence between
the two entities for the owned entity
exemption.
Proposed rule 151.7(b)(1)(i)(D)
conditions aggregation relief on a
demonstration that such person does
not share employees that control the
owned entity’s trading decisions, and
the employees of the owned entity do
not share trading control with such
persons. The Commission is concerned
that shared employees with knowledge
of trading decisions undermine the
independence of trading between
entities. Similar to the restriction on
information sharing, the sharing of
employees with knowledge of trading
decisions presents a strong risk to the
independence of trading between
entities. In the aggregation petition, the
Working Groups submit that entities
should be permitted to share ‘‘attorneys,
accountants, risk managers, compliance
and other mid- and back-office
71 See
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personnel.’’ 72 At this time, the
Commission questions, and seeks
comment regarding, whether the sharing
of such persons compromises
independence because it would provide
each entity with knowledge of the
other’s trading decisions.73
Proposed rule 151.7(b)(1)(i)(E)
conditions aggregation relief on a
demonstration that the person and the
owned entity do not have risk
management systems that permit the
sharing of trades or trading strategies
with the other. This condition addresses
concerns that risk management systems
that permit the sharing of trades or
trading strategies with each other
present a significant risk of coordinated
trading through the sharing of
information.74 The Commission has not
proposed a condition that the risk
management system be separately
developed from the risk management
system of the owned entity, and the
Commission seeks comment as to
whether risk management systems that
do not communicate trade information
can maintain independence of trading
between entities.75
Proposed rule 151.7(b)(1)(ii)
conditions aggregation relief on a
demonstration that such person does
not have greater than a 50 percent
ownership or equity interest in the
owned entity. An equity or ownership
interest above 50 percent constitutes a
majority ownership or equity interest of
the owned entity and is so significant as
to require aggregation under the
ownership prong of Section 4a(a)(1) of
the CEA. This proposal would provide
administrative certainty and would
address concerns about circumvention
of position limits by coordinated trading
or direct or indirect influence between
entities. To the extent that the majority
owner may have the ability and
incentive to direct, control or influence
the management of the owned entity,
the proposed bright-line test would be a
reasonable approach to the aggregation
of owned accounts pursuant to Section
72 Aggregation
petition at Exhibit A.
Commission notes that the proposed
condition barring the sharing of employees that
control the owned entity’s trading decisions would
include a prohibition on sharing of employees
described in the aggregation petition (attorneys,
accountants, risk managers, compliance and other
mid-and back-office personnel), to the extent such
employees are aware of the trading decisions of the
person or the owned entity.
74 This condition is similar to a condition
proposed in the aggregation petition.
75 The Commission remains concerned that a
trading system, as opposed to a risk management
system, that is not separately developed from
another system can subvert independence because
such a system could apply the same or similar
trading strategies even without the sharing of
trading information.
73 The
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4a(a)(1). A person with a greater than 50
percent ownership interest in multiple
accounts would have the ability to hold
and control a significantly large and
potentially unduly large overall position
in a particular commodity, which
position limits are intended to
prevent.76
The proposed owned entity
exemption and the clarification and
expansion of the violation of law
exemption address concerns raised in
the aggregation petition and interim
final rule comments. First, the
clarification and extension of the
violation of law exemption responds to
concerns that market participants could
face increased liability under state,
federal and foreign law. While the
aggregation petition and other
commenters argue that an owned nonfinancial entity exemption would
reduce the risk of liability under
antitrust and other laws, the proposed
clarification and expansion would allow
market participants to avail themselves
of the violation of law exemption in
those circumstances where the sharing
of information creates a reasonable risk
of violating the above mentioned bodies
of law.
The proposed owned entity
exemption applies to both financial and
non-financial entities that have passive
ownership interests. Market participants
that qualify for the exemption can file
a notice with the Commission
demonstrating independence between
entities and, thereafter, forgo the
development of monitoring and tracking
systems for the aggregation of accounts.
The Commission seeks comment as to
whether such passive interests present a
significantly reduced risk of coordinated
trading compared to owned entities that
fail the criteria for the proposed
exemption. In addition, the Commission
specifically requests comment as to
whether the proposed relief should be
76 The Commission notes that aggregation based
on ownership looks to a person’s equity interest
regardless of voting control. By way of comparison,
with a greater than 50 percent interest in voting
shares, such person generally is required to
consolidate the owned entity for purposes of the
Generally Accepted Accounting Principles
(‘‘GAAP’’). See Financial Accounting Standards
Board Accounting Standards Codification Topic
810, at paragraphs 810–10–15–8 and 10, available
at https://asc.fasb.org/. See also Accounting
Research Bulletin 51 at paragraph 3 and Statement
of Financial Accounting Standard No. 94 at
paragraph 2. The Commission believes that
aggregation based upon an ownership or equity
interest of greater than 50 percent, regardless of
voting interest, is appropriate to address the
heightened risk of direct or indirect influence over
the owned entity. Further, unless a particular
exemption applies, a person with a 50 percent or
greater voting interest in an owned entity would
likely be required to aggregate the positions of the
owned entity on the basis of control.
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limited to ownership interests in nonfinancial entities.
While the owned non-financial entity
exemption mentioned in the aggregation
petition would permit disaggregation
even if the owned entity is a wholly
owned company, the Commission is
concerned that an ownership interest
greater than 50 percent presents
heightened concerns for coordinated
trading or direct or indirect influence
over an account or position, and that
permitting disaggregation at that level of
ownership would be inconsistent with
the statutory requirement to aggregate
on the basis of ownership. Small
ownership interests of less than 10
percent do not warrant aggregation. A
10 percent or greater ownership interest
has served as a useful measure for
aggregation, but the Commission has
determined relief may be warranted for
passive investments. However, for the
reasons discussed above, an ownership
interest greater than 50 percent requires
aggregation because ownership at that
level serves as a useful benchmark for
the increased risk of direct or indirect
influence over the trading of an owned
entity. Because the circumstances
facilitating control can be difficult to
monitor, a facts and circumstances
review would be difficult to administer
by both market participants and the
Commission. In addition, a person with
a greater than 50 percent ownership
interest in multiple accounts may have
the ability to hold a significantly large
and potentially unduly large overall
position in a particular commodity,
which position limits are intended to
prevent. Therefore, the Commission
proposes limiting the availability of the
exemption to those having an
ownership interest no greater than 50
percent because such a bright-line rule
would provide clarity to market
participants and a useful tool for the
Commission to simplify aggregation
where there is an increased and
substantial risk of coordinated trading.77
With regard to filing requirements for
the exemption in regulation 151.7(b) (1),
the Commission notes that market
participants would be required to file in
accordance with regulation 151.7(h).78
As such, market participants must file a
notice with the Commission with a
description of how they adhere to the
77 The Commission reminds market participants
that proposed regulation 151.7(b)(1) does not affect
the applicability of a separate exemption from
aggregation (e.g., the independent account
controller exemption).
78 Where the provisions of regulation 151.7
require a person to file a notice, entities cannot rely
upon an exemption unless such entity has properly
filed a notice in accordance with regulation
151.7(h).
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31775
criteria in regulation 151.7(b)(1) and a
certification that the conditions are met.
This certification, as well as any other
certification made under regulation
151.7(h), must come from a senior
officer of the market participant with
knowledge as to the contents of the
notice.79 Therefore, the Commission is
proposing to clarify in regulation
151.7(h)(1)(ii) that such certification
come from a senior officer. Further,
regulation 151.7(h)(3) requires market
participants to promptly update a notice
filing in the event of a material change
of the information contained in the
notice filing.80
With regard to the type of material
necessary to file a notice to claim an
exemption under 151.7(b)(1), the
Commission notes that each submission
must be specific to the facts of the
particular entity. The person claiming
the exemption must provide specific
facts that demonstrate compliance with
each condition of relief. Such a
demonstration should likely include an
organizational chart including the
ownership and control structure of the
involved entities, a description of the
risk management system, a description
of the information-sharing systems
(including bulletin boards, and common
email addresses of the entities
identified), an explanation of how and
to whom the trade data and position
information is distributed (including the
responsibilities of the individual
receiving such information), and the
officers that receive reports of the trade
data and position information.81
The Commission specifically requests
comments as to the appropriateness of
the owned entity exemption as well as
the conditions applicable to the
exemption. Should the Commission add
additional criteria? If so, what criteria
and why? Should the Commission
require market participants to submit
additional information to claim the
exemption? If so, what information and
why? With regard to the owned entity
exemption, should the Commission alter
the scope of the exemption? If so, how
should it be altered and why? Further,
79 See 17 CFR 151.7(h)(1)(ii). Market participants
should update the certification if the individual
certifying compliance no longer works for the
company.
80 In this regard, the Commission clarifies that a
material change would include, among other
events, if the person making the original
certification is no longer employed by the company.
See also CEA § § 6(c)(2) and 9(a)(3).
81 The Commission notes that this list is not
meant to be exhaustive of the factors that would
indicate an exemption is warranted and should not
be interpreted as being solely sufficient to claim the
exemption because each filing is fact specific. As
noted earlier, the Commission may demand
additional information regarding the exemption
within its discretion.
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at what percent of ownership interest
should a market participant no longer be
able to claim the exemption proposed in
regulation 151.7(b)(1), if any? Are there
specific circumstances in which a
higher percentage of ownership than 50
percent would be appropriate to claim
the exemption in regulation 151.7(b)(1)
notwithstanding the concerns described
above regarding coordinated trading,
direct or indirect influence, and
significantly large and potentially
unduly large overall positions in a
particular commodity? In addition, the
Commission welcomes comment on the
owned non-financial entity exemption
set forth in appendix A of the
aggregation petition as an alternative to
the owned entity exemption proposed
herein.
2. Higher Tier Entities
In connection with the Working
Groups’ request for the Commission to
include an owned non-financial entity
exemption, the Working Groups also
request that the Commission provide
relief from the filing requirements for
claiming the exemption. Specifically,
the aggregation petition argues that if an
entity files a notice and claims the
owned non-financial entity exemption,
then ‘‘every higher-tier company (a
company that holds an interest in the
company that submitted the notice)
need not aggregate the referenced
contracts of the owned non-financial
entities identified in the notice.’’ 82
Thus, the Commission is proposing
rules that provide relief to such ‘‘highertier entities’’ within the context of a
corporate structure.83
Proposed rule 151.7(j) provides that
higher-tier entities may rely upon a
notice for exemption filed by the owned
entity, and such reliance would only go
to the accounts or positions specifically
identified in the notice. For example, if
company A has a 30 percent interest in
company B, and company B has filed an
exemption notice for the accounts and
positions of company C, then company
A may rely upon company B’s
exemption notice for the accounts and
positions of company C. Should
company A wish to disaggregate the
accounts or positions of company B,
company A would have to file a
separate notice for an exemption.
The proposed rules also provide that
a higher-tier entity that wishes to rely
upon an owned entity’s exemption
notice must comply with conditions of
the applicable aggregation exemption
82 Aggregation
petition at 23.
purposes of the discussion below, ‘‘highertier’’ entities include entities with a 10 percent or
greater ownership interest in an owned entity.
83 For
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other than the notice filing
requirements. Although higher-tier
entities need not submit a separate
notice to rely upon the notice filed by
an owned entity, the Commission notes
that it may, upon call, request that a
higher-tier entity submit information to
the Commission, including the
possibility of an on-site visit,
demonstrating compliance with the
applicable conditions.
The Commission believes that these
proposed rules, if adopted, should
significantly reduce the filing
requirements for aggregation
exemptions. Further, the Commission
does not anticipate that the reduction in
filing will impact the Commission’s
ability to effectively survey the proper
application of exemptions from
aggregation. The initial filing of an
owned entity exemption notice should
provide the Commission with sufficient
information regarding the
appropriateness of the exemption, while
repetitive filings of higher-tier entities
would not be expected to provide
additional substantive information.
However, the Commission again notes
that higher-tier entities would still be
required to comply with the substantive
conditions of the exemption specified in
the owned entity’s notice filing.
C. Underwriting
As noted above, Commission
regulation 151.7(g) includes an
exemption from aggregation where an
ownership interest is in an unsold
allotment of securities. FIA requests that
the Commission expand the exemption
to include situations where securities
are owned in anticipation of demand as
part of normal market-making activity,
or as a result of a routine life cycle
event, such as a stock distribution.
The Commission believes that the
ownership interest of a broker-dealer
registered with the SEC, or similarly
registered with a foreign regulatory
authority,84 in an entity based on the
ownership of securities acquired as part
of reasonable activity in the normal
course of business as a dealer is largely
consistent with the ownership of an
unsold allotment of securities covered
by the underwriting exemption
currently found in regulation 151.7(g).
In both circumstances, the ownership
interest is likely transitory and not to
hold for investment purposes.
Accordingly, the Commission is
proposing an aggregation exemption in
regulation 151.7(g) for such activity.85
84 See
15 U.S.C. 78o.
Commission specifically notes that this
proposed exemption would not apply to registered
broker-dealers that acquire an ownership interest in
85 The
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However, the Commission notes that
this exemption would not apply where
a broker-dealer acquires more than a 50
percent ownership interest in another
entity because this would not be
consistent with holding such a
transitory interest for the purpose of
market making and runs a higher risk of
coordinated trading.86 Therefore, a
broker-dealer that acquires more than 50
percent ownership interest in another
entity must aggregate that entity, in the
absence of another aggregation
exemption.
The Commission requests comment
on whether ownership of stock, by a
broker-dealer registered with the SEC or
similarly registered with a foreign
regulatory authority, that is acquired as
part of reasonable activity in the normal
course of business as a dealer, without
other ownership interests or indicia of
control or concerted action, warrants
aggregation.
D. Independent Account Controller for
Eligible Entities
As noted above in section I.A of this
release, section 151.7(f) provides an
eligible entity with an exemption for the
eligible entity’s customer accounts that
are managed and controlled by
independent account controllers. In the
part 151 rulemaking, the Commission
adopted the same definitions of eligible
entity and independent account
controller found in the Commission’s
prior position limit regulations in
regulation 150.1. The definition of
eligible entity includes ‘‘the limited
partner or shareholder in a commodity
pool the operator of which is exempt
from registration under § 4.13 of this
chapter * * *.’’ However, with regard
to a CPO that is exempt under
regulation 4.13, the definition of an
independent account controller only
extends to ‘‘a general partner of a
commodity pool the operator of which
is exempt from registration under § 4.13
of this chapter.’’ At the time the
Commission expanded the IAC
exemption to include regulation 4.13
commodity pools, market participants
generally structured such pools as
limited partnerships.87
The Commission understands that
today, not all regulation 4.13
commodity pools are formed as
partnerships. For example, regulation
securities with the intent to hold for investment
purposes.
86 With regard to FIA’s request that the exemption
include a broker-dealer’s ownership of securities in
anticipation of demand or as part of routine life
cycle events, the proposed rules would cover such
activity if the activity was in the normal course of
the person’s business as a dealer.
87 See 63 FR 38532.
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4.13 pools may be formed as limited
liability companies and have managing
members, not general partners.
The Commission is proposing to
expand the definition of independent
account controller to include the
managing member of a limited liability
company. As such, regulation 4.13
commodity pools established as limited
liability companies would be accorded
the same treatment as such pools
formed as limited partnerships. The
limitation of the exemption to general
partners was based upon a market
structure that, historically, did not
generally include regulation 4.13
commodity pools established as limited
liability companies. In light of market
developments since the Commission
expanded IACs to include regulation
4.13 pools as eligible entities, it may not
be appropriate for there to be a
distinction between limited
partnerships and limited liability
companies in this regard. As such, the
Commission is proposing to amend the
definitions of eligible entity and
independent account controller in part
151.1 to specifically provide for
regulation 4.13 commodity pools
established as limited liability
companies.
The Commission intends to
coordinate the disposition of the
petition with the implementation of
position limits under part 151. To do so,
among other things, the Commission has
directed staff to promptly review
comment letters as soon as practicable
following close of the comment period.
Further, in order to provide an orderly
transition to the compliance dates
specified in part 151.4, the Commission
intends to finalize consideration of the
petition prior to the first compliance
date of part 151.
III. Related Matters
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A. Considerations of Costs and Benefits
Section 15(a) of the CEA requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the
CEA or issuing an order.88 Section 15(a)
further specifies that the costs and
benefits shall be evaluated in light of the
following five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations.
The proposed rules provide the public
with an opportunity to comment on
88 7
U.S.C. 19(a).
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concerns raised in the aggregation
petition and in comments on the interim
final rule. The petitioner and the
commenters seek clarification of certain
provisions of the Commission’s
aggregation policy, and seek to alter or
expand exemptions from aggregation to
include circumstances where there may
be a low risk of coordinated trading. The
Commission requests comment on all
aspects of its consideration of costs and
benefits, including identification and
assessment of any costs and benefits not
discussed herein. In addition, the
Commission requests that commenters
provide data and any other information
or statistics that they believe supports
their positions with respect to the
Commission’s consideration of costs
and benefits.
1. Aggregation Petition and Other
Comments
As discussed in section I.B. of this
release, the Commission received a
petition seeking relief from certain
aggregation provisions in the final rules,
as well as several comments regarding
aggregation in response to the interim
final rule on cash-settled contract limits.
Among other things, the aggregation
petition requests that the Commission
provide an aggregation exemption for
owned non-financial entities similar to
an exemption that the Commission
proposed but did not adopt in its final
rules.89
The aggregation petition states that
compliance with the final rules’
aggregation requirements would require
information sharing and coordination of
trading that is contrary to current best
practices.90 The aggregation petition
contends that the aggregation rules may
impede investment in commercial firms,
impair liquidity and competition in
energy derivatives markets, or cause
firms to exit the market altogether.91
Further, the aggregation petition states
that the aggregation rules necessitate the
development and implementation of
extensive and expensive information
technology systems that can track
positions across numerous affiliates,
even if those affiliates currently trade
independently of each other.92 The
aggregation petition also submits that
companies with an ownership position
in a joint venture would have to divest
89 As part of the proposed rules for part 151, the
Commission proposed that persons with an
ownership or equity interest in a non-financial
entity need not aggregate the positions or accounts
of the non-financial entity provided the person filed
an application demonstrating compliance with
certain conditions. See Position Limits for
Derivatives, 76 FR 4752, 4762–63, Jan. 26, 2011.
90 See Aggregation Petition at 19.
91 Id. at 10–16.
92 Id. at 11.
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31777
their interest to avoid operational
difficulties associated with aggregating
positions.93 The petitioner contends
that these asserted costs could be
mitigated if the Commission were to
adopt a variant of the owned nonfinancial entity exemption,94 clarify that
the violation of law exemption applies
to situations in which there is a
‘‘reasonable risk’’ of violating the
applicable law, expand the violation of
law exemption to include possible
violations of local, state, foreign, and
international law,95 and adopt
provisions relieving ‘‘higher-tier’’
entities of the filing requirement, as
discussed above.96
Several commenters to the
Commission’s interim final rule also
suggest that the Commission adopt a
version of the ‘‘owned non-financial
entity’’ exemption; these commenters
argue that even above 10 percent
ownership, where there is no common
control, there is no risk of coordinated
trading and, therefore, no need for
aggregation of positions.97 These
commenters recommend that the
Commission aggregate based on control,
and not based on an ownership interest
in a position or account.98 Commenters
contend that aggregation of accounts in
passive investments, where the owned
entity is independently managed and
controlled, will be costly and have a
negative impact on markets and market
participants.99 Commenters also claim
that many businesses establish
information barriers between affiliates,
and that the final rules would require
the destruction of those barriers in order
to ensure compliance.100
As with the petitioners, commenters
to the interim final rule also assert that
the aggregation provisions impose
significant operational challenges for
entities and end-users in particular,
requiring them to develop and maintain
costly internal infrastructure
mechanisms to ensure compliance.101
FIA estimates that for a large
conglomerate, costs to comply with the
final rule’s aggregation procedures
could be high. In particular, FIA
estimates that each entity could spend
as much as $500,000 to $1,000,000 to
identify all entities subject to
93 Id.
at 15.
at Exhibit A.
95 Id. at 16–18.
96 Id. at 23.
97 See CL–FIA at 15; CL-Atmos at 4–5; and CL–
EEI at 14–15.
98 See e.g. CL–FIA at 15; CL–EEI at 1–2, 14–15;
CL-Atmos at 3–5; and CL–AGA at 1–3.
99 See CL–FIA at 18 and CL–EEI at 16–17.
100 See CL–FIA at 15; CL–EEI at 14–15; and CLAtmos at 3.
101 See CL–EEI at 14–15; and CL-Atmos at 1–2.
94 Id.
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aggregation and to establish protocols
for reporting all commonly owned and
controlled positions in Referenced
Contracts; as much as $1,000,000 to
$1,500,000 to establish new information
technology systems for consolidating
and tracking aggregated position
information; and approximately
$100,000 for each entity subject to
aggregation to report position
information to its affiliates and/or
controlling entities.102
With regard to the exemption for
federal law information sharing
restriction in regulation 151.7(i), several
commenters also suggest that the
Commission extend the exemption to
include state and foreign
jurisdictions.103 One commenter wrote
that the provision in regulation 151.7(i)
that requires an opinion of counsel to
obtain such an exemption was too
burdensome and should be revised.104
One commenter also suggests that the
Commission extend the underwriting
exemption in regulation 151.7(g) to
include situations where a broker-dealer
acquires positions for legitimate dealing
reasons, such as in anticipation of
increased demand, as part of its normal
market-making activity, or as a result of
a routine life-cycle event.105
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2. Summary of the Commission’s
Proposal
Exemption for Violation of Laws. In
the final part 151 rules, the Commission
included an exemption from aggregation
for those entities for whom sharing the
requisite information would violate
federal law. The Commission seeks to
clarify that it always intended the
exemption to apply in those
circumstances in which the sharing of
information presents a ‘‘reasonable risk’’
of violating the applicable law(s).
As explained above, one commenter
urged the Commission to drop the
requirement that, to obtain the
violation-of-laws exemption an entity
must submit an opinion of counsel (as
discussed in section II.C). Such an
opinion allows the Commission to
review the facts and circumstances
supporting the claimed exemption, and
thus the proposed rules would retain
the requirement to submit an opinion of
counsel.
In light of the aggregation petition and
comments on the interim final rule, the
Commission is including in this
proposal an expansion of the violationof-law exemption to include state law
102 See
CL–FIA at 19–20.
CL–EEI at 17–18; CL–AGA at 1–2; CL–FIA
at 6; and CL-Atmos at 5.
104 See CL–AGA at 5.
105 See CL–FIA at 16.
103 See
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and the law of foreign jurisdictions. The
existing rule allows entities who believe
that the aggregation provisions would
require them to violate state or foreign
laws to seek an exemption on a case-bycase basis. The Commission seeks
comment as to the scope of the
proposed exemption.
Proposed Owned Entity Exemption.
Proposed rule 151.7(b)(1) provides that
any person with an ownership or equity
interest in an entity (financial or nonfinancial) of 10 percent or greater may
disaggregate the owned entity’s
positions upon demonstrating
compliance with each of several
specified indicia of independence.106
The proposed indicia are that such
person and the owned entity: (1) Do not
have knowledge of the trading decisions
of the other; (2) trade pursuant to
separately developed and independent
trading systems; (3) have in place
policies and procedures to preclude
sharing knowledge of, gaining access to,
or receiving data about, trades of the
other; (4) do not share employees that
control the trading decisions of the
other; and (5) maintain a risk
management system that does not allow
the sharing of trade information or
trading strategies between entities. In
addition, such person’s ownership or
equity interest in the owned entity
cannot exceed 50 percent.
The aggregation petition and several
of the other commenters urge that the
Commission should permit market
participants to disaggregate accounts in
situations where ownership of an
account is passive, as they contend
there is a less of a concern regarding
coordinated trading.107 The aggregation
petition and other commenters suggest
that the Commission add an owned nonfinancial entity exemption, which they
contend would incorporate such
situations as well as alleviate potential
106 As discussed in section II.D.1, at over 50
percent ownership, the proposed ownership
standard would mandate aggregation in order to
give effect to the statutory requirement that
positions ‘‘held’’ by a person must be aggregated,
and because of a person’s ability to influence
management and the concomitant heightened
concerns about coordinated trading. The owned
entity exemption does not impact the availability of
the IAC, FCM, and federal, state, or foreign law
information sharing restriction exemptions as found
in regulation 151.7(h). However, as proposed, this
exemption from the ownership criteria would not
apply to investments in accounts with identical
trading strategies.
107 They further contend that a lack of an owned
non-financial entity exemption could increase
liability for antitrust and other federal law and
regulations. This concern is addressed by the
proposed clarification discussed above, which
provides that market participants may avail
themselves of the violation of law exemption if the
sharing of information creates a reasonable risk of
a violation.
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negative impacts to liquidity and
competition in both physical and
derivatives markets.
The Commission is proposing to
permit disaggregation of entities where
a person has no greater than a 50
percent interest in the entity and meets
certain other conditions. The proposed
owned-entity exemption would apply to
a person’s passive investments in either
financial or non-financial entities.
Those who qualify under this proposal
would have to demonstrate that they
meet all of its conditions. The
Commission seeks comment as to
whether the concerns suggested by the
aggregation petition and other
commenters are valid, whether this
proposal meets those concerns, and
whether the 50 percent limit and other
conditions are appropriate.
Expansion of the Underwriter
Exemption. The Commission is also
proposing to expand the exemption for
the underwriting of securities that was
adopted as regulation 151.7(g) to
include ownership interests acquired
through the market-making activities of
an affiliated broker dealer. This
proposal would exempt from
aggregation ownership interests
acquired as part of a person’s reasonable
market-making activity in the normal
course of business as a broker-dealer
registered with the SEC or comparable
registration in a foreign jurisdiction,108
so long as there is no other ownership
interests or indicia of control or
concerted action. The Commission
intends for this proposal to apply to
ownership interests that are likely
transitory and not for investment
purposes, and seeks comment as to
whether such interests are at a low risk
for the coordination of trading or
whether this exemption could lead to
evasion of applicable position limits.109
Proposed ‘‘Higher-Tier’’ Entity Filing
Relief. The Commission also is
proposing to extend filing relief to
‘‘higher-tier’’ entities. As such, proposed
regulation 151.7(j) provides that highertier entities may rely on exemption
notices filed by owned entities.
Commenters claim that such an
exemption would reduce the burden of
filing exemption notices by eliminating
redundancies. The Commission seeks
comment as to whether this proposal
will in fact reduce the filing burden for
claiming an exemption, and whether the
proposal would affect the Commission’s
108 See
15 U.S.C. 78o.
Commission specifically notes that this
proposed exemption would not apply to registered
broker-dealers that acquire an ownership interest in
securities with the intent to hold for investment
purposes.
109 The
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ability to oversee how exemptions are
applied in the market.
Independent Account Controller
Exemption. As discussed above, the IAC
exemption in regulation 151.7(f)
previously included commodity pools
exempt from registration under § 4.13
that are structured as limited
partnerships. The Commission is
proposing to allow commodity pools
structured as limited liability companies
to rely on the IAC exemption. The
Commission seeks comment as to
whether there is any relevant distinction
between limited partnerships and
limited liability companies for purposes
of this exemption.
3. Consideration of Costs and Benefits
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It is the Commission’s goal that this
proposal uphold part 151’s regulatory
aims without diminishing its
effectiveness. In so doing, the
Commission adheres to its belief that
aggregation represents a key element to
prevent evasion of prescribed position
limits and that its historical approach
towards aggregation—one that
appropriately blends consideration of
ownership and control indicia—remains
sound.110
The Commission seeks comment as to
whether compliance with this proposal
will reduce the costs market
participants will incur to comply with
the aggregation requirements of the final
rules. In particular, how would the cost
of filing a notice for disaggregation relief
compare with the cost of developing
systems necessary to aggregate the
positions of owned entities under the
current version of part 151? Note that,
in the preamble to part 151, the
Commission estimated that the filing of
a Notice of Disaggregation would create
certain costs for market participants.111
In particular, the Commission
approximated that the aggregationrelated reporting requirements would
affect ‘‘ninety entities, resulting in a
total burden, across all these entities, of
225,000 annual labor hours and $5.9
million in annualized capital, start-up,
total operating, and maintenance
costs.’’ 112 The Commission has
estimated the additional burden that
may result from the proposed rules as
part of its Paperwork Reduction Act
calculations, and requests comment on
110 The
Commission’s general policy on
aggregation is derived from CEA Section 4a(a)(1),
which directs the Commission to aggregate based on
separate considerations of ownership, control, or
persons acting pursuant to an express or implied
agreement.
111 The costs of filing the Notice included costs
of filing an opinion of counsel as well as the other
necessary information under § 151.7(h).
112 76 FR 71626 at 71683.
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those estimations.113 The Commission
also seeks comment as to how many
entities would be able to take advantage
of the proposed exemption.
Alternatively, how many entities would
be able to take advantage of the owned
non-financial entity exemption
described in the aggregation petition?
Because costs associated with the
aggregation of positions are highly
variable and entity-specific, the
Commission requests that commenters
submit data from which the
Commission can consider and quantify
the costs of the proposed rules.
In assessing benefits, it is important
for the Commission to determine
whether the proposed rules will
enhance the Commission’s ability to
monitor compliance with position limits
by focusing the Commission’s resources
on those entities most at risk of
coordinated trading through multiple
accounts. The Commission seeks
comment as to whether the proposed
amendments to the Commission’s
aggregation policy will result in lower
costs for market participants without
compromising the core purposes of the
position limits regime.
4. Section 15(a) Considerations
As the Commission has long held,
position limits are an important
regulatory tool that is designed to
prevent concentrated positions of
sufficient size to manipulate or disrupt
markets. The aggregation of accounts for
purposes of applying position limits
represents an integral component that
impacts the effectiveness of those limits.
In the final rule, the Commission
implemented a policy for the
aggregation of accounts that largely
tracked its longstanding standards of
aggregation, which were designed to
prevent evasion of those position limits.
The proposed rules would amend this
policy to introduce and expand certain
exemptions. The Commission intends
for the proposed rules to preserve the
important protections of the existing
aggregation policy, but at a lower cost
for market participants. The
Commission requests comment on its
consideration of the costs and benefits
of the proposed rules in relation to each
of the Section 15(a) factors discussed
herein.
a. Protection of Market Participants and
the Public
The Commission wants to ensure that
the exemptions proposed in these rules
will not lessen the protection of market
participants and the public that the
aggregation policy in the Final Rule
113 See
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provides. Given that the account
aggregation standards are necessary to
implement an effective position limit
regime, it is important that the clarified
and expanded exemptions of the
proposed rules be sufficiently tailored to
exempt from aggregation only those
accounts that do pose a low risk of
coordinated trading. The Commission
believes that clarifying the scope of the
violation of law exemption to include
the risk of violating the applicable law
more accurately informs market
participants as to the standard for
claiming the exemption. The proposed
owned-entity exemption maintains the
Commission’s historical presumption
threshold of 10 percent ownership or
equity interest and makes that
presumption rebuttable only where
several conditions indicative of
independence are met. This exemption
focuses on the conditions that impact
trading independence. The Commission
intends that any exemption it adopts
would allow the Commission to direct
its resources to monitoring those entities
with a higher risk of coordinated trading
and thus at a higher risk of
circumventing position limits, without
reducing the protection of market
participants and the public that the
Commission’s aggregation policy
affords.
Similarly, the Commission intends for
the ‘‘higher-tier’’ entity exemption, and
the expansion of the underwriting and
IAC exemptions, to reduce costs for
market participants without a
compromise to the integrity or
effectiveness of the Commission’s
aggregation policy.
The Commission welcomes comment
regarding whether the proposed rules
would impact protection of market
participants and the public.
b. Efficiency, Competitiveness, and
Financial Integrity of Futures Markets
The Commission wants to ensure that
the exemptions proposed in these rules
would fully preserve account
aggregation as a tool to uphold the
integrity of the part 151 position limit
regime, which helps maintain the
overall competitiveness and integrity of
derivatives markets. The Commission
seeks comment regarding whether the
proposed rules would impact the
efficiency, competitiveness, and/or
financial integrity of futures markets.
c. Price Discovery
Similarly, the Commission wants to
ensure that the exemptions proposed in
these rules do not adversely impact the
price discovery process, which the part
151 position limit regime (including the
account aggregation provisions in
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§ 151.7) is designed to protect. The
Commission welcomes comment as to
whether the proposed rules would
impact price discovery.
d. Sound Risk Management
The Commission wants to ensure that
the exemptions proposed in these rules
will not lessen the effectiveness of the
sound risk management practices that
the Final Rule promotes. The
Commission welcomes comment as to
whether the proposed rules would
impact sound risk management
practices.
e. Other Public Interest Considerations
The Commission has not identified
any other public interest considerations
related to the costs and benefits of the
proposed rules. The Commission
welcomes comment as to whether there
are additional public interest
considerations the Commissions should
consider.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires that agencies consider
the impact of their regulations on small
businesses.114 The requirements related
to the proposed amendments fall mainly
on DCMs, swap execution facilities
(‘‘SEF’’) that are trading facilities, FCMs,
foreign brokers, and large traders. The
Commission has previously determined
that DCMs, FCMs, foreign brokers and
large traders are not ‘‘small entities’’ for
the purposes of the RFA.115 Further, in
the Commission’s position limits
rule,116 the Commission determined
that SEFs, which includes SEFs that are
trading facilities, are not ‘‘small
entities’’ for purposes of the RFA.
Accordingly, the Chairman, on behalf
of the Commission, hereby certifies, on
behalf of the Commission, pursuant to 5
U.S.C. 605(b), that the actions proposed
to be taken herein would not have a
significant economic impact on a
substantial number of small entities.
srobinson on DSK4SPTVN1PROD with PROPOSALS
C. Paperwork Reduction Act
1. Overview
The Paperwork Reduction Act
(‘‘PRA’’) imposes certain requirements
on Federal agencies in connection with
their conducting or sponsoring any
collection of information as defined by
the PRA.117 An agency may not conduct
or sponsor, and a person is not required
114 44
U.S.C. 601 et seq.
Policy Statement and Establishment of
Definitions of ‘‘Small Entities’’ for Purposes of the
Regulatory Flexibility Act, 47 FR 18618, Apr. 30
1982. See also Special Calls, 72 FR 34417, Jun. 22,
2007 (foreign broker determination).
116 76 FR 71626, Nov. 18, 2011.
117 44 U.S.C. 3501 et seq.
115 See
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to respond to, a collection of
information unless it displays a
currently valid control number. Certain
provisions of the proposed regulations
would result in new collection of
information requirements within the
meaning of the PRA. The Commission
seeks to supplement the control number
assigned by the Office of Management
and Budget (‘‘OMB’’) for part 151—
Position Limits for Futures and Swaps
(OMB control number 3038–0077).
Therefore the Commission is submitting
this proposal to OMB for review in
accordance with 44 U.S.C. 3507(d) and
5 CFR 1320.11.
In January of 2012, the Commission
received a petition requesting relief
under section 4a(a)(7) of the CEA and
clarification of certain aggregation
requirements in regulation 151.7. In
response to that petition, the
Commission is proposing to clarify
certain aspects of the aggregation
standards, and to expand the scope of
certain exemptions from aggregation. If
adopted, responses to this collection of
information would be mandatory to the
extent persons wish to rely upon the
exemptions contained within the
proposed amendments to Commission
regulation 151.7. 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 CEA strictly prohibits the
Commission, unless specifically
authorized by the CEA, 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.118 The Commission also is
required to protect certain information
contained in a government system of
records pursuant to the Privacy Act of
1974.119
Proposed rule 151.7(b)(1) establishes
an exemption for a person to
disaggregate the positions of a
separately organized entity (‘‘owned
entity’’). To claim the exemption, a
person would need to meet certain
criteria and file a notice with the
Commission in accordance with
regulation 151.7(h). The notice filing
would need to demonstrate compliance
with certain conditions set forth in
regulations 151.7(b)(1)(i)–(vii). Similar
to other exemptions from aggregation,
the notice filing would be effective upon
submission to the Commission, but the
Commission may call for additional
118 7
119 5
PO 00000
U.S.C. 12(a)(1).
U.S.C. 552a.
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information as well as reject, modify or
otherwise condition such relief. Further,
such person is obligated to amend the
notice filing in the event of a material
change to the filing.
The proposed rules also amend
regulation 151.7(i), which provides an
exemption from aggregation where the
sharing of information between persons
would cause either person to violate
federal law. The proposed amendments
clarify that the exemption would apply
to a situation where the sharing of
information creates a reasonable risk of
a violation of federal law or regulations
adopted thereunder, and not solely a per
se violation. For the same reasons the
Commission adopted the exemption for
information sharing restrictions for
federal law, the Commission expanded
the exemption in regulation 151.7(i) to
generally extend to the state law and the
law of a foreign jurisdiction. The
proposed rules also retain the
requirement that market participants file
a notice demonstrating compliance with
the condition and an opinion of counsel
that the sharing of information could
create a reasonable risk of a violation of
state or federal law or the law of a
foreign jurisdiction. The opinion allows
Commission staff to review the legal
basis for the asserted regulatory
impediment to the sharing of
information, and is particularly helpful
where the asserted impediment arises
from laws and/or regulations that the
Commission does not directly
administer. Further, Commission staff
will have the ability to consult with
other federal regulators as to the
accuracy of the opinion, and to
coordinate the development of rules
surrounding information sharing and
aggregation across accounts in the
future.
The Commission is also proposing to
amend the definitions of eligible entity
and independent account controller in
part 151.1 to specifically provide for
regulation 4.13 commodity pools
established as limited liability
companies. These proposed
amendments will likely expand the
number of entities that can file for the
independent account controller
aggregation exemption.
Finally, the proposed rules include
relief from notice filings for ‘‘highertier’’ entities, which, under proposed
regulation 151.7(j), may rely on the
filings submitted by owned entities. A
‘‘higher-tier’’ entity need not submit a
separate notice pursuant to the notice
filing requirements to rely upon the
notice filed by an owned entity as long
as it complies with conditions of the
applicable aggregation exemption.
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Federal Register / Vol. 77, No. 104 / Wednesday, May 30, 2012 / Proposed Rules
2. Reporting Burdens
Proposed regulation 151.7(b)(1)
specifies that qualified persons may file
a notice claiming exemptive relief from
aggregation. Proposed regulation
151.7(b)(1)(vii) states that the notice is
to be filed in accordance with regulation
151.7(h), which requires a description of
the relevant circumstances that warrant
disaggregation and a statement that
certifies that the conditions set forth in
the exemptive provision have been met.
Persons claiming the exemption would
be required to submit to the
Commission, as requested, such
information as relates to the claim for
exemption. An updated or amended
notice must be filed with the
Commission upon any material change.
With regard to the existing filing
procedure for claiming exemptions from
aggregation, in the part 151 final rule
the Commission estimated that ninety
entities would incur a burden of
225,000 annual labor hours as well as
$5.9 million in annualized capital, startup, total operating, and maintenance
costs. This estimate was based on each
entity submitting one notice of
disaggregation per year at a burden of
2,500 labor hours. Given the expansion
of the exemptions that market
participants may claim, the Commission
anticipates an increase in the number of
notice filings; however, because of the
relief for ‘‘higher-tier’’ entities under
proposed regulation 151.7(j), the
Commission expects that increase to be
offset by a reduction in the number of
filings by ‘‘higher-tier’’ entities. Thus,
the Commission anticipates a small net
increase in the number of filings under
regulation 151.7 as a result of the
proposed rules. The Commission
believes that this small increase will
create a small increase in the annual
labor burden. However, because entities
will have already incurred the capital,
start-up, operating, and maintenance
costs to file other exemptive notices, the
Commission does not anticipate an
increase in those costs.
In light of the Commission providing
for these additional exemptions, the
Commission estimates that 90 entities
will each file two notices annually
under proposed regulation 151.7(b)(1),
at an average of 20 hours per filing.
Thus, the Commission approximates a
total per-entity burden of 40 labor hours
annually. Using the same labor cost
estimates as in the existing collection
(OMB# 3038–0077),120 such a burden
120 The Commission staff’s estimates concerning
the wage rates are based on salary information for
the securities industry compiled by the Securities
Industry and Financial Markets Association
(‘‘SIFMA’’). The $78.61 per hour is derived from
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would cost approximately $3,100 per
entity for filings under proposed
regulation 151.7(b)(1). Under proposed
regulation 151.7(f), the Commission
anticipates that 10 entities will annually
file one notice each, at an average of 20
hours per filing, for a per-entity burden
of 20 labor hours annually. Such a
burden would cost approximately
$1,600 per entity. Finally, the
Commission anticipates that 45 entities
will annually file one notice each under
proposed regulation 151.7(i), at an
average of 80 hours per filing, for a perentity burden of 80 hours each. Such a
burden would cost approximately
$6,300 per entity. Monetary estimates
have been rounded to the nearest
hundred.
In sum, the Commission estimates
that 145 entities would submit a total of
235 responses per year and incur a total
burden of 7,400 labor hours at a cost of
approximately $582,000 annually in
addition to the existing burden under
§ 151.7.
3. Comments on Information Collection
The Commission invites the public
and other federal agencies to comment
on any aspect of the reporting and
recordkeeping burdens discussed above.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the
Commission solicits comments in order
to: (1) Evaluate whether the proposed
collections of information are necessary
for the proper performance of the
functions of the Commission, including
whether the information will have
practical utility, (2) evaluate the
accuracy of the Commission’s estimate
of the burden of the proposed
collections of information, (3) determine
whether there are ways to enhance the
quality, utility, and clarity of the
information to be collected, and (4)
minimize the burden of the collections
of information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology.
Comments may be submitted directly
to the Office of Information and
Regulatory Affairs, by fax at (202) 395–
6566 or by email at OIRAsubmissions@omb.eop.gov. Please
provide the Commission with a copy of
figures from a weighted average of salaries and
bonuses across different professions from the
SIFMA Report on Management & Professional
Earnings in the Securities Industry 2010, modified
to account for an 1800-hour work-year and
multiplied by 1.3 to account for overhead and other
benefits. The wage rate is a weighted national
average of salary and bonuses for professionals with
the following titles (and their relative weight);
‘‘programmer (senior)’’ (60% weight), ‘‘compliance
advisor (intermediate)’’ (20%), ‘‘systems analyst’’
(10%), and ‘‘assistant/associate general counsel’’
(10%).
PO 00000
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31781
comments submitted so that all
comments can be summarized and
addressed in the final regulation
preamble. Refer to the Addresses section
of this notice for comment submission
instructions to the Commission. A copy
of the supporting statements for the
collection of information discussed
above may be obtained by visiting
RegInfo.gov. OMB is required to make a
decision concerning the collection of
information between 30 and 60 days
after publication of this release.
Consequently, a comment to OMB is
most assured of being fully considered
if received by OMB (and the
Commission) within 30 days after the
publication of this notice of proposed
rulemaking.
List of Subjects in 17 CFR Part 151
Position limits, Bona fide hedging,
Referenced contracts.
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 151—POSITION LIMITS FOR
FUTURES AND SWAPS
1. The authority citation for part 151
is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f,
6g, 6t, 12a, 19, as amended by Title VII of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111–203,
124 Stat. 1376 (2010).
2. In § 151.1, revise the definition for
‘‘eligible entity’’ and paragraph (5) of
the definition of ‘‘independent account
controller’’ to read as follows:
§ 151.1
Definitions.
*
*
*
*
*
Eligible Entity means a commodity
pool operator; the operator of a trading
vehicle which is excluded, or which
itself has qualified for exclusion from
the definition of the term ‘‘pool’’ or
‘‘commodity pool operator,’’
respectively, under § 4.5 of this chapter;
the limited partner, limited member or
shareholder in a commodity pool the
operator of which is exempt from
registration under § 4.13 of this chapter;
a commodity trading advisor; a bank or
trust company; a savings association; an
insurance company; or the separately
organized affiliates of any of the above
entities:
*
*
*
*
*
Independent Account Controller
* * *
(5) Who is registered as a futures
commission merchant, an introducing
broker, a commodity trading advisor, or
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an associated person of any such
registrant, or is a general partner or
manager of a commodity pool the
operator of which is exempt from
registration under § 4.13 of this chapter.
*
*
*
*
*
3. Revise § 151.7 to read as follows:
3. In § 151.7:
a. Revise paragraph (b);
b. Add paragraph (e)(4);
c. Revise paragraphs (g), (h), and (i);
and
d. Add paragraph (j).
The revisions and additions read as
follows:
§ 151.7
Aggregation of positions.
srobinson on DSK4SPTVN1PROD with PROPOSALS
*
*
*
*
*
(b) Ownership of accounts generally.
For the purpose of applying the position
limits set forth in § 151.4, except for the
ownership interest of limited partners,
shareholders, members of a limited
liability company, beneficiaries of a
trust or similar type of pool participant
in a commodity pool subject to the
provisos set forth in paragraph (c) of this
section or in accounts or positions in
multiple pools as set forth in paragraph
(d) of this section, any person holding
positions in more than one account, or
holding accounts or positions in which
the person by power of attorney or
otherwise directly or indirectly has a 10
percent or greater ownership or equity
interest, must aggregate all such
accounts or positions. However—
(1) Any person with a 10 percent or
greater ownership or equity interest in
an owned entity, need not aggregate the
accounts or positions of the owned
entity with any other accounts or
positions such person is required to
aggregate, provided that:
(i) Such person, including any entity
that such person must aggregate, and the
owned entity:
(A) Do not have knowledge of the
trading decisions of the other;
(B) Trade pursuant to separately
developed and independent trading
systems;
(C) Have and enforce written
procedures to preclude each from
having knowledge of, gaining access to,
or receiving data about, trades of the
other. Such procedures must include
document routing and other procedures
or security arrangements, including
separate physical locations, which
would maintain the independence of
their activities;
(D) Do not share employees that
control the trading decisions of either;
and
(E) Do not have risk management
systems that permit the sharing of trades
or trading strategy;
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(ii) Such person does not have greater
than a 50 percent ownership or equity
interest in the owned entity; and
(iii) Such person complies with the
requirements of paragraph (h) of this
section.
(2) [Reserved]
*
*
*
*
*
(e) * * *
(4) The futures commission merchant
or the affiliate has complied with the
requirements of paragraph (h) of this
section.
*
*
*
*
*
(g) Exemption for underwriting.
Notwithstanding any of the provisions
of this section, a person need not
aggregate the positions or accounts of an
owned entity if the ownership interest
is based on the ownership of securities
constituting the whole or a part of an
unsold allotment to or subscription by
such person as a participant in the
distribution of such securities by the
issuer or by or through an underwriter.
(1) Further, a broker-dealer registered
with the Securities and Exchange
Commission, or similarly registered
with a foreign regulatory authority, need
not aggregate the positions or accounts
of an owned entity if the ownership
interest is based on the ownership of
securities acquired as part of reasonable
activity in the normal course of business
as a dealer, provided that, such person
does not have actual knowledge of the
trading decisions of the owned entity.
(h) Notice filing for exemption. (1)
Persons seeking an aggregation
exemption under paragraph (b)(1), (c),
(e), (f), or (i) of this section shall file a
notice with the Commission, which
shall be effective upon submission of
the notice, and shall include:
(i) a description of the relevant
circumstances that warrant
disaggregation; and
(ii) a statement of a senior officer of
the entity certifying that the conditions
set forth in the applicable aggregation
exemption provision have been met.
(2) Upon call by the Commission, any
person claiming an aggregation
exemption under this section shall
provide such information concerning
the person’s claim for exemption as is
requested by the Commission. Upon
notice and opportunity for the affected
person to respond, the Commission may
amend, suspend, terminate, or
otherwise modify a person’s aggregation
exemption for failure to comply with
the provisions of this section.
(3) In the event of a material change
to the information provided in the
notice filed under this paragraph, an
updated or amended notice shall
promptly be filed detailing the material
change.
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(4) A notice shall be submitted in the
form and manner provided for in
§ 151.10.
(i) Exemption for law information
sharing restriction. Notwithstanding any
other provision of this section, a person
is not subject to the aggregation
requirements of this section if the
sharing of information associated with
such aggregation creates a reasonable
risk that either person could violate
state or federal law or the law of a
foreign jurisdiction, or regulations
adopted thereunder, and provided that
such a person does not have actual
knowledge of information associated
with such aggregation. Provided further,
that such person file a prior notice
pursuant to paragraph (h) of this section
and an opinion of counsel that the
sharing of information creates a
reasonable risk that either person could
violate state or federal law or the law of
a foreign jurisdiction, or regulations
adopted thereunder. Provided however,
the exemption in this paragraph shall
not apply where the law or regulation
serves as a means to evade the
aggregation of accounts or positions. All
documents submitted pursuant to this
paragraph shall be in English, or if not,
accompanied by an official English
translation.
(j) Higher-Tier Entities. If an owned
entity has filed a notice under paragraph
(h) or (i) of this section, any person with
an ownership or equity interest of 10
percent or greater in the owned entity
need not file a separate notice
identifying the same positions and
accounts previously identified in the
notice filing of the owned entity,
provided that:
(1) Such person complies with the
conditions applicable to the exemption
specified in the owned entity’s notice
filing, other than the filing
requirements; and
(2) Such person does not otherwise
control trading of the accounts or
positions identified in the owned
entity’s notice.
(3) Upon call by the Commission, any
person relying on the exemption in
paragraph (j)(1) of this section shall
provide to the Commission such
information concerning the person’s
claim for exemption. Upon notice and
opportunity for the affected person to
respond, the Commission may amend,
suspend, terminate, or otherwise modify
a person’s aggregation exemption for
failure to comply with the provisions of
this section.
4. In § 151.10, revise paragraph (b)(4)
to read as follows:
§ 151.10
*
E:\FR\FM\30MYP1.SGM
*
Form and manner of reporting.
*
30MYP1
*
*
Federal Register / Vol. 77, No. 104 / Wednesday, May 30, 2012 / Proposed Rules
(b) * * *
(4) A notice of disaggregation is filed
pursuant to § 151.7(h), in which case the
notice shall be effective upon filing.
*
*
*
*
*
5. In § 151.12, revise paragraph (a)(5)
and add paragraph (a)(6) to read as
follows:
§ 151.12 Delegation of authority to the
Director of the Division of Market Oversight.
(a) * * *
(5) In § 151.7(j)(1)(iii) to call for
additional information from a trader
claiming the exemption in § 151.7(j)(1).
(6) In § 150.10 for providing
instructions or determining the format,
coding structure, and electronic data
transmission procedures for submitting
data records and any other information
required under this part.
*
*
*
*
*
Issued in Washington, DC, on May 17,
2012 by the Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendix will not
appear in the Code of Federal Regulations.
[FR Doc. 2012–12526 Filed 5–29–12; 8:45 am]
BILLING CODE P
srobinson on DSK4SPTVN1PROD with PROPOSALS
Appendix 1—Statement of
Commissioner Jill E. Sommers
I support the Commission’s proposed rules
that, among other things, expand the
exemptions relating to information sharing
restrictions, expand the circumstances under
which market participants will not be
required to aggregate positions, and reduce
the reporting burdens on higher tier entities.
I am pleased that we recognize that the final
position limits rules issued on November 18,
2011 set forth an unworkable and overly
restrictive approach to these issues.
Essentially, as they relate to ‘‘owned
entities,’’ the proposed rules contain three
‘‘tiers’’ for purposes of aggregation. First, if
the ownership interest is less than 10
percent, one need not aggregate positions
with those of the owned entity. Second, if the
ownership interest is between 10 percent and
50 percent, one must aggregate positions with
those of the owned entity unless it can be
shown that there is a lack of knowledge of,
and control over, the trading of the owned
entity. Third, if the ownership interest
exceeds 50 percent, one must always
aggregate positions with those of the owned
entity, even if there is a lack of knowledge
of, and control over, the trading of the owned
entity.
I question whether a bright-line approach
is the correct approach, and if it is, whether
the line should be drawn at 50 percent. In the
absence of knowledge of, and control over,
trading of an owned entity, is there a real
difference between owning 49 percent and
owning 50 percent? I don’t think there is. In
justifying 50 percent as the correct place to
draw the line, the preamble to the proposed
rules states, ‘‘such a bright-line rule would
provide clarity to market participants and a
useful tool for the Commission to simplify
VerDate Mar<15>2010
16:32 May 29, 2012
Jkt 226001
aggregation.’’ Providing clarity and certainty
to market participants is important. However,
if providing clarity and certainty results in a
one-size-fits-all answer that fails to take into
account the varying needs of a very diverse
group of market participants, the clarity and
certainty are of little use. Moreover, while it
is important to establish an aggregation
approach that the Commission can effectively
administer, I hesitate to put too much weight
on ‘‘simplifying’’ the approach if the
simplified approach is needlessly restrictive.
In my dissent to the final position limits
rules, I expressed concern that with regard to
the 19 new reference contracts, the
Commission was taking on ‘‘front-line
oversight of the granting and monitoring of
bona-fide hedging exemptions for the
transactions of massive, global corporate
conglomerates that on a daily basis produce,
process, handle, store, transport, and use
physical commodities in their extremely
complex logistical operations.’’ My concerns
apply equally to the issue of aggregation. We
have limited experience as it relates to these
new reference contracts, and no experience
aggregating swaps into the overall
calculations. In the face of such limited
experience, our apparent certainty on where
to draw lines is troubling.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–141075–09]
RIN 1545–BJ15
Property Transferred in Connection
With the Performance of Services
Under Section 83
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed regulations relating to
property transferred in connection with
the performance of services under
section 83 of the Internal Revenue Code
(Code). These proposed regulations
affect certain taxpayers who received
property transferred in connection with
the performance of services.
DATES: Written or electronic comments
must be received by August 28, 2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–141075–09), room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–141075–
09), Courier’s Desk, Internal Revenue
SUMMARY:
PO 00000
Frm 00046
Fmt 4702
Sfmt 4702
31783
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically
via the Federal eRulemaking Portal at
https://www.regulations.gov/ (IRS REG–
141075–09).
FOR FURTHER INFORMATION CONTACT:
Concerning these proposed regulations,
Thomas Scholz or Dara Alderman at
(202) 622–6030 (not a toll-free number);
concerning submissions of comments,
and/or to request a hearing,
Oluwafunmilayo (Fumni) Taylor, at
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 83(a) of the Internal Revenue
Code (Code) provides that if, in
connection with the performance of
services, property is transferred to any
person other than the person for whom
such services are performed, the excess
of (1) the fair market value of the
property (determined without regard to
lapse restrictions) at the first time the
rights of the person having the
beneficial interest in such property are
transferable or are not subject to a
substantial risk of forfeiture, whichever
occurs earlier, over (2) the amount (if
any) paid for such property, is included
in the gross income of the service
provider in the first taxable year in
which the rights of the person having
the beneficial interest in such property
are transferable or are not subject to a
substantial risk of forfeiture. Section
83(c)(1) provides that the rights of a
person in property are subject to a
substantial risk of forfeiture if such
person’s rights to full enjoyment of such
property are conditioned upon the
future performance of substantial
services by any individual.
Section 1.83–3(c)(1) provides that, for
purposes of section 83 and the
regulations, whether a risk of forfeiture
is substantial or not depends upon the
facts and circumstances. Section 1.83–
3(c)(1) further provides that a
substantial risk of forfeiture exists
where rights in property that are
transferred are conditioned, directly or
indirectly, upon the future performance
(or refraining from performance) of
substantial services by any person, or
the occurrence of a condition related to
a purpose of the transfer, and the
possibility of forfeiture is substantial if
such condition is not satisfied.
Illustrations provided in § 1.83–3(c)(2)
of the regulations demonstrate when a
substantial risk of forfeiture will be
considered to exist.
In addition to providing that a
person’s rights in property are subject to
a substantial risk of forfeiture if
conditioned upon the future
E:\FR\FM\30MYP1.SGM
30MYP1
Agencies
[Federal Register Volume 77, Number 104 (Wednesday, May 30, 2012)]
[Proposed Rules]
[Pages 31767-31783]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12526]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 151
RIN 3038-AD82
Aggregation, Position Limits for Futures and Swaps
AGENCY: Commodity Futures Trading Commission.
[[Page 31768]]
ACTION: Notice of proposed rulemaking.
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SUMMARY: On November 18, 2011, the Commodity Futures Trading Commission
(``Commission'' or ``CFTC'') published in the Federal Register a final
rule and interim final rule, which establish a position limits regime
for 28 exempt and agricultural commodity futures and options contracts
and the physical commodity swaps that are economically equivalent to
such contracts. In response to a petition for exemptive relief under
the Commodity Exchange Act and certain comments to the Commission's
interim final rule for spot-month limits for cash-settled contracts,
this notice proposes certain modifications to the Commission's policy
for aggregation under the position limits regime in CFTC regulations.
DATES: Comments must be received on or before June 29, 2012.
ADDRESSES: You may submit comments, identified by RIN number3038-AD82,
by any of the following methods:
Agency Web Site: https://www.cftc.gov.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow instructions for submitting comments.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that is exempt from disclosure under the Freedom of Information Act, a
petition for confidential treatment of the exempt information may be
submitted according to the procedure established in CFTC regulation
145.9 (17 CFR 145.9).
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under the Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist,
Division of Market Oversight, at (202) 418-5452, ssherrod@cftc.gov;
Neal Kumar, Counsel, Office of General Counsel, at (202) 418-5353,
nkumar@cftc.gov, Riva Spear Adriance, Senior Special Counsel, Division
of Market Oversight, at (202) 418-5494, radriance@cftc.gov, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street
NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Introduction
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII
of the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'')
\3\ to establish a comprehensive new regulatory framework for swaps and
security-based swaps. The legislation was enacted to reduce risk,
increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and comprehensive regulation of swap dealers and major
swap participants; (2) imposing clearing and trade execution
requirements on standardized derivative products; (3) creating robust
recordkeeping and real-time reporting regimes; and (4) enhancing the
Commission's rulemaking and enforcement authorities with respect to,
among others, all registered entities and intermediaries subject to the
Commission's oversight.
---------------------------------------------------------------------------
\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at https://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm.
\2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\3\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------
As amended by the Dodd-Frank Act, sections 4a(a)(2) and 4a(a)(5) of
the CEA mandate that the Commission establish limits for futures and
option contracts traded on a designated contract market (``DCM''), as
well as swaps that are economically equivalent to such futures or
options contracts traded on a DCM. This mandate directed the Commission
to establish position limits on the expedited timeframe of 180 days
from the date of enactment for exempt commodities and 270 days from the
date of enactment for agricultural commodities. In response to the
Congressional mandate, the Commission proposed and ultimately adopted
final rules in part 151 regarding position limits for 28 physical
commodity futures and option contracts (``Core Referenced Futures
Contracts'') and physical commodity swaps that are economically
equivalent to such contracts (collectively with Core Referenced Futures
Contracts referred to as ``Referenced Contracts'').\4\
---------------------------------------------------------------------------
\4\ See Position Limits for Futures and Swaps, 76 FR 71626, Nov.
18, 2011.
---------------------------------------------------------------------------
The regulations in the part 151 position limits regime, consistent
with the Commission's historical approach to position limits,\5\
generally includes three components: (1) The level of the limits, which
set a threshold that restricts the number of speculative positions that
a person may hold in the spot-month, individual month, and all months
combined,\6\ (2) an exemption for positions that constitute bona fide
hedging transactions,\7\ and (3) rules to determine which accounts and
positions a person must aggregate for the purpose of determining
compliance with the position limit levels.\8\
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\5\ See 17 CFR 150 (1999). Prior to the Dodd-Frank Act
rulemaking, the Commission administered position limits under
Commission regulation 150, which established federal position limits
on certain enumerated agricultural contracts. The position limits on
these agricultural contracts are referred to as ``legacy'' limits,
and the listed commodities are referred to as ``enumerated''
agricultural commodities.
\6\ See 17 CFR 151.4.
\7\ See 17 CFR 151.5. See also CEA section 4a(c)(1) & (2).
\8\ See 17 CFR 151.7.
---------------------------------------------------------------------------
The Commission published Part 151 in the Federal Register in
November of 2011, but determined to phase in compliance with the new
position limits regime.\9\ Specifically, 60 days after the Commission
publishes a joint final rulemaking with the Securities and Exchange
Commission (``SEC'') further defining the term ``swap'' in the Federal
Register,\10\ the rules require market participants to comply with
spot-month limits for the 28 physical commodities as well as non-spot
month limits for the enumerated agricultural contracts. The Commission
also established the spot-month position limit levels for cash-settled
contracts on an interim final basis and solicited comments on the
appropriateness of such levels.\11\ Finally, for the remaining non-spot
month limits (i.e., all commodities other than the enumerated
agricultural commodities), the rules require compliance on the first
calendar day of the third calendar month following a
[[Page 31769]]
Commission order providing the numerical level of the non-spot month
limits based upon a formula provided in part 151.\12\
---------------------------------------------------------------------------
\9\ See 76 FR at 71632; and 151.4(d).
\10\ Id. See also Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 76 FR 29818, May 23,
2011 (notice of proposed rulemaking).
\11\ See 76 FR 71637.
\12\ See 151.4(d)(3).
---------------------------------------------------------------------------
As noted above, one of the three major components to the
Commission's position limits regime is determining which accounts and
positions a person must aggregate.\13\ The final rule in regulation
151.7 largely adopted the Commission's existing aggregation policy
under regulation 150.4. The aggregation provisions generally require
that unless a particular exemption applies, a person must aggregate all
positions for which that person controls the trading decisions with all
the positions for which that person has a 10 percent or greater
ownership interest in an account or position, as well as the positions
of two or more persons acting pursuant to an express or implied
agreement or understanding.\14\
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\13\ The proposed rules in this release deal solely with the
aggregation of accounts.
\14\ See 17 CFR 151.7(a) & (b). In addition, the Commission
included a new aggregation provision for persons with positions in
accounts with identical trading strategies. This provision applies
even if a person does not control trading and has a less than 10
percent interest in an account. See 17 CFR 151.7(d).
---------------------------------------------------------------------------
Regulation 151.7 retained the scope of exemptions from aggregation
that were contained in regulation 150.4, including the ownership
interests of limited partners in pooled accounts,\15\ discretionary
accounts and customer trading programs of futures commission merchants
(``FCM''),\16\ and eligible entities with independent account
controllers that manage customer positions (``IAC'' or ``IAC
exemption'').\17\ Further, the Commission provided two additional
exemptions for underwriters of securities,\18\ and where the sharing of
information between persons would cause either person to violate
federal law or regulations adopted thereunder.\19\ With the exception
of the exemption for underwriters, market participants were required to
file a notice with the Commission demonstrating compliance with the
conditions applicable to each exemption.\20\
---------------------------------------------------------------------------
\15\ 17 CFR 151.7(c).
\16\ 17 CFR 151.7(e).
\17\ 17 CFR 151.7(f).
\18\ 17 CFR 151.7(g).
\19\ See 17 CFR 151.7(i).
\20\ See 17 CFR 151.7(h). The exemption for federal law
information sharing restrictions in regulation 151.7(i), also
requires that market participants submit an opinion of counsel that
the sharing of information would cause a violation of federal law.
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B. Aggregation Petition and Interim Final Rule Comments
On January 19th, 2012 the Commission received a petition for
interim relief from, among other things, part 151's provision for
aggregation of positions across accounts (hereinafter aggregation
petition'') \21\ under CEA section 4a(a)(7) for purposes of part
151.\22\ The Commission has also received letters that generally
support the aggregation petition.\23\ In addition, several commenters
opined on the aggregation rules in connection with the Commission's
request for comment on the interim final rule for spot-month position
limits on cash-settled contracts.\24\ As further discussed below, the
aggregation petition and certain interim final rule commenters argue
that the Commission should clarify the exemption provided in regulation
151.7(i) where the sharing of information would cause a violation of
federal law and expand the exemption to include circumstances in which
state or foreign law would prohibit the sharing of information
necessary to comply with the aggregation standard. In addition, the
aggregation petition and commenters request that the Commission create
an aggregation exemption for owned non-financial entities.\25\ In this
connection, some commenters argue that the Commission should only
aggregate on the basis of control and not ownership. Finally, one
commenter requests that the Commission expand the exemption provided in
151.7(g) for the ownership interests of broker-dealers connected with
specific market-making activity.
---------------------------------------------------------------------------
\21\ The aggregation petition was originally filed by the
Working Group of Commercial Energy Firms; certain members of the
group later reconstituted as the Commercial Energy Working Group.
Both groups (hereinafter, collectively, the ``Working Groups'') wish
to present one voice with respect to the petition. A copy of the
aggregation petition can be found on the Commission's Web site at
www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgap011912.pdf.
\22\ CEA section 4a(a)(7) specifically provides: ``The
Commission, by rule, regulation, or order, may exempt, conditionally
or unconditionally, any person or class of persons, any swap or
class of swaps, any contract of sale of a commodity for future
delivery or class of such contracts, any option or class of options,
or any transaction or class of transactions from any requirement it
may establish under this section with respect to position limits.''
7 U.S.C. 6a(a)(7).
\23\ See Commodity Markets Council (``CMC'') on March 9, 2012;
Edison Electric Institute and the American Gas Association on March
1, 2012; and the Futures Industry Association (``FIA'') on March 26,
2012.
\24\ See FIA on January 17, 2012 (``CL-FIA''); Atmos Energy
Holdings (``ATMOS'') on January 17, 2012 (``CL-Atmos''); Edison
Electric Institute (``EEI'') on January 17, 2012 (``CL-EEI''); and
American Gas Association (``AGA'') on January 17, 2012 (``CL-AGA'').
\25\ The Commission initially proposed but did not adopt an
exemption that would have permitted persons with an ownership or
equity interest in a non-financial entity not to aggregate the
positions or accounts of the non-financial entity provided the
person filed an application demonstrating compliance with certain
conditions. See Position Limits for Derivatives, 76 FR 4752, 4762-
63, Jan. 26, 2011. The Commission determined not to adopt this
proposed exemption, but instead generally retained the Commission's
existing aggregation policy. See 76 FR 71626.
---------------------------------------------------------------------------
1. Exemption for Federal Law Restriction
As noted above, section 151.7(i) provides an exemption from
aggregation where the sharing of information between persons would
cause either person to violate federal law. The aggregation petition
seeks to clarify that the exemption would apply to potential violations
of federal law,\26\ and also seeks to expand the exemption to apply to
local, state, foreign and international law.\27\ According to the
aggregation petition, the standard in the rule could be read as limited
to per se violations of the law, but not cover ``indicia of improper
market activity.'' \28\ Further, market participants may not be able to
rely on the exemption where they take certain action to avoid the
``potential'' of a violation. Moreover, the Working Groups argue that
the filing of an opinion of counsel to claim the exemption may act as a
disincentive for market participants to avail themselves of the
exemption because an adverse opinion would harm the applicant.
---------------------------------------------------------------------------
\26\ Aggregation petition at 18.
\27\ Id. at 24.
\28\ Id. at 17.
---------------------------------------------------------------------------
Similar to the petition, certain commenters to the interim final
rule argue that the requirement that the sharing of information ``would
cause'' a violation of federal law sets the bar too high to claim the
exemption.\29\ In this connection, commenters opine that such a high
standard makes it too difficult to obtain an opinion of counsel to
reach the necessary conclusion.\30\ Therefore, several commenters argue
that the Commission should clarify that the standard to claim the
exemption is that the sharing of information presents either party with
a reasonable risk of violating federal law.\31\ Commenters also believe
that the Commission should expand this exemption to cover potential
violations of state and foreign law.\32\ Finally, one commenter
suggests
[[Page 31770]]
that the Commission should remove the requirement to file an opinion of
counsel to claim the exemption, which the commenter believes is
burdensome.\33\
---------------------------------------------------------------------------
\29\ See CL-FIA at 16-17; CL-Atmos at 5-6; and CL-EEI at 17-18.
\30\ CL-EEI at 17-18; and CL-Atmos at 5-6.
\31\ CL-FIA at 16-17; CL-EEI at 17-18; and CL-Atmos at 5-6.
\32\ CL-AGA at 2; CL-FIA at 16-17; CL-EEI at 17-18; and CL-Atmos
5-6.
\33\ CL-AGA at 5.
---------------------------------------------------------------------------
2. The Owned Non-Financial Entity Exemption and Aggregation Based on
Ownership Generally
As noted above, the proposed rules for part 151 proposed that a
person with a 10 percent or greater ownership or equity interest in a
non-financial entity need not aggregate the positions of the non-
financial entity with his own positions, if the person filed an
application with the Commission demonstrating compliance with certain
conditions. This exemption was not part of the Commission's previously
existing aggregation policy for position limits on the enumerated
agricultural contracts in part 150. Ultimately, the Commission
determined to largely retain its existing aggregation policy with
limited additional exemptions, and did not adopt the proposed owned
non-financial entity exemption.
According to the aggregation petition, the Commission's failure to
include an exemption for a person's ownership interest in a non-
financial entity will result in ``serious adverse consequences'' to the
Working Groups participants, and represents a ``drastic departure from
current market practices.'' \34\ In light of these consequences, the
aggregation petition includes a draft owned non-financial entity
exemption for the Commission to incorporate into its aggregation
policy. The draft exemption is similar, but not identical to, the owned
non-financial entity exemption that the Commission proposed but did not
adopt as part of its final rule.\35\
---------------------------------------------------------------------------
\34\ See Aggregation petition, pg. 5-16.
\35\ Id. at Exhibit A.
---------------------------------------------------------------------------
The aggregation petition suggests that without an owned non-
financial entity exemption, the rules would force information sharing
and the coordination of trading between entities, which would be
contrary to existing best practices for antitrust compliance.\36\ Given
the conflict with such practices, the Working Groups argue that
compliance with the position limits rules may create liability under
the antitrust laws. The Working Groups also argue that the aggregation
rules, as adopted by the Commission, are contrary to certain industry
best practices that ``go beyond the letter of the law or applicable
regulations in order to ensure that activities of unregulated entities
are kept separate from activities of regulated entities to the greatest
extent possible.'' \37\
---------------------------------------------------------------------------
\36\ Id. at 7. The Working Groups cite to best practices issued
by the Federal Trade Commission and the U.S. Department of Justice
regarding antitrust guidelines (``Antitrust Guidelines for
Collaboration Among Competitors''). Available at www.ftc.gov/os/2000/04/ftcdojguidelines.pdf.
\37\ Id. at pg. 9.
---------------------------------------------------------------------------
The aggregation petition also opines that the information sharing
between persons necessary to comply with the position limits would
impose significant costs that would impact the physical and derivatives
markets.\38\ According to the Working Groups, entities with complex
corporate structure arrangements that include established information
barriers to ensure compliance with other regulatory requirements will
face significant costs to monitor positions on an intra-day basis,
notwithstanding the current lack of control over such trading.\39\ In
this case, the Working Groups claim that aggregation will significantly
impact holding companies and firms that invest in commercial firms,
particularly in the context of ``passive investment.'' Such firms will
have to monitor the commercial firm for compliance with position limits
and ``insert itself into the management of the firm.'' \40\ In
addition, according to the Working Groups, the aggregation of futures,
cleared swaps and bilateral swaps across entities on a real time basis
requires technology that does not yet exist.\41\ The aggregation
petition also points to concerns surrounding allocation and reporting
of positions, sharing of information on physical inventories, and
information sharing for the unwinding of accounts.\42\
---------------------------------------------------------------------------
\38\ Id. at 10-16.
\39\ Similarly, according to the aggregation petition, the
aggregation requirements impose significant compliance burdens where
ownership interests may involve international companies, or where a
corporate structure includes multiple levels of companies between a
parent company and a child company with an account or position.
\40\ Id. at 11.
\41\ Id.
\42\ Id. at 12-14.
---------------------------------------------------------------------------
The Working Groups assert that the position limit rules represent a
``drastic departure from the status quo.'' \43\ According to the
aggregation petition, the Commission's position limits previously only
applied to agricultural commodity futures and options on futures, and
DCM position limits applied to futures on energy and metals
commodities.\44\ However, the Commission's new position limits rules
will apply to swaps for the first time. Further, the Working Groups
contend that DCMs previously provided ``aggregation exemptions that
provided the flexibility necessary for commercial enterprises to manage
their position limit obligations across entities without undue
burden.'' \45\ In addition, the aggregation of accounts across
commercial firms could lead to decreased liquidity and competition in
the energy derivatives market.
---------------------------------------------------------------------------
\43\ Id. at 14.
\44\ The Commission notes that although the aggregation petition
describes the final position limit rules, including the aggregation
requirements, as a ``drastic departure from the status quo,'' and
seeks to differentiate between Commission and DCM rules regarding
treatment of owned positions for purposes of aggregation, many
current and past DCM rules require aggregation of the positions a
person either owns or controls. See Board of Trade of the City of
Chicago, Inc. (``CBOT'') Rule 559.D; Chicago Mercantile Exchange,
Inc. (``CME'') Rule 559.D; New York Mercantile Exchange, Inc.
(``NYMEX'') Rule 559.D; ICE Futures U.S., Inc. (``ICE US'') Rule
6.12; Board of Trade of Kansas City, Missouri, Inc. (``KCBT'') Rule
2008.00; and Minneapolis Grain Exchange, Inc. (``MGE'') Rule 7310.
See also NYMEX Rule 9.35, MGEX Rule 7310 and CBOT Rule 425.05 as
examples of older rules requiring aggregation of the positions a
person either owns or controls, which were in effect over the last
10 years. Furthermore, acceptable practices adopted by the
Commission in August, 2001, provided DCMs with a safe harbor for
position limit rules that aggregated positions a person owns or
controls. See 66 FR 42256, 42280, August 10, 2001, Appendix B to
Part 38, Core Principle 5. See also https://www.cftc.gov/files/foia/fedreg01/foi010810a.pdf.
\45\ Id. at 15.
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In light of these changes, the Working Groups believe that the
Commission should provide relief in the form of an owned non-financial
entity exemption. The aggregation petition includes a draft owned non-
financial entity exemption that follows the Commission's prior proposed
exemption with some modifications.\46\
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\46\ Id. at Exhibit A.
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Similar to the aggregation petition, commenters to the interim
final rule request that the Commission adopt an owned non-financial
entity exemption.\47\ FIA and EEI argue that without such an exemption,
market participants would have to aggregate all positions held by any
entity in which it has a ten percent ownership interest, even if such
interest is passive without control over trading. According to FIA,
such a consequence would ``have an unnecessary and profoundly negative
impact on users of Referenced Contracts, and their affiliates with no
corresponding benefit to the stability or integrity of the market.''
\48\ EEI also argues that the owned non-financial entity exemption
would provide commercial firms the same aggregation relief as eligible
entities that rely on the independent account controller exemption.\49\
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\47\ CL-FIA at 17-18; and CL-EEI at 16-17.
\48\ CL-FIA at 18. See also CL-EEI at 16-17.
\49\ CL-EEI at 16.
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Several commenters also address the requirement that persons
aggregate
[[Page 31771]]
based upon ownership of positions generally. These commenters recommend
that the Commission only aggregate based on control, and not aggregate
positions based upon an ownership interest in a position or
account.\50\ According to these commenters, aggregation through an
ownership interest, absent control of trading decisions, will impose
significant burdens for entities to aggregate on an intra-day basis,
may harm liquidity, and does not address the potential concerns about
coordinated trading. Similar to the comments regarding the owned non-
financial entity exemption, commenters submit that aggregating
positions based solely on ownership creates substantial compliance
burdens within the context of a complex corporate structure. In this
connection, EEI suggests that the Commission not require an entity to
aggregate owned positions if an entity could show the independence of
trading decisions of the owned entity.\51\
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\50\ See e.g., CL-FIA at 15; CL-EEI at 1-2, 14-15; CL-Atmos at
3-5; and CL-AGA at 1-3.
\51\ See e.g., CL-EEI at 14-15.
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3. Exemption for Underwriters
As noted above, Commission rule 151.7(g) includes an exemption from
the ownership criteria for aggregation if the ownership interest:
Is based on the ownership of securities constituting the whole
or a part of an unsold allotment to or subscription by such person
as a participant in the distribution of such securities by the
issuer or by or through an underwriter.
FIA submits that the Commission should clarify and expand this
exemption to include an ownership interest based on the acquisition or
disposition of securities acquired in connection with the trading or
market-making activities of a broker-dealer registered with the SEC, or
a comparable broker-dealer.\52\ FIA believes that aggregation based
upon a 10 percent ownership interest should not be required if the
broker-dealer acquires the interest--(1) In anticipation of demand, (2)
as part of its normal market-making activity, or (3) as a result of a
routine life cycle event, such as a stock distribution. Such ownership
interests, according to FIA, do not present the same concerns about
sharing transaction or position information that may facilitate
coordinated trading.\53\
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\52\ CL-FIA at 6, 16.
\53\ CL-FIA at 16.
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In response to the issues raised in the aggregation petition and
comments to the interim final rule, the Commission has determined to
propose modifications to certain position limits aggregation
provisions.
II. Proposed Rules
A. Proposed Rules for Information Sharing Restriction
The Commission is proposing to clarify that the scope of the
exemption in regulation 151.7(i) includes a reasonable risk of a
violation of federal law. The Commission intended to cover such risks
in the final rule and is therefore proposing to amend regulation
151.7(i) to make clear that the exemption includes circumstances in
which the sharing of information would create a reasonable risk of a
violation of federal law or regulations adopted thereunder.
The proposed rules retain the requirement that market participants
file an opinion of counsel to rely on the exemption in regulation
151.7(i). The opinion allows Commission staff to review the legal basis
for the asserted regulatory impediment to the sharing of information,
and is particularly helpful where the asserted impediment arises from
laws and/or regulations that the Commission does not directly
administer. Further, Commission staff will have the ability to consult
with other federal regulators as to the accuracy of the opinion, and to
coordinate the development of rules surrounding information sharing and
aggregation across accounts in the future. The Commission also notes
that the proposed clarification should address the concerns of
commenters that obtaining an opinion of counsel could be difficult if
the Commission read the existing standard to include only per se
violations.
With regard to comments that the exemption should permit persons to
rely upon ``best practices'' or other ``guidelines,'' the Commission
notes that the proposed exemption applies to situations where the
sharing of information creates a reasonable risk of violating federal
law or regulations adopted thereunder. Whether a reasonable risk exists
will depend on the interconnection of the applicable statute and
regulatory guidance, as well as the particular facts and circumstances
as applied to the statute and guidance. Notwithstanding the
Commission's facts and circumstances review of potentially conflicting
federal law or regulations, the exemption in regulation 151.7(i) is
effective upon filing of the notice in 151.7(h) and opinion of counsel.
These provisions authorize the Commission to request additional
information beyond that contained in the notice filing, and the
Commission may amend, suspend, terminate or otherwise modify a person's
aggregation exemption upon further review. As the Commission gains
further experience with the exemption for federal law information
sharing restriction in regulation 151.7(i), the Commission anticipates
providing further guidance to market participants.
1. Proposed Rules for Information Sharing Restriction--Foreign Law
For the same reasons the Commission adopted the exemption for
federal information sharing restrictions, the Commission proposes
extending the exemption to the law of a foreign jurisdiction. In
addition, similar to the clarification for the exemption for federal
law information sharing restriction, the Commission is also proposing
an exemption where the sharing of information creates a reasonable risk
of violating the law of a foreign jurisdiction. However, the Commission
remains concerned that certain market participants could potentially
use the existing and proposed expansion of the exemption in regulation
151.7(i) to evade the requirements for the aggregation of accounts. In
this regard, this proposed rule, consistent with the exemption for
federal law information sharing restriction, includes the requirement
to file an opinion of counsel specifically identifying the restriction
of law and facts particular to the market participant claiming the
exemption.\54\
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\54\ The Commission notes that the proposed expansion of this
exemption includes a proposed technical change to regulation
151.7(i). The proposed technical change specifies that the
``notice'' filing referenced in current regulation 151.7(i) is a
reference to the notice filing requirements set forth in regulation
151.7(h). In addition, the Commission has proposed a technical
change to the FCM exemption in current regulation 151.7(e). Proposed
regulation 151.7(e)(4) is designed for ease of reference for market
participants to follow the filing requirements in regulation
151.7(h), which requires persons claiming the FCM exemption in
regulation 151.7(e) to file pursuant to regulation 151.7(h).
Finally, the Commission is also proposing a technical change to the
form and manner of filing for an aggregation exemption in regulation
151.10(b)(4). Specifically, this proposed change makes clear that a
notice filing for an aggregation exemption is effective upon filing.
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The Commission notes that the aggregation petition references
information sharing restrictions that arise from ``international'' law.
The proposed rules include relief from aggregation for information
sharing that could create a reasonable risk of violating the law of a
foreign jurisdiction. The Commission seeks comment as to whether this
proposal adequately addresses the concerns of market participants
outlined in the interim final rule comments and the
[[Page 31772]]
aggregation petition, and as to whether those concerns are valid. The
Commission specifically requests comment on the types of
``international'' law, if any, which could create information sharing
restrictions other than the law of a foreign jurisdiction. Should the
regulation 151.7(i) exemption include ``international'' law or is it
sufficient to refer to the ``law of a foreign jurisdiction''?
Alternatively, the Commission is considering a case-by-case approach
through petitions submitted pursuant to CEA section 4a(a)(7). Should
the Commission adopt such a case-by-case approach?
2. Proposed Rules for Information Sharing Restriction--State Law
After consideration of the aggregation petition and the interim
final rule comments the Commission is also proposing to establish an
exemption for situations where information sharing restrictions could
trigger state law violations. In addition, similar to the clarification
for the exemption for federal law information sharing restriction, the
Commission is also proposing that the state law information sharing
restriction apply to situations where the sharing of information
creates a reasonable risk of violating the state law. However, as noted
above, the Commission remains concerned about the potential for evasion
within the context of this exemption. In this regard, this proposed
rule, consistent with the federal law information sharing restriction,
includes the requirement to file an opinion of counsel specifically
identifying the restriction of law and facts particular to the market
participant claiming the exemption.
The Commission solicits comments as to the appropriateness of
extending the information sharing exemption to state law. Should the
Commission provide for such an exemption? Alternatively, the Commission
is considering a case-by-case approach through petitions submitted
pursuant to CEA section 4a(a)(7). Should the Commission adopt such a
case-by-case approach and otherwise rely upon the preemption of state
law in administering its aggregation policy?
The Commission notes that the aggregation petition cites to Texas
Public Utility Code Substantive Rule 25.503, which provides that ``a
market participant shall not collude with other market participants to
manipulate the price or supply of power.'' \55\ That provision applies
to intra-state transactions and resembles regulations of the Federal
Energy Regulatory Commission.\56\ In this regard, should the Commission
limit application of the proposed exemption for state law information
sharing restrictions to laws that have a comparable provision at the
federal level? What criteria should the Commission use in identifying
state laws that a person may rely upon for an exemption from
aggregation?
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\55\ Aggregation petition at 24.
\56\ See e.g. 18 CFR 1c.1 & 1c.2.
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The Commission also solicits additional comment as to the types of
state laws, including specific laws, which could create an information
sharing restriction in conflict with the Commission's aggregation
policy.
The Commission further notes that the aggregation petition seeks to
extend the exemption to information sharing restrictions that arise
from ``local'' law.\57\ However, neither the aggregation petition nor
interim final rule commenters have provided examples, and the
Commission is concerned that an exemption for local law would be
difficult to implement due to the number of laws and/or regulations
that would need to be considered and the vast numbers of localities
that might issue such laws and/or regulations.
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\57\ Aggregation petition at 24.
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The Commission solicits comment as to the appropriateness of
extending the information sharing exemption to ``local'' law.
Commenters are asked to provide the scope of local law and identify any
specific laws that create information sharing restrictions that would
conflict with the Commission's aggregation policy. What criteria could
the Commission use in identifying local laws that a person may rely
upon for an exemption from aggregation? Should the Commission adopt a
case-by-case approach through petitions submitted pursuant to CEA
section 4a(a)(7) and otherwise rely upon the preemption of local law in
administering its aggregation policy?
B. Proposed Rules--Ownership of Positions Generally
The Commission continues to consider ownership an appropriate
measure for aggregation. Section 4a(a)(1) of the CEA provides for the
general aggregation standard with regard to position limits, and
specifically provides:
In determining whether any person has exceeded such limits, the
positions held and trading done by any persons directly or
indirectly controlled by such person shall be included with the
positions held and trading done by such person; and further, such
limits upon positions and trading shall apply to positions held by,
and trading done by, two or more persons acting pursuant to an
expressed or implied agreement or understanding, the same as if the
positions were held by, or the trading were done by, a single
person.\58\
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\58\ 7 U.S.C. 6a.
Congress incorporated this provision into Section 4a as part of the CEA
Amendments of 1968 (``1968 Act'').\59\ The legislative history to the
1968 Act indicates that Congress added this language to expressly
incorporate prior administrative determinations of the Commodity
Exchange Authority (predecessor to the Commission).\60\ Prior to the
1968 Act, administrative determinations as well as regulations of the
Commodity Exchange Authority announced standards that included control
of trading and the ownership of positions.\61\
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\59\ Public Law 90-258, 82 Stat. 26 (1968).
\60\ See S. Rep No. 947, 90th Cong., 2 Sess. 5 (1968). This
senate report provides:
Certain longstanding administrative interpretations would be
incorporated in the act. As an example, the present act authorizes
the Commodity Exchange Commission to fix limits on the amount of
speculative ``trading'' that may be done. The Commission has
construed this to mean that it has the authority to set limits on
the amount of buying or selling that may be done and on the size of
positions that may be held. All of the Commission's speculative
limit orders, dating back to 1938, have been based upon this
interpretation. The bill would clarify the act in this regard * * *.
Section 2 of the bill amends section 4a(1) of the act to show
clearly the authority to impose limits on ``positions which may be
held.'' It further provides that trading done and positions held by
a person controlled by another shall be considered as done or held
by such other; and that trading done or positions held by two or
more persons acting pursuant to an express or implied understanding
shall be treated as if done or held by a single person.
\61\ See Administrative Determination (``A.D.'') 163 (Aug. 7,
1957) (``[I]n the application of speculative limits, accounts in
which the firm has a financial interest must be combined with any
trading of the firm itself or any other accounts in which it in fact
exercises control.''). In addition, the Commission's predecessor,
and later the Commission, provided the aggregation standards for
purposes of position limits in the large trader reporting rules. See
Supersedure of Certain Regulations, 26 FR 2968, Apr. 7, 1961. In
1961, then regulation 18.01 read:
``(a) Multiple Accounts. If any trader holds or has a financial
interest in or controls more than one account, whether carried with
the same or with different futures commission merchants or foreign
brokers, all such accounts shall be considered as a single account
for the purpose of determining whether such trader has a reportable
position and for the purpose of reporting.'' 17 CFR 18.01 (1961).
The provisions concerning aggregation for position limits
generally remained part of the Commission's large trader reporting
regime until 1999 when the Commission incorporated the aggregation
provisions into part 150.4 with the existing position limit
provisions in part 150. See 64 FR 24038, May 5, 1999. The
Commission's part 151 rulemaking also incorporates the aggregation
provisions in part 151.7 along with the remaining position limit
provisions in part 151. See 76 FR 71626, Nov. 18, 2011.
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In light of the language in section 4a, the legislative history and
regulatory developments, the Commission has
[[Page 31773]]
historically viewed, and continues to view, section 4a as requiring
aggregation on the basis of either ownership or control.\62\ The
Commission also believes that aggregation of positions across accounts
based upon ownership is a necessary part of the Commission's position
limit regime.\63\ An ownership standard establishes a bright-line test
that provides certainty to market participants and the Commission.\64\
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\62\ See e.g., Exemptions from Speculative Position Limits for
Positions which have a Common Owner but which are Independently
Controlled and for Certain Spread Positions, 53 FR 41563, 41564,
Oct. 24, 1988); and Exemption from Speculative Position Limits for
Positions which have a Common Owner but which are Independently
Controlled and for Certain Spread Positions, 55 FR 30926, July 30,
1990.
\63\ See also, Exemptions from Speculative Position Limits for
Positions which have a Common Owner but which are Independently
Controlled and for Certain Spread Positions, 53 FR 13290, 13292,
Apr. 22, 1988. In response to two separate petitions, the Commission
proposed the independent account controller exemption from
speculative position limits, but declined to remove the ownership
standard from its aggregation policy.
\64\ See also Revision of Federal Speculative Position Limits
and Associated Rules, 64 FR 24038, 24044, May 5, 1999 (``[T]he
Commission * * * interprets the `held or controlled' criteria as
applying separately to ownership of positions or to control of
trading decisions.''); and 53 FR 13290, 13293 (1988).
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Absent aggregation on the basis of ownership, the Commission would
have to apply a control test in all cases, which poses significant
administrative challenges to individually assess control across all
market participants. Further, if the statute only required aggregation
based on control, market participants may be able to use an ownership
interest to circumvent aggregation in circumstances where an ownership
interest is used to directly or indirectly influence control over the
account or position. The Commission also notes that the ownership prong
attributes a position to the beneficial owner of multiple accounts that
amount to an unduly large position, which position limits are intended
to prevent. Therefore, the proposed rules would continue to require
aggregation based upon either ownership or control.
Regarding a threshold level to aggregate on the basis of ownership,
the Commission has generally found that an ownership or equity interest
of less than 10 percent in an account or position that is controlled by
another person who makes discretionary trading decisions does not
present a concern that such ownership interest results in control over
trading or can be used indirectly to create a large speculative
position through ownership interests in multiple accounts. As such, the
Commission has traditionally viewed an ownership interest below 10
percent as not warranting aggregation.\65\ Commenters suggest that a
similar analysis should prevail for an ownership interest of 10 percent
or more where such ownership represents a passive investment that does
not involve control of the trading decisions of the owned entity.
Commenters argue that under these conditions, such passive investments
would present a reduced concern for trading pursuant to direct or
indirect control, as well as a reduced risk for persons with positions
in multiple accounts to hold an unduly large overall position.
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\65\ The Commission codified this aggregation threshold in its
1979 statement of policy on aggregation, which was derived from the
administrative experience of the Commission's predecessor. See
Statement of Policy on Aggregation of Accounts and Adoption of
Related Reporting Rules, 44 FR 33839, 33843, Jun. 13, 1979. Note,
however, rule 151.7(d) will separately require aggregation of
investments in accounts with identical trading strategies.
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While prior Commission rulemakings have generally restricted
exemptions to the ownership criteria to limited partners of commodity
pools and independent account controllers managing customer funds for
an eligible entity, the Commission has considered a broader passive
investment exemption.\66\ Further, the Commission indicated in the part
151 final rule that the development of aggregation exemptions could
occur over time.\67\ This incremental approach to account aggregation
standards reflects the Commission's historical practice.\68\ Consistent
with that practice, the Commission has considered the additional
information provided and the concerns raised by the aggregation
petition and interim final rule commenters, and believes it appropriate
to propose certain relief from the ownership criteria of
aggregation.\69\
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\66\ See e.g., 53 FR 13290, 13292 (1988) (proposal). The 1988
proposal for the independent account controller rule requested
comment on the possibility of a broader passive investment
exemption, and specifically noted:
``[Q]uestions also have been raised regarding the continued
appropriateness of the Commission's aggregation standard which
provides that a beneficial interest in an account or positions of
ten percent or more constitutes a financial interest tantamount to
ownership. This threshold financial interest serves to establish
ownership under both the ownership criterion of the aggregation
standard and as one of the indicia of control under the 1979
Aggregation Policy.
In particular, certain instances have come to the Commission's
attention where beneficial ownership in several otherwise unrelated
accounts may be greater than ten percent, but the circumstances
surrounding the financial interest clearly exclude the owner from
control over the positions. The Commission is requesting comment on
whether further revisions to the current Commission rules and
policies regarding ownership are advisable in light of the exemption
hereby being proposed. If such financial interests raise issues not
addressed by the proposed exemption for independent account
controllers, what approach best resolves those issues while
maintaining a bright-line aggregation test?''
\67\ See 76 FR 71626, 71654.
\68\ See e.g., 53 FR 41563, 41567, Oct. 24, 1988 (the definition
of eligible entity for purposes of the IAC exemption originally only
included CPOs, or exempt CPOs or pools, but the Commission indicated
a willingness to expand the exemption after a ``reasonable
opportunity'' to review the exemption.); 56 FR 14308, 14312, Apr. 9,
1991 (The Commission expanded eligible entities to include commodity
trading advisors, but did not include additional entities requested
by commenters until the Commission had the opportunity to assess the
current expansion and further evaluate the additional entities); and
64 FR 24038, May 5, 1999 (The Commission expanded the list of
eligible entities to include many of the entities commenters
requested in the 1991 rulemaking).
\69\ The Commission notes that ownership and control are
considered separately for the aggregation of accounts. As such, if
the Commission were to adopt the proposed exemption outlined below,
and a market participant qualified for the exemption, such person
would nonetheless have to aggregate those same accounts or positions
identified in the exemption if such person otherwise controlled
trading, acted pursuant to an express or implied agreement or held
positions in accounts with identical trading strategies.
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1. Disaggregation Relief for Owned Entities
Proposed rule 151.7(b) continues the Commission's longstanding rule
that persons with an ownership or equity interest in an account or
position of less than 10 percent need not aggregate such positions
solely on the basis of the ownership criteria. Persons with a 10
percent or greater ownership interest would still generally be required
to aggregate the account or positions. However, proposed rule
151.7(b)(1) establishes a notice filing procedure to permit a person in
specified circumstances to disaggregate the positions of a separately
organized entity (``owned entity''), even if such person has a 10
percent or greater interest in the owned entity. The notice filing
would need to demonstrate compliance with certain conditions set forth
in 151.7(b)(1)(i), and such relief would not be available to persons
with a greater than 50 percent ownership or equity interest in the
owned entity. Similar to other exemptions from aggregation, the notice
filing would be effective upon submission to the Commission, but the
Commission may subsequently call for additional information as well as
reject, modify or otherwise condition such relief. Further, such person
is obligated to amend the notice filing in the event of a material
change to the circumstances described in the filing.
The proposed criteria to claim relief under 151.7(b)(1) address the
Commission's concerns that an
[[Page 31774]]
ownership or equity interest of 10 percent and above may facilitate or
enable control over trading of the owned entity or allow a person to
accumulate a large position through multiple accounts that could
overall amount to an unduly large position. Essentially, the proposed
rules amending the ownership criteria for aggregation across accounts
establish a rebuttable presumption that persons with an ownership or
equity interest of 10 percent or greater must aggregate, but such
persons may file for disaggregation relief if their ownership interest
does not exceed 50 percent and they can demonstrate independence by
meeting the criteria described below.\70\
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\70\ The Commission notes that the conditions for independence
apply to the person filing the notice as well as the owned entity.
In addition, for purposes of complying with the proposed conditions,
such ``person'' shall include any entity that such person must
aggregate pursuant to regulation 151.7. For example, if company A
files a notice under proposed regulation 151.7(b)(1) for company A's
equity interest of 30 percent in company B, then company A must
comply with the conditions for the exemption, including any entity
with which company A aggregates positions under 151.7. In this
connection, if company A controls the trading of company C, then
there must be independence between company B and company C for
purposes of company A's 151.7(b)(1) notice filing.
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Proposed rule 151.7(b)(1)(i)(A) conditions aggregation relief for
the ownership interest in another entity on a demonstration that a
person filing for disaggregation relief and the owned entity do not
have knowledge of the trading decisions of the other. The Commission
believes that where an entity has an ownership interest in another
entity and neither entity share trading information, such entities
demonstrate independence. In contrast, persons with knowledge of
trading decisions of another in which they have an ownership interest
are likely to take such decisions into account in making their own
trading decisions, which implicates the Commission's concern about
independence and enhances the risk for coordinated trading. For
purposes of this provision, the Commission does not consider knowledge
of overall end-of-day position information to necessarily constitute
knowledge of trading decisions, so long as the position information
cannot be used to dictate or infer trading strategies. As such, the
knowledge of end-of-day positions for the purpose of monitoring credit
limits for corporate guarantees would not necessarily constitute
knowledge of trading information. However, the ability to monitor the
development of positions on a real time basis could constitute
knowledge of trading decisions because of the substantial likelihood
that such knowledge might affect trading strategies or influence
trading decisions of the other.
Proposed rule 151.7(b)(1)(i)(B) conditions aggregation relief on a
demonstration that such person seeking disaggregation relief and the
owned entity trade pursuant to separately developed and independent
trading systems. Further, proposed rule 151.7(b)(1)(i)(C) conditions
relief on a demonstration that such person and the owned entity have,
and enforce, written procedures to preclude the one entity from having
knowledge of, gaining access to, or receiving data about, trades of the
other. Such procedures must include document routing and other
procedures or security arrangements, including separate physical
locations, which would maintain the independence of their activities.
The Commission has applied these same conditions in connection with the
IAC exemption to ensure independence of trading between an eligible
entity and an affiliated independent account controller.\71\ Such
conditions have been useful in ensuring that trading is not coordinated
through the development of similar trading systems, and that procedures
are in place to prevent the sharing of trading decisions between
entities. Similar to the IAC exemption, the proposed owned entity
exemption in proposed rule 151.1(b)(1) would permit disaggregation if
there is independence of trading between two entities. Thus the
Commission proposes to include the above conditions, which are already
applicable in the IAC context, and which should also strengthen the
independence between the two entities for the owned entity exemption.
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\71\ See 17 CFR 151.7(f).
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Proposed rule 151.7(b)(1)(i)(D) conditions aggregation relief on a
demonstration that such person does not share employees that control
the owned entity's trading decisions, and the employees of the owned
entity do not share trading control with such persons. The Commission
is concerned that shared employees with knowledge of trading decisions
undermine the independence of trading between entities. Similar to the
restriction on information sharing, the sharing of employees with
knowledge of trading decisions presents a strong risk to the
independence of trading between entities. In the aggregation petition,
the Working Groups submit that entities should be permitted to share
``attorneys, accountants, risk managers, compliance and other mid- and
back-office personnel.'' \72\ At this time, the Commission questions,
and seeks comment regarding, whether the sharing of such persons
compromises independence because it would provide each entity with
knowledge of the other's trading decisions.\73\
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\72\ Aggregation petition at Exhibit A.
\73\ The Commission notes that the proposed condition barring
the sharing of employees that control the owned entity's trading
decisions would include a prohibition on sharing of employees
described in the aggregation petition (attorneys, accountants, risk
managers, compliance and other mid-and back-office personnel), to
the extent such employees are aware of the trading decisions of the
person or the owned entity.
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Proposed rule 151.7(b)(1)(i)(E) conditions aggregation relief on a
demonstration that the person and the owned entity do not have risk
management systems that permit the sharing of trades or trading
strategies with the other. This condition addresses concerns that risk
management systems that permit the sharing of trades or trading
strategies with each other present a significant risk of coordinated
trading through the sharing of information.\74\ The Commission has not
proposed a condition that the risk management system be separately
developed from the risk management system of the owned entity, and the
Commission seeks comment as to whether risk management systems that do
not communicate trade information can maintain independence of trading
between entities.\75\
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\74\ This condition is similar to a condition proposed in the
aggregation petition.
\75\ The Commission remains concerned that a trading system, as
opposed to a risk management system, that is not separately
developed from another system can subvert independence because such
a system could apply the same or similar trading strategies even
without the sharing of trading information.
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Proposed rule 151.7(b)(1)(ii) conditions aggregation relief on a
demonstration that such person does not have greater than a 50 percent
ownership or equity interest in the owned entity. An equity or
ownership interest above 50 percent constitutes a majority ownership or
equity interest of the owned entity and is so significant as to require
aggregation under the ownership prong of Section 4a(a)(1) of the CEA.
This proposal would provide administrative certainty and would address
concerns about circumvention of position limits by coordinated trading
or direct or indirect influence between entities. To the extent that
the majority owner may have the ability and incentive to direct,
control or influence the management of the owned entity, the proposed
bright-line test would be a reasonable approach to the aggregation of
owned accounts pursuant to Section
[[Page 31775]]
4a(a)(1). A person with a greater than 50 percent ownership interest in
multiple accounts would have the ability to hold and control a
significantly large and potentially unduly large overall position in a
particular commodity, which position limits are intended to
prevent.\76\
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\76\ The Commission notes that aggregation based on ownership
looks to a person's equity interest regardless of voting control. By
way of comparison, with a greater than 50 percent interest in voting
shares, such person generally is required to consolidate the owned
entity for purposes of the Generally Accepted Accounting Principles
(``GAAP''). See Financial Accounting Standards Board Accounting
Standards Codification Topic 810, at paragraphs 810-10-15-8 and 10,
available at https://asc.fasb.org/. See also Accounting Research
Bulletin 51 at paragraph 3 and Statement of Financial Accounting
Standard No. 94 at paragraph 2. The Commission believes that
aggregation based upon an ownership or equity interest of greater
than 50 percent, regardless of voting interest, is appropriate to
address the heightened risk of direct or indirect influence over the
owned entity. Further, unless a particular exemption applies, a
person with a 50 percent or greater voting interest in an owned
entity would likely be required to aggregate the positions of the
owned entity on the basis of control.
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The proposed owned entity exemption and the clarification and
expansion of the violation of law exemption address concerns raised in
the aggregation petition and interim final rule comments. First, the
clarification and extension of the violation of law exemption responds
to concerns that market participants could face increased liability
under state, federal and foreign law. While the aggregation petition
and other commenters argue that an owned non-financial entity exemption
would reduce the risk of liability under antitrust and other laws, the
proposed clarification and expansion would allow market participants to
avail themselves of the violation of law exemption in those
circumstances where the sharing of information creates a reasonable
risk of violating the above mentioned bodies of law.
The proposed owned entity exemption applies to both financial and
non-financial entities that have passive ownership interests. Market
participants that qualify for the exemption can file a notice with the
Commission demonstrating independence between entities and, thereafter,
forgo the development of monitoring and tracking systems for the
aggregation of accounts. The Commission seeks comment as to whether
such passive interests present a significantly reduced risk of
coordinated trading compared to owned entities that fail the criteria
for the proposed exemption. In addition, the Commission specifically
requests comment as to whether the proposed relief should be limited to
ownership interests in non-financial entities.
While the owned non-financial entity exemption mentioned in the
aggregation petition would permit disaggregation even if the owned
entity is a wholly owned company, the Commission is concerned that an
ownership interest greater than 50 percent presents heightened concerns
for coordinated trading or direct or indirect influence over an account
or position, and that permitting disaggregation at that level of
ownership would be inconsistent with the statutory requirement to
aggregate on the basis of ownership. Small ownership interests of less
than 10 percent do not warrant aggregation. A 10 percent or greater
ownership interest has served as a useful measure for aggregation, but
the Commission has determined relief may be warranted for passive
investments. However, for the reasons discussed above, an ownership
interest greater than 50 percent requires aggregation because ownership
at that level serves as a useful benchmark for the increased risk of
direct or indirect influence over the trading of an owned entity.
Because the circumstances facilitating control can be difficult to
monitor, a facts and circumstances review would be difficult to
administer by both market participants and the Commission. In addition,
a person with a greater than 50 percent ownership interest in multiple
accounts may have the ability to hold a significantly large and
potentially unduly large overall position in a particular commodity,
which position limits are intended to prevent. Therefore, the
Commission proposes limiting the availability of the exemption to those
having an ownership interest no greater than 50 percent because such a
bright-line rule would provide clarity to market participants and a
useful tool for the Commission to simplify aggregation where there is
an increased and substantial risk of coordinated trading.\77\
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\77\ The Commission reminds market participants that proposed
regulation 151.7(b)(1) does not affect the applicability of a
separate exemption from aggregation (e.g., the independent account
controller exemption).
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With regard to filing requirements for the exemption in regulation
151.7(b) (1), the Commission notes that market participants would be
required to file in accordance with regulation 151.7(h).\78\ As such,
market participants must file a notice with the Commission with a
description of how they adhere to the criteria in regulation
151.7(b)(1) and a certification that the conditions are met. This
certification, as well as any other certification made under regulation
151.7(h), must come from a senior officer of the market participant
with knowledge as to the contents of the notice.\79\ Therefore, the
Commission is proposing to clarify in regulation 151.7(h)(1)(ii) that
such certification come from a senior officer. Further, regulation
151.7(h)(3) requires market participants to promptly update a notice
filing in the event of a material change of the information contained
in the notice filing.\80\
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\78\ Where the provisions of regulation 151.7 require a person
to file a notice, entities cannot rely upon an exemption unless such
entity has properly filed a notice in accordance with regulation
151.7(h).
\79\ See 17 CFR 151.7(h)(1)(ii). Market participants should
update the certification if the individual certifying compliance no
longer works for the company.
\80\ In this regard, the Commission clarifies that a material
change would include, among other events, if the person making the
original certification is no longer employed by the company. See
also CEA Sec. Sec. 6(c)(2) and 9(a)(3).
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With regard to the type of material necessary to file a notice to
claim an exemption under 151.7(b)(1), the Commission notes that each
submission must be specific to the facts of the particular entity. The
person claiming the exemption must provide specific facts that
demonstrate compliance with each condition of relief. Such a
demonstration should likely include an organizational chart including
the ownership and control structure of the involved entities, a
description of the risk management system, a description of the
information-sharing systems (including bulletin boards, and common
email addresses of the entities identified), an explanation of how and
to whom the trade data and position information is distributed
(including the responsibilities of the individual receiving such
information), and the officers that receive reports of the trade data
and position information.\81\
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\81\ The Commission notes that this list is not meant to be
exhaustive of the factors that would indicate an exemption is
warranted and should not be interpreted as being solely sufficient
to claim the exemption because each filing is fact specific. As
noted earlier, the Commission may demand additional information
regarding the exemption within its discretion.
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The Commission specifically requests comments as to the
appropriateness of the owned entity exemption as well as the conditions
applicable to the exemption. Should the Commission add additional
criteria? If so, what criteria and why? Should the Commission require
market participants to submit additional information to claim the
exemption? If so, what information and why? With regard to the owned
entity exemption, should the Commission alter the scope of the
exemption? If so, how should it be altered and why? Further,
[[Page 31776]]
at what percent of ownership interest should a market participant no
longer be able to claim the exemption proposed in regulation
151.7(b)(1), if any? Are there specific circumstances in which a higher
percentage of ownership than 50 percent would be appropriate to claim
the exemption in regulation 151.7(b)(1) notwithstanding the concerns
described above regarding coordinated trading, direct or indirect
influence, and significantly large and potentially unduly large overall
positions in a particular commodity? In addition, the Commission
welcomes comment on the owned non-financial entity exemption set forth
in appendix A of the aggregation petition as an alternative to the
owned entity exemption proposed herein.
2. Higher Tier Entities
In connection with the Working Groups' request for the Commission
to include an owned non-financial entity exemption, the Working Groups
also request that the Commission provide relief from the filing
requirements for claiming the exemption. Specifically, the aggregation
petition argues that if an entity files a notice and claims the owned
non-financial entity exemption, then ``every higher-tier company (a
company that holds an interest in the company that submitted the
notice) need not aggregate the referenced contracts of the owned non-
financial entities identified in the notice.'' \82\ Thus, the
Commission is proposing rules that provide relief to such ``higher-tier
entities'' within the context of a corporate structure.\83\
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\82\ Aggregation petition at 23.
\83\ For purposes of the discussion below, ``higher-tier''
entities include entities with a 10 percent or greater ownership
interest in an owned entity.
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Proposed rule 151.7(j) provides that higher-tier entities may rely
upon a notice for exemption filed by the owned entity, and such
reliance would only go to the accounts or positions specifically
identified in the notice. For example, if company A has a 30 percent
interest in company B, and company B has filed an exemption notice for
the accounts and positions of company C, then company A may rely upon
company B's exemption notice for the accounts and positions of company
C. Should company A wish to disaggregate the accounts or positions of
company B, company A would have to file a separate notice for an
exemption.
The proposed rules also provide that a higher-tier entity that
wishes to rely upon an owned entity's exemption notice must comply with
conditions of the applicable aggregation exemption other than the
notice filing requirements. Although higher-tier entities need not
submit a separate notice to rely upon the notice filed by an owned
entity, the Commission notes that it may, upon call, request that a
higher-tier entity submit information to the Commission, including the
possibility of an on-site visit, demonstrating compliance with the
applicable conditions.
The Commission believes that these proposed rules, if adopted,
should significantly reduce the filing requirements for aggregation
exemptions. Further, the Commission does not anticipate that the
reduction in filing will impact the Commission's ability to effectively
survey the proper application of exemptions from aggregation. The
initial filing of an owned entity exemption notice should provide the
Commission with sufficient information regarding the appropriateness of
the exemption, while repetitive filings of higher-tier entities would
not be expected to provide additional substantive information. However,
the Commission again notes that higher-tier entities would still be
required to comply with the substantive conditions of the exemption
specified in the owned entity's notice filing.
C. Underwriting
As noted above, Commission regulation 151.7(g) includes an
exemption from aggregation where an ownership interest is in an unsold
allotment of securities. FIA requests that the Commission expand the
exemption to include situations where securities are owned in
anticipation of demand as part of normal market-making activity, or as
a result of a routine life cycle event, such as a stock distribution.
The Commission believes that the ownership interest of a broker-
dealer registered with the SEC, or similarly registered with a foreign
regulatory authority,\84\ in an entity based on the ownership of
securities acquired as part of reasonable activity in the normal course
of business as a dealer is largely consistent with the ownership of an
unsold allotment of securities covered by the underwriting exemption
currently found in regulation 151.7(g). In both circumstances, the
ownership interest is likely transitory and not to hold for investment
purposes. Accordingly, the Commission is proposing an aggregation
exemption in regulation 151.7(g) for such activity.\85\
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\84\ See 15 U.S.C. 78o.
\85\ The Commission specifically notes that this proposed
exemption would not apply to registered broker-dealers that acquire
an ownership interest in securities with the intent to hold for
investment purposes.
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However, the Commission notes that this exemption would not apply
where a broker-dealer acquires more than a 50 percent ownership
interest in another entity because this would not be consistent with
holding such a transitory interest for the purpose of market making and
runs a higher risk of coordinated trading.\86\ Therefore, a broker-
dealer that acquires more than 50 percent ownership interest in another
entity must aggregate that entity, in the absence of another
aggregation exemption.
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\86\ With regard to FIA's request that the exemption include a
broker-dealer's ownership of securities in anticipation of demand or
as part of routine life cycle events, the proposed rules would cover
such activity if the activity was in the normal course of the
person's business as a dealer.
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The Commission requests comment on whether ownership of stock, by a
broker-dealer registered with the SEC or similarly registered with a
foreign regulatory authority, that is acquired as part of reasonable
activity in the normal course of business as a dealer, without other
ownership interests or indicia of control or concerted action, warrants
aggregation.
D. Independent Account Controller for Eligible Entities
As noted above in section I.A of this release, section 151.7(f)
provides an eligible entity with an exemption for the eligible entity's
customer accounts that are managed and controlled by independent
account controllers. In the part 151 rulemaking, the Commission adopted
the same definitions of eligible entity and independent account
controller found in the Commission's prior position limit regulations
in regulation 150.1. The definition of eligible entity includes ``the
limited partner or shareholder in a commodity pool the operator of
which is exempt from registration under Sec. 4.13 of this chapter * *
*.'' However, with regard to a CPO that is exempt under regulation
4.13, the definition of an independent account controller only extends
to ``a general partner of a commodity pool the operator of which is
exempt from registration under Sec. 4.13 of this chapter.'' At the
time the Commission expanded the IAC exemption to include regulation
4.13 commodity pools, market participants generally structured such
pools as limited partnerships.\87\
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\87\ See 63 FR 38532.
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The Commission understands that today, not all regulation 4.13
commodity pools are formed as partnerships. For example, regulation
[[Page 31777]]
4.13 pools may be formed as limited liability companies and have
managing members, not general partners.
The Commission is proposing to expand the definition of independent
account controller to include the managing member of a limited
liability company. As such, regulation 4.13 commodity pools established
as limited liability companies would be accorded the same treatment as
such pools formed as limited partnerships. The limitation of the
exemption to general partners was based upon a market structure that,
historically, did not generally include regulation 4.13 commodity pools
established as limited liability companies. In light of market
developments since the Commission expanded IACs to include regulation
4.13 pools as eligible entities, it may not be appropriate for there to
be a distinction between limited partnerships and limited liability
companies in this regard. As such, the Commission is proposing to amend
the definitions of eligible entity and independent account controller
in part 151.1 to specifically provide for regulation 4.13 commodity
pools established as limited liability companies.
The Commission intends to coordinate the disposition of the
petition with the implementation of position limits under part 151. To
do so, among other things, the Commission has directed staff to
promptly review comment letters as soon as practicable following close
of the comment period. Further, in order to provide an orderly
transition to the compliance dates specified in part 151.4, the
Commission intends to finalize consideration of the petition prior to
the first compliance date of part 151.
III. Related Matters
A. Considerations of Costs and Benefits
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing an order.\88\ Section 15(a) further specifies
that the costs and benefits shall be evaluated in light of the
following five broad areas of market and public concern: (1) Protection
of market participants and the public; (2) efficiency, competitiveness,
and financial integrity of futures markets; (3) price discovery; (4)
sound risk management practices; and (5) other public interest
considerations.
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\88\ 7 U.S.C. 19(a).
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The proposed rules provide the public with an opportunity to
comment on concerns raised in the aggregation petition and in comments
on the interim final rule. The petitioner and the commenters seek
clarification of certain provisions of the Commission's aggregation
policy, and seek to alter or expand exemptions from aggregation to
include circumstances where there may be a low risk of coordinated
trading. The Commission requests comment on all aspects of its
consideration of costs and benefits, including identification and
assessment of any costs and benefits not discussed herein. In addition,
the Commission requests that commenters provide data and any other
information or statistics that they believe supports their positions
with respect to the Commission's consideration of costs and benefits.
1. Aggregation Petition and Other Comments
As discussed in section I.B. of this release, the Commission
received a petition seeking relief from certain aggregation provisions
in the final rules, as well as several comments regarding aggregation
in response to the interim final rule on cash-settled contract limits.
Among other things, the aggregation petition requests that the
Commission provide an aggregation exemption for owned non-financial
entities similar to an exemption that the Commission proposed but did
not adopt in its final rules.\89\
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\89\ As part of the proposed rules for part 151, the Commission
proposed that persons with an ownership or equity interest in a non-
financial entity need not aggregate the positions or accounts of the
non-financial entity provided the person filed an application
demonstrating compliance with certain conditions. See Position
Limits for Derivatives, 76 FR 4752, 4762-63, Jan. 26, 2011.
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The aggregation petition states that compliance with the final
rules' aggregation requirements would require information sharing and
coordination of trading that is contrary to current best practices.\90\
The aggregation petition contends that the aggregation rules may impede
investment in commercial firms, impair liquidity and competition in
energy derivatives markets, or cause firms to exit the market
altogether.\91\ Further, the aggregation petition states that the
aggregation rules necessitate the development and implementation of
extensive and expensive information technology systems that can track
positions across numerous affiliates, even if those affiliates
currently trade independently of each other.\92\ The aggregation
petition also submits that companies with an ownership position in a
joint venture would have to divest their interest to avoid operational
difficulties associated with aggregating positions.\93\ The petitioner
contends that these asserted costs could be mitigated if the Commission
were to adopt a variant of the owned non-financial entity
exemption,\94\ clarify that the violation of law exemption applies to
situations in which there is a ``reasonable risk'' of violating the
applicable law, expand the violation of law exemption to include
possible violations of local, state, foreign, and international
law,\95\ and adopt provisions relieving ``higher-tier'' entities of the
filing requirement, as discussed above.\96\
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\90\ See Aggregation Petition at 19.
\91\ Id. at 10-16.
\92\ Id. at 11.
\93\ Id. at 15.
\94\ Id. at Exhibit A.
\95\ Id. at 16-18.
\96\ Id. at 23.
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Several commenters to the Commission's interim final rule also
suggest that the Commission adopt a version of the ``owned non-
financial entity'' exemption; these commenters argue that even above 10
percent ownership, where there is no common control, there is no risk
of coordinated trading and, therefore, no need for aggregation of
positions.\97\ These commenters recommend that the Commission aggregate
based on control, and not based on an ownership interest in a position
or account.\98\ Commenters contend that aggregation of accounts in
passive investments, where the owned entity is independently managed
and controlled, will be costly and have a negative impact on markets
and market participants.\99\ Commenters also claim that many businesses
establish information barriers between affiliates, and that the final
rules would require the destruction of those barriers in order to
ensure compliance.\100\
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\97\ See CL-FIA at 15; CL-Atmos at 4-5; and CL-EEI at 14-15.
\98\ See e.g. CL-FIA at 15; CL-EEI at 1-2, 14-15; CL-Atmos at 3-
5; and CL-AGA at 1-3.
\99\ See CL-FIA at 18 and CL-EEI at 16-17.
\100\ See CL-FIA at 15; CL-EEI at 14-15; and CL-Atmos at 3.
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As with the petitioners, commenters to the interim final rule also
assert that the aggregation provisions impose significant operational
challenges for entities and end-users in particular, requiring them to
develop and maintain costly internal infrastructure mechanisms to
ensure compliance.\101\ FIA estimates that for a large conglomerate,
costs to comply with the final rule's aggregation procedures could be
high. In particular, FIA estimates that each entity could spend as much
as $500,000 to $1,000,000 to identify all entities subject to
[[Page 31778]]
aggregation and to establish protocols for reporting all commonly owned
and controlled positions in Referenced Contracts; as much as $1,000,000
to $1,500,000 to establish new information technology systems for
consolidating and tracking aggregated position information; and
approximately $100,000 for each entity subject to aggregation to report
position information to its affiliates and/or controlling
entities.\102\
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\101\ See CL-EEI at 14-15; and CL-Atmos at 1-2.
\102\ See CL-FIA at 19-20.
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With regard to the exemption for federal law information sharing
restriction in regulation 151.7(i), several commenters also suggest
that the Commission extend the exemption to include state and foreign
jurisdictions.\103\ One commenter wrote that the provision in
regulation 151.7(i) that requires an opinion of counsel to obtain such
an exemption was too burdensome and should be revised.\104\
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\103\ See CL-EEI at 17-18; CL-AGA at 1-2; CL-FIA at 6; and CL-
Atmos at 5.
\104\ See CL-AGA at 5.
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One commenter also suggests that the Commission extend the
underwriting exemption in regulation 151.7(g) to include situations
where a broker-dealer acquires positions for legitimate dealing
reasons, such as in anticipation of increased demand, as part of its
normal market-making activity, or as a result of a routine life-cycle
event.\105\
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\105\ See CL-FIA at 16.
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2. Summary of the Commission's Proposal
Exemption for Violation of Laws. In the final part 151 rules, the
Commission included an exemption from aggregation for those entities
for whom sharing the requisite information would violate federal law.
The Commission seeks to clarify that it always intended the exemption
to apply in those circumstances in which the sharing of information
presents a ``reasonable risk'' of violating the applicable law(s).
As explained above, one commenter urged the Commission to drop the
requirement that, to obtain the violation-of-laws exemption an entity
must submit an opinion of counsel (as discussed in section II.C). Such
an opinion allows the Commission to review the facts and circumstances
supporting the claimed exemption, and thus the proposed rules would
retain the requirement to submit an opinion of counsel.
In light of the aggregation petition and comments on the interim
final rule, the Commission is including in this proposal an expansion
of the violation-of-law exemption to include state law and the law of
foreign jurisdictions. The existing rule allows entities who believe
that the aggregation provisions would require them to violate state or
foreign laws to seek an exemption on a case-by-case basis. The
Commission seeks comment as to the scope of the proposed exemption.
Proposed Owned Entity Exemption. Proposed rule 151.7(b)(1) provides
that any person with an ownership or equity interest in an entity
(financial or non-financial) of 10 percent or greater may disaggregate
the owned entity's positions upon demonstrating compliance with each of
several specified indicia of independence.\106\ The proposed indicia
are that such person and the owned entity: (1) Do not have knowledge of
the trading decisions of the other; (2) trade pursuant to separately
developed and independent trading systems; (3) have in place policies
and procedures to preclude sharing knowledge of, gaining access to, or
receiving data about, trades of the other; (4) do not share employees
that control the trading decisions of the other; and (5) maintain a
risk management system that does not allow the sharing of trade
information or trading strategies between entities. In addition, such
person's ownership or equity interest in the owned entity cannot exceed
50 percent.
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\106\ As discussed in section II.D.1, at over 50 percent
ownership, the proposed ownership standard would mandate aggregation
in order to give effect to the statutory requirement that positions
``held'' by a person must be aggregated, and because of a person's
ability to influence management and the concomitant heightened
concerns about coordinated trading. The owned entity exemption does
not impact the availability of the IAC, FCM, and federal, state, or
foreign law information sharing restriction exemptions as found in
regulation 151.7(h). However, as proposed, this exemption from the
ownership criteria would not apply to investments in accounts with
identical trading strategies.
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The aggregation petition and several of the other commenters urge
that the Commission should permit market participants to disaggregate
accounts in situations where ownership of an account is passive, as
they contend there is a less of a concern regarding coordinated
trading.\107\ The aggregation petition and other commenters suggest
that the Commission add an owned non-financial entity exemption, which
they contend would incorporate such situations as well as alleviate
potential negative impacts to liquidity and competition in both
physical and derivatives markets.
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\107\ They further contend that a lack of an owned non-financial
entity exemption could increase liability for antitrust and other
federal law and regulations. This concern is addressed by the
proposed clarification discussed above, which provides that market
participants may avail themselves of the violation of law exemption
if the sharing of information creates a reasonable risk of a
violation.
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The Commission is proposing to permit disaggregation of entities
where a person has no greater than a 50 percent interest in the entity
and meets certain other conditions. The proposed owned-entity exemption
would apply to a person's passive investments in either financial or
non-financial entities. Those who qualify under this proposal would
have to demonstrate that they meet all of its conditions. The
Commission seeks comment as to whether the concerns suggested by the
aggregation petition and other commenters are valid, whether this
proposal meets those concerns, and whether the 50 percent limit and
other conditions are appropriate.
Expansion of the Underwriter Exemption. The Commission is also
proposing to expand the exemption for the underwriting of securities
that was adopted as regulation 151.7(g) to include ownership interests
acquired through the market-making activities of an affiliated broker
dealer. This proposal would exempt from aggregation ownership interests
acquired as part of a person's reasonable market-making activity in the
normal course of business as a broker-dealer registered with the SEC or
comparable registration in a foreign jurisdiction,\108\ so long as
there is no other ownership interests or indicia of control or
concerted action. The Commission intends for this proposal to apply to
ownership interests that are likely transitory and not for investment
purposes, and seeks comment as to whether such interests are at a low
risk for the coordination of trading or whether this exemption could
lead to evasion of applicable position limits.\109\
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\108\ See 15 U.S.C. 78o.
\109\ The Commission specifically notes that this proposed
exemption would not apply to registered broker-dealers that acquire
an ownership interest in securities with the intent to hold for
investment purposes.
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Proposed ``Higher-Tier'' Entity Filing Relief. The Commission also
is proposing to extend filing relief to ``higher-tier'' entities. As
such, proposed regulation 151.7(j) provides that higher-tier entities
may rely on exemption notices filed by owned entities. Commenters claim
that such an exemption would reduce the burden of filing exemption
notices by eliminating redundancies. The Commission seeks comment as to
whether this proposal will in fact reduce the filing burden for
claiming an exemption, and whether the proposal would affect the
Commission's
[[Page 31779]]
ability to oversee how exemptions are applied in the market.
Independent Account Controller Exemption. As discussed above, the
IAC exemption in regulation 151.7(f) previously included commodity
pools exempt from registration under Sec. 4.13 that are structured as
limited partnerships. The Commission is proposing to allow commodity
pools structured as limited liability companies to rely on the IAC
exemption. The Commission seeks comment as to whether there is any
relevant distinction between limited partnerships and limited liability
companies for purposes of this exemption.
3. Consideration of Costs and Benefits
It is the Commission's goal that this proposal uphold part 151's
regulatory aims without diminishing its effectiveness. In so doing, the
Commission adheres to its belief that aggregation represents a key
element to prevent evasion of prescribed position limits and that its
historical approach towards aggregation--one that appropriately blends
consideration of ownership and control indicia--remains sound.\110\
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\110\ The Commission's general policy on aggregation is derived
from CEA Section 4a(a)(1), which directs the Commission to aggregate
based on separate considerations of ownership, control, or persons
acting pursuant to an express or implied agreement.
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The Commission seeks comment as to whether compliance with this
proposal will reduce the costs market participants will incur to comply
with the aggregation requirements of the final rules. In particular,
how would the cost of filing a notice for disaggregation relief compare
with the cost of developing systems necessary to aggregate the
positions of owned entities under the current version of part 151? Note
that, in the preamble to part 151, the Commission estimated that the
filing of a Notice of Disaggregation would create certain costs for
market participants.\111\ In particular, the Commission approximated
that the aggregation-related reporting requirements would affect
``ninety entities, resulting in a total burden, across all these
entities, of 225,000 annual labor hours and $5.9 million in annualized
capital, start-up, total operating, and maintenance costs.'' \112\ The
Commission has estimated the additional burden that may result from the
proposed rules as part of its Paperwork Reduction Act calculations, and
requests comment on those estimations.\113\ The Commission also seeks
comment as to how many entities would be able to take advantage of the
proposed exemption. Alternatively, how many entities would be able to
take advantage of the owned non-financial entity exemption described in
the aggregation petition?
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\111\ The costs of filing the Notice included costs of filing an
opinion of counsel as well as the other necessary information under
Sec. 151.7(h).
\112\ 76 FR 71626 at 71683.
\113\ See section III.C.2 of this release.
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Because costs associated with the aggregation of positions are
highly variable and entity-specific, the Commission requests that
commenters submit data from which the Commission can consider and
quantify the costs of the proposed rules.
In assessing benefits, it is important for the Commission to
determine whether the proposed rules will enhance the Commission's
ability to monitor compliance with position limits by focusing the
Commission's resources on those entities most at risk of coordinated
trading through multiple accounts. The Commission seeks comment as to
whether the proposed amendments to the Commission's aggregation policy
will result in lower costs for market participants without compromising
the core purposes of the position limits regime.
4. Section 15(a) Considerations
As the Commission has long held, position limits are an important
regulatory tool that is designed to prevent concentrated positions of
sufficient size to manipulate or disrupt markets. The aggregation of
accounts for purposes of applying position limits represents an
integral component that impacts the effectiveness of those limits. In
the final rule, the Commission implemented a policy for the aggregation
of accounts that largely tracked its longstanding standards of
aggregation, which were designed to prevent evasion of those position
limits. The proposed rules would amend this policy to introduce and
expand certain exemptions. The Commission intends for the proposed
rules to preserve the important protections of the existing aggregation
policy, but at a lower cost for market participants. The Commission
requests comment on its consideration of the costs and benefits of the
proposed rules in relation to each of the Section 15(a) factors
discussed herein.
a. Protection of Market Participants and the Public
The Commission wants to ensure that the exemptions proposed in
these rules will not lessen the protection of market participants and
the public that the aggregation policy in the Final Rule provides.
Given that the account aggregation standards are necessary to implement
an effective position limit regime, it is important that the clarified
and expanded exemptions of the proposed rules be sufficiently tailored
to exempt from aggregation only those accounts that do pose a low risk
of coordinated trading. The Commission believes that clarifying the
scope of the violation of law exemption to include the risk of
violating the applicable law more accurately informs market
participants as to the standard for claiming the exemption. The
proposed owned-entity exemption maintains the Commission's historical
presumption threshold of 10 percent ownership or equity interest and
makes that presumption rebuttable only where several conditions
indicative of independence are met. This exemption focuses on the
conditions that impact trading independence. The Commission intends
that any exemption it adopts would allow the Commission to direct its
resources to monitoring those entities with a higher risk of
coordinated trading and thus at a higher risk of circumventing position
limits, without reducing the protection of market participants and the
public that the Commission's aggregation policy affords.
Similarly, the Commission intends for the ``higher-tier'' entity
exemption, and the expansion of the underwriting and IAC exemptions, to
reduce costs for market participants without a compromise to the
integrity or effectiveness of the Commission's aggregation policy.
The Commission welcomes comment regarding whether the proposed
rules would impact protection of market participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
The Commission wants to ensure that the exemptions proposed in
these rules would fully preserve account aggregation as a tool to
uphold the integrity of the part 151 position limit regime, which helps
maintain the overall competitiveness and integrity of derivatives
markets. The Commission seeks comment regarding whether the proposed
rules would impact the efficiency, competitiveness, and/or financial
integrity of futures markets.
c. Price Discovery
Similarly, the Commission wants to ensure that the exemptions
proposed in these rules do not adversely impact the price discovery
process, which the part 151 position limit regime (including the
account aggregation provisions in
[[Page 31780]]
Sec. 151.7) is designed to protect. The Commission welcomes comment as
to whether the proposed rules would impact price discovery.
d. Sound Risk Management
The Commission wants to ensure that the exemptions proposed in
these rules will not lessen the effectiveness of the sound risk
management practices that the Final Rule promotes. The Commission
welcomes comment as to whether the proposed rules would impact sound
risk management practices.
e. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations related to the costs and benefits of the proposed rules.
The Commission welcomes comment as to whether there are additional
public interest considerations the Commissions should consider.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider the impact of their regulations on small businesses.\114\ The
requirements related to the proposed amendments fall mainly on DCMs,
swap execution facilities (``SEF'') that are trading facilities, FCMs,
foreign brokers, and large traders. The Commission has previously
determined that DCMs, FCMs, foreign brokers and large traders are not
``small entities'' for the purposes of the RFA.\115\ Further, in the
Commission's position limits rule,\116\ the Commission determined that
SEFs, which includes SEFs that are trading facilities, are not ``small
entities'' for purposes of the RFA.
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\114\ 44 U.S.C. 601 et seq.
\115\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, Apr. 30 1982. See also Special Calls, 72 FR 34417, Jun.
22, 2007 (foreign broker determination).
\116\ 76 FR 71626, Nov. 18, 2011.
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies, on behalf of the Commission, pursuant to 5 U.S.C. 605(b),
that the actions proposed to be taken herein would not have a
significant economic impact on a substantial number of small entities.
C. Paperwork Reduction Act
1. Overview
The Paperwork Reduction Act (``PRA'') imposes certain requirements
on Federal agencies in connection with their conducting or sponsoring
any collection of information as defined by the PRA.\117\ An agency may
not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number. Certain provisions of the proposed regulations would result in
new collection of information requirements within the meaning of the
PRA. The Commission seeks to supplement the control number assigned by
the Office of Management and Budget (``OMB'') for part 151--Position
Limits for Futures and Swaps (OMB control number 3038-0077). Therefore
the Commission is submitting this proposal to OMB for review in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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\117\ 44 U.S.C. 3501 et seq.
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In January of 2012, the Commission received a petition requesting
relief under section 4a(a)(7) of the CEA and clarification of certain
aggregation requirements in regulation 151.7. In response to that
petition, the Commission is proposing to clarify certain aspects of the
aggregation standards, and to expand the scope of certain exemptions
from aggregation. If adopted, responses to this collection of
information would be mandatory to the extent persons wish to rely upon
the exemptions contained within the proposed amendments to Commission
regulation 151.7. 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 CEA strictly prohibits the
Commission, unless specifically authorized by the CEA, 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.\118\ The Commission also is required to
protect certain information contained in a government system of records
pursuant to the Privacy Act of 1974.\119\
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\118\ 7 U.S.C. 12(a)(1).
\119\ 5 U.S.C. 552a.
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Proposed rule 151.7(b)(1) establishes an exemption for a person to
disaggregate the positions of a separately organized entity (``owned
entity''). To claim the exemption, a person would need to meet certain
criteria and file a notice with the Commission in accordance with
regulation 151.7(h). The notice filing would need to demonstrate
compliance with certain conditions set forth in regulations
151.7(b)(1)(i)-(vii). Similar to other exemptions from aggregation, the
notice filing would be effective upon submission to the Commission, but
the Commission may call for additional information as well as reject,
modify or otherwise condition such relief. Further, such person is
obligated to amend the notice filing in the event of a material change
to the filing.
The proposed rules also amend regulation 151.7(i), which provides
an exemption from aggregation where the sharing of information between
persons would cause either person to violate federal law. The proposed
amendments clarify that the exemption would apply to a situation where
the sharing of information creates a reasonable risk of a violation of
federal law or regulations adopted thereunder, and not solely a per se
violation. For the same reasons the Commission adopted the exemption
for information sharing restrictions for federal law, the Commission
expanded the exemption in regulation 151.7(i) to generally extend to
the state law and the law of a foreign jurisdiction. The proposed rules
also retain the requirement that market participants file a notice
demonstrating compliance with the condition and an opinion of counsel
that the sharing of information could create a reasonable risk of a
violation of state or federal law or the law of a foreign jurisdiction.
The opinion allows Commission staff to review the legal basis for the
asserted regulatory impediment to the sharing of information, and is
particularly helpful where the asserted impediment arises from laws
and/or regulations that the Commission does not directly administer.
Further, Commission staff will have the ability to consult with other
federal regulators as to the accuracy of the opinion, and to coordinate
the development of rules surrounding information sharing and
aggregation across accounts in the future.
The Commission is also proposing to amend the definitions of
eligible entity and independent account controller in part 151.1 to
specifically provide for regulation 4.13 commodity pools established as
limited liability companies. These proposed amendments will likely
expand the number of entities that can file for the independent account
controller aggregation exemption.
Finally, the proposed rules include relief from notice filings for
``higher-tier'' entities, which, under proposed regulation 151.7(j),
may rely on the filings submitted by owned entities. A ``higher-tier''
entity need not submit a separate notice pursuant to the notice filing
requirements to rely upon the notice filed by an owned entity as long
as it complies with conditions of the applicable aggregation exemption.
[[Page 31781]]
2. Reporting Burdens
Proposed regulation 151.7(b)(1) specifies that qualified persons
may file a notice claiming exemptive relief from aggregation. Proposed
regulation 151.7(b)(1)(vii) states that the notice is to be filed in
accordance with regulation 151.7(h), which requires a description of
the relevant circumstances that warrant disaggregation and a statement
that certifies that the conditions set forth in the exemptive provision
have been met. Persons claiming the exemption would be required to
submit to the Commission, as requested, such information as relates to
the claim for exemption. An updated or amended notice must be filed
with the Commission upon any material change.
With regard to the existing filing procedure for claiming
exemptions from aggregation, in the part 151 final rule the Commission
estimated that ninety entities would incur a burden of 225,000 annual
labor hours as well as $5.9 million in annualized capital, start-up,
total operating, and maintenance costs. This estimate was based on each
entity submitting one notice of disaggregation per year at a burden of
2,500 labor hours. Given the expansion of the exemptions that market
participants may claim, the Commission anticipates an increase in the
number of notice filings; however, because of the relief for ``higher-
tier'' entities under proposed regulation 151.7(j), the Commission
expects that increase to be offset by a reduction in the number of
filings by ``higher-tier'' entities. Thus, the Commission anticipates a
small net increase in the number of filings under regulation 151.7 as a
result of the proposed rules. The Commission believes that this small
increase will create a small increase in the annual labor burden.
However, because entities will have already incurred the capital,
start-up, operating, and maintenance costs to file other exemptive
notices, the Commission does not anticipate an increase in those costs.
In light of the Commission providing for these additional
exemptions, the Commission estimates that 90 entities will each file
two notices annually under proposed regulation 151.7(b)(1), at an
average of 20 hours per filing. Thus, the Commission approximates a
total per-entity burden of 40 labor hours annually. Using the same
labor cost estimates as in the existing collection (OMB 3038-
0077),\120\ such a burden would cost approximately $3,100 per entity
for filings under proposed regulation 151.7(b)(1). Under proposed
regulation 151.7(f), the Commission anticipates that 10 entities will
annually file one notice each, at an average of 20 hours per filing,
for a per-entity burden of 20 labor hours annually. Such a burden would
cost approximately $1,600 per entity. Finally, the Commission
anticipates that 45 entities will annually file one notice each under
proposed regulation 151.7(i), at an average of 80 hours per filing, for
a per-entity burden of 80 hours each. Such a burden would cost
approximately $6,300 per entity. Monetary estimates have been rounded
to the nearest hundred.
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\120\ The Commission staff's estimates concerning the wage rates
are based on salary information for the securities industry compiled
by the Securities Industry and Financial Markets Association
(``SIFMA''). The $78.61 per hour is derived from figures from a
weighted average of salaries and bonuses across different
professions from the SIFMA Report on Management & Professional
Earnings in the Securities Industry 2010, modified to account for an
1800-hour work-year and multiplied by 1.3 to account for overhead
and other benefits. The wage rate is a weighted national average of
salary and bonuses for professionals with the following titles (and
their relative weight); ``programmer (senior)'' (60% weight),
``compliance advisor (intermediate)'' (20%), ``systems analyst''
(10%), and ``assistant/associate general counsel'' (10%).
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In sum, the Commission estimates that 145 entities would submit a
total of 235 responses per year and incur a total burden of 7,400 labor
hours at a cost of approximately $582,000 annually in addition to the
existing burden under Sec. 151.7.
3. Comments on Information Collection
The Commission invites the public and other federal agencies to
comment on any aspect of the reporting and recordkeeping burdens
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission
solicits comments in order to: (1) Evaluate whether the proposed
collections of information are necessary for the proper performance of
the functions of the Commission, including whether the information will
have practical utility, (2) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collections of information, (3)
determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected, and (4) minimize the burden
of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566 or by email at OIRA-submissions@omb.eop.gov. Please provide the Commission with a copy of
comments submitted so that all comments can be summarized and addressed
in the final regulation preamble. Refer to the Addresses section of
this notice for comment submission instructions to the Commission. A
copy of the supporting statements for the collection of information
discussed above may be obtained by visiting RegInfo.gov. OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication of this release. Consequently,
a comment to OMB is most assured of being fully considered if received
by OMB (and the Commission) within 30 days after the publication of
this notice of proposed rulemaking.
List of Subjects in 17 CFR Part 151
Position limits, Bona fide hedging, Referenced contracts.
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 151--POSITION LIMITS FOR FUTURES AND SWAPS
1. The authority citation for part 151 is revised to read as
follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 6g, 6t, 12a, 19, as
amended by Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
2. In Sec. 151.1, revise the definition for ``eligible entity''
and paragraph (5) of the definition of ``independent account
controller'' to read as follows:
Sec. 151.1 Definitions.
* * * * *
Eligible Entity means a commodity pool operator; the operator of a
trading vehicle which is excluded, or which itself has qualified for
exclusion from the definition of the term ``pool'' or ``commodity pool
operator,'' respectively, under Sec. 4.5 of this chapter; the limited
partner, limited member or shareholder in a commodity pool the operator
of which is exempt from registration under Sec. 4.13 of this chapter;
a commodity trading advisor; a bank or trust company; a savings
association; an insurance company; or the separately organized
affiliates of any of the above entities:
* * * * *
Independent Account Controller * * *
(5) Who is registered as a futures commission merchant, an
introducing broker, a commodity trading advisor, or
[[Page 31782]]
an associated person of any such registrant, or is a general partner or
manager of a commodity pool the operator of which is exempt from
registration under Sec. 4.13 of this chapter.
* * * * *
3. Revise Sec. 151.7 to read as follows:
3. In Sec. 151.7:
a. Revise paragraph (b);
b. Add paragraph (e)(4);
c. Revise paragraphs (g), (h), and (i); and
d. Add paragraph (j).
The revisions and additions read as follows:
Sec. 151.7 Aggregation of positions.
* * * * *
(b) Ownership of accounts generally. For the purpose of applying
the position limits set forth in Sec. 151.4, except for the ownership
interest of limited partners, shareholders, members of a limited
liability company, beneficiaries of a trust or similar type of pool
participant in a commodity pool subject to the provisos set forth in
paragraph (c) of this section or in accounts or positions in multiple
pools as set forth in paragraph (d) of this section, any person holding
positions in more than one account, or holding accounts or positions in
which the person by power of attorney or otherwise directly or
indirectly has a 10 percent or greater ownership or equity interest,
must aggregate all such accounts or positions. However--
(1) Any person with a 10 percent or greater ownership or equity
interest in an owned entity, need not aggregate the accounts or
positions of the owned entity with any other accounts or positions such
person is required to aggregate, provided that:
(i) Such person, including any entity that such person must
aggregate, and the owned entity:
(A) Do not have knowledge of the trading decisions of the other;
(B) Trade pursuant to separately developed and independent trading
systems;
(C) Have and enforce written procedures to preclude each from
having knowledge of, gaining access to, or receiving data about, trades
of the other. Such procedures must include document routing and other
procedures or security arrangements, including separate physical
locations, which would maintain the independence of their activities;
(D) Do not share employees that control the trading decisions of
either; and
(E) Do not have risk management systems that permit the sharing of
trades or trading strategy;
(ii) Such person does not have greater than a 50 percent ownership
or equity interest in the owned entity; and
(iii) Such person complies with the requirements of paragraph (h)
of this section.
(2) [Reserved]
* * * * *
(e) * * *
(4) The futures commission merchant or the affiliate has complied
with the requirements of paragraph (h) of this section.
* * * * *
(g) Exemption for underwriting. Notwithstanding any of the
provisions of this section, a person need not aggregate the positions
or accounts of an owned entity if the ownership interest is based on
the ownership of securities constituting the whole or a part of an
unsold allotment to or subscription by such person as a participant in
the distribution of such securities by the issuer or by or through an
underwriter.
(1) Further, a broker-dealer registered with the Securities and
Exchange Commission, or similarly registered with a foreign regulatory
authority, need not aggregate the positions or accounts of an owned
entity if the ownership interest is based on the ownership of
securities acquired as part of reasonable activity in the normal course
of business as a dealer, provided that, such person does not have
actual knowledge of the trading decisions of the owned entity.
(h) Notice filing for exemption. (1) Persons seeking an aggregation
exemption under paragraph (b)(1), (c), (e), (f), or (i) of this section
shall file a notice with the Commission, which shall be effective upon
submission of the notice, and shall include:
(i) a description of the relevant circumstances that warrant
disaggregation; and
(ii) a statement of a senior officer of the entity certifying that
the conditions set forth in the applicable aggregation exemption
provision have been met.
(2) Upon call by the Commission, any person claiming an aggregation
exemption under this section shall provide such information concerning
the person's claim for exemption as is requested by the Commission.
Upon notice and opportunity for the affected person to respond, the
Commission may amend, suspend, terminate, or otherwise modify a
person's aggregation exemption for failure to comply with the
provisions of this section.
(3) In the event of a material change to the information provided
in the notice filed under this paragraph, an updated or amended notice
shall promptly be filed detailing the material change.
(4) A notice shall be submitted in the form and manner provided for
in Sec. 151.10.
(i) Exemption for law information sharing restriction.
Notwithstanding any other provision of this section, a person is not
subject to the aggregation requirements of this section if the sharing
of information associated with such aggregation creates a reasonable
risk that either person could violate state or federal law or the law
of a foreign jurisdiction, or regulations adopted thereunder, and
provided that such a person does not have actual knowledge of
information associated with such aggregation. Provided further, that
such person file a prior notice pursuant to paragraph (h) of this
section and an opinion of counsel that the sharing of information
creates a reasonable risk that either person could violate state or
federal law or the law of a foreign jurisdiction, or regulations
adopted thereunder. Provided however, the exemption in this paragraph
shall not apply where the law or regulation serves as a means to evade
the aggregation of accounts or positions. All documents submitted
pursuant to this paragraph shall be in English, or if not, accompanied
by an official English translation.
(j) Higher-Tier Entities. If an owned entity has filed a notice
under paragraph (h) or (i) of this section, any person with an
ownership or equity interest of 10 percent or greater in the owned
entity need not file a separate notice identifying the same positions
and accounts previously identified in the notice filing of the owned
entity, provided that:
(1) Such person complies with the conditions applicable to the
exemption specified in the owned entity's notice filing, other than the
filing requirements; and
(2) Such person does not otherwise control trading of the accounts
or positions identified in the owned entity's notice.
(3) Upon call by the Commission, any person relying on the
exemption in paragraph (j)(1) of this section shall provide to the
Commission such information concerning the person's claim for
exemption. Upon notice and opportunity for the affected person to
respond, the Commission may amend, suspend, terminate, or otherwise
modify a person's aggregation exemption for failure to comply with the
provisions of this section.
4. In Sec. 151.10, revise paragraph (b)(4) to read as follows:
Sec. 151.10 Form and manner of reporting.
* * * * *
[[Page 31783]]
(b) * * *
(4) A notice of disaggregation is filed pursuant to Sec. 151.7(h),
in which case the notice shall be effective upon filing.
* * * * *
5. In Sec. 151.12, revise paragraph (a)(5) and add paragraph
(a)(6) to read as follows:
Sec. 151.12 Delegation of authority to the Director of the Division
of Market Oversight.
(a) * * *
(5) In Sec. 151.7(j)(1)(iii) to call for additional information
from a trader claiming the exemption in Sec. 151.7(j)(1).
(6) In Sec. 150.10 for providing instructions or determining the
format, coding structure, and electronic data transmission procedures
for submitting data records and any other information required under
this part.
* * * * *
Issued in Washington, DC, on May 17, 2012 by the Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix 1--Statement of Commissioner Jill E. Sommers
I support the Commission's proposed rules that, among other
things, expand the exemptions relating to information sharing
restrictions, expand the circumstances under which market
participants will not be required to aggregate positions, and reduce
the reporting burdens on higher tier entities. I am pleased that we
recognize that the final position limits rules issued on November
18, 2011 set forth an unworkable and overly restrictive approach to
these issues.
Essentially, as they relate to ``owned entities,'' the proposed
rules contain three ``tiers'' for purposes of aggregation. First, if
the ownership interest is less than 10 percent, one need not
aggregate positions with those of the owned entity. Second, if the
ownership interest is between 10 percent and 50 percent, one must
aggregate positions with those of the owned entity unless it can be
shown that there is a lack of knowledge of, and control over, the
trading of the owned entity. Third, if the ownership interest
exceeds 50 percent, one must always aggregate positions with those
of the owned entity, even if there is a lack of knowledge of, and
control over, the trading of the owned entity.
I question whether a bright-line approach is the correct
approach, and if it is, whether the line should be drawn at 50
percent. In the absence of knowledge of, and control over, trading
of an owned entity, is there a real difference between owning 49
percent and owning 50 percent? I don't think there is. In justifying
50 percent as the correct place to draw the line, the preamble to
the proposed rules states, ``such a bright-line rule would provide
clarity to market participants and a useful tool for the Commission
to simplify aggregation.'' Providing clarity and certainty to market
participants is important. However, if providing clarity and
certainty results in a one-size-fits-all answer that fails to take
into account the varying needs of a very diverse group of market
participants, the clarity and certainty are of little use. Moreover,
while it is important to establish an aggregation approach that the
Commission can effectively administer, I hesitate to put too much
weight on ``simplifying'' the approach if the simplified approach is
needlessly restrictive.
In my dissent to the final position limits rules, I expressed
concern that with regard to the 19 new reference contracts, the
Commission was taking on ``front-line oversight of the granting and
monitoring of bona-fide hedging exemptions for the transactions of
massive, global corporate conglomerates that on a daily basis
produce, process, handle, store, transport, and use physical
commodities in their extremely complex logistical operations.'' My
concerns apply equally to the issue of aggregation. We have limited
experience as it relates to these new reference contracts, and no
experience aggregating swaps into the overall calculations. In the
face of such limited experience, our apparent certainty on where to
draw lines is troubling.
[FR Doc. 2012-12526 Filed 5-29-12; 8:45 am]
BILLING CODE P